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Broadcom 10-K 2007
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
     
(Mark One)    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2005
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number 000-23993
 
(BOARDCOM LOGO)
 
     
California   33-0480482
(State or Other Jurisdiction
of Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
 
16215 Alton Parkway
Irvine, California 92618-3616
(Address of Principal Executive Offices) (Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (949) 926-5000
 
Securities registered pursuant to Section 12(b) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 o     No þ
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ     Accelerated filer o     Non-accelerated filed o
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ
 
The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the registrant on June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $14.4 billion (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.
 
The registrant has two classes of common stock authorized, Class A common stock and Class B common stock. The rights, preferences and privileges of each class of common stock are substantially identical except for voting rights. Shares of Class B common stock are not publicly traded but are convertible at any time into shares of Class A common stock on a one-for-one basis. As of December 31, 2006 there were 473.5 million shares of Class A common stock and 74.8 million shares of Class B common stock outstanding.
 
 
Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the 2006 Annual Meeting of Shareholders filed March 27, 2006 and supplemented April 6, 2006.
 


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Broadcom®, the pulse logo, 54g®, Air Force®, Blutonium®, BroadVoice®, CryptoNetX®, NetLink®, NetXtreme®, QAMLink®, QuadSquad®, SiByte®, StrataSwitch®, StrataXGS®, V-thernet®, Videocore®, 125 High Speed Modetm, BroadRangetm, CableCheckertm, CellAiritytm, FirePathtm, InConcerttm, Intensi-fi tm, LoopDTechtm, NetXtreme IItm, ROBOSwitchtm, ROBOswitch-plustm, ROBO-HStm, SecureEasySetuptm, StrataSwitch IItm, StrataXGS IIItm, SystemI/Otm and WebSuperSmarttm are among the trademarks of Broadcom Corporation and/or its affiliates in the United States, certain other countries and/or the EU. Any other trademarks or trade names mentioned are the property of their respective owners.
 
©2007 Broadcom Corporation. All rights reserved.


 

 
BROADCOM CORPORATION
 
AMENDED ANNUAL REPORT ON FORM 10-K/A
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 
 
             
        Page
 
    Explanatory Note   1
 
  Business   11
  Risk Factors   31
  Unresolved Staff Comments   49
  Properties   49
  Legal Proceedings   50
  Submission of Matters to a Vote of Security Holders   50
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   52
  Selected Consolidated Financial Data   54
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   56
  Quantitative and Qualitative Disclosures about Market Risk   101
  Financial Statements and Supplementary Data   102
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   102
  Controls and Procedures   102
  Other Information   107
 
  Directors and Executive Officers of the Registrant   108
  Executive Compensation.   109
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   112
  Certain Relationships and Related Transactions   112
  Principal Accounting Fees and Services   112
 
  Exhibits and Financial Statement Schedules   113
 EXHIBIT 10.4
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32


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All statements included or incorporated by reference in this amended Annual Report on Form 10-K/A, other than statements or characterizations of historical fact, are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements concerning projected net revenue, costs and expenses and gross margin; our accounting estimates, assumptions and judgments; the impact of new accounting rules related to the expensing of stock options on our future reported results; our success in pending litigation; the demand for our products; the effect that seasonality and volume fluctuations in the demand for our customers’ consumer-oriented products will have on our quarterly operating results; our dependence on a few key customers for a substantial portion of our revenue; our ability to scale our operations in response to changes in demand for existing products and services or the demand for new products requested by our customers; the competitive nature of and anticipated growth in our markets; our ability to migrate to smaller process geometries; manufacturing, assembly and test capacity; our ability to consummate acquisitions and integrate their operations successfully; our prospective needs for additional capital; inventory and accounts receivable levels; and the level of accrued rebates. These forward-looking statements are based on our current expectations, estimates, approximations and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under “Risk Factors” in Item 1A of this Report. These forward-looking statements speak only as of the date of this Report. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as otherwise required by law.
 
Forward-looking statements are not the only statements you should regard with caution. The preparation of our restated consolidated financial statements required us to make judgments with respect to the methodologies we selected to calculate the adjustments contained in the restated financial statements as well as estimates and assumptions regarding the application of those methodologies. These judgments, estimates and assumptions, which are based on factors that we believe to be reasonable under the circumstances, affected the amounts of additional deferred compensation and additional stock-based compensation expense that we recorded. The application of alternative methodologies, estimates and assumptions could have resulted in materially different amounts.
 
EXPLANATORY NOTE
 
 
We recently completed a voluntary review of our equity award practices. The voluntary review, which commenced in May 2006 and covered all grants of options to purchase shares of our Class A or Class B common stock, referred to in this amended Annual Report on Form 10-K/A, or this Report, as stock options or options, and other equity awards made since our initial public offering in April 1998, was directed by the Audit Committee of our Board of Directors. The voluntary review consisted of two components: (1) an equity award review, so-referenced in this Report, to determine whether we used appropriate measurement dates for option grants and other equity awards made under our extensive employee equity award programs, which was conducted with the assistance of outside legal counsel Irell & Manella LLP and forensic accountants FTI Consulting Inc., and (2) an investigation of the conduct and performance of Broadcom’s officers, employees and directors who were involved in the stock option granting process, referred to in this Report as the conduct review, which was conducted with the assistance of independent legal counsel Kaye Scholer LLP and forensic accountants LECG, LLC.
 
Based on the results of the equity award review, the Audit Committee concluded that, pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations, the accounting measurement dates for most of the stock option grants awarded between June 1998 and May 2003, covering options to purchase 232.9 million shares of our Class A or Class B common stock, differed from the measurement dates previously used for such awards. As a result, revised measurement dates were applied to the affected option grants and Broadcom has recorded a total of $2.259 billion in additional stock-based compensation


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expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being amortized over the service period relating to each option, typically four years, with approximately 95% of the expense being recorded in years prior to 2004.
 
As a consequence of these adjustments, our audited consolidated financial statements and related disclosures for the three years ended December 31, 2005 and our consolidated statements of operations and consolidated balance sheet data for the five years ended December 31, 2005, included in “Selected Consolidated Financial Data” in Part II, Item 6 of this Report, have been restated. In addition, the unaudited quarterly financial information for interim periods of 2005 and 2004, included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Report, has been restated. We have also restated the stock-based compensation expense footnote information calculated under Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, or SFAS 123, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, or SFAS 148, under the disclosure-only alternatives of those pronouncements for the years 2003 through 2005 and for interim periods of 2005 and 2004. The restated footnote information has been included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in the Consolidated Financial Statements in Part II, Item 15 of this Report.
 
The adjustments did not affect Broadcom’s previously-reported revenue, cash, cash equivalents or marketable securities balances in any of the restated periods.
 
Share and per share information presented in this Report has been adjusted to reflect all splits and dividends of our common stock subsequent to April 16, 1998, including the three-for-two stock split effected February 21, 2006 through the payment of a stock dividend.
 
Findings of the Equity Award Review
 
From our initial public offering through May 2003, Broadcom’s option grant processes and procedures were not formalized or consistently followed. During this period, option grants awarded to employees who were not then executive officers, as defined in Section 16 of the Securities Exchange Act of 1934, as amended, or Section 16 Officers, were approved by our Equity Award Committee (then known as the Option Committee). The committee consisted of two directors who were also Section 16 Officers, pursuant to authority delegated by the Board of Directors under Broadcom’s 1998 Stock Incentive Plan, as amended and restated, or the 1998 Plan, and our 1999 Special Stock Option Plan. The Equity Award Committee did not conduct formal meetings with respect to all option grants; rather, the committee members often held informal discussions, either in person or telephonically, to determine whether option grants should be approved and priced as of that day. The Equity Award Committee members conferred frequently (often weekly) during 1998 and 1999. From 2000 through 2002, the Equity Award Committee members conferred less frequently and sometimes made option grants only once a quarter. No formal, contemporaneous written records of the Equity Award Committee discussions or meetings were kept. Instead, the Equity Award Committee relied upon, and option grant approvals were documented by, unanimous written consents, which were dated “as of” a specified date but were generally prepared after that date and signed at a later time. Thus, Broadcom has been unable to locate affirmative, contemporaneous documentation of Equity Award Committee meetings related to many past option grants.
 
During the equity award review, we determined that 18 grant dates were selected after the “as of” date indicated on the unanimous written consents documenting the approvals for some or all of the options granted. Accordingly, during the equity award review process, we presumed that each of the 96 grant dates from our initial public offering through May 2003 did not meet the measurement date criteria of APB 25 unless we could locate contemporaneous documentation confirming both that (1) a meeting occurred on a specified grant date and (2) the identification of employee-recipients and grant amounts were finalized by that grant date. Because we applied this presumption, a significant portion of the restatement adjustments are based upon our inability to locate such documentation.
 
During the same period, from our initial public offering through May 2003, option grants to Section 16 Officers and members of the Board of Directors were approved by the Board of Directors or the Compensation


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Committee or made pursuant to the Automatic Director Grant Program under the 1998 Plan. Like the Equity Award Committee, the Compensation Committee relied upon, and option grant approvals were documented by, unanimous written consents, which were dated “as of” a specified date but generally were prepared after that date and signed at a later time. We have been unable to locate affirmative, contemporaneous documentation of Compensation Committee meetings related to several Section 16 Officer option grants. At the time of two grant dates to Section 16 Officers, a vacancy on the Compensation Committee existed; however, the vacancy had been formally filled by the time the unanimous written consents were executed by the committee members. Most grants to directors were made automatically on the dates specified under the 1998 Plan.
 
None of the grants requiring measurement date adjustments was made to our co-founders or any current or former member of our Board of Directors.
 
In June 2003 we implemented revisions to our stock option grant processes and procedures. As a result, the processes were formalized and a consistent procedure was implemented for the Equity Award and Compensation Committees. In addition, the composition of the Equity Award Committee was changed to include an independent director. Our review of the equity award practices in effect since June 2003 has determined that our equity granting processes and practices are sound and have been consistently adhered to, and we have not identified any instances of inappropriate measurement dates under APB 25 for option grants or other equity awards made since May 2003.
 
Currently, the Compensation Committee and Equity Award Committee each hold monthly equity award meetings based upon a predetermined schedule. The process requires that any proposed equity awards be reviewed in advance by both our Shareholder Services and Human Resources Departments, and requires communication of the details of proposed equity awards to committee members prior to each monthly meeting, as well as to award recipients promptly after the meeting. Equity awards are priced and valued based upon the closing price of our Class A common stock on the Nasdaq Global Select MarketSM (previously the Nasdaq National Market) on the date of the meeting. Decisions of each committee meeting are documented by minutes.
 
 
During the course of the equity award review, we identified three reasons that led to the determination that 81 grant dates failed to meet the measurement date criteria of APB 25. None of the grants requiring measurement date adjustments was made to our co-founders or any current or former member of our Board of Directors. For some of the 81 grant dates, more than one reason applied; as a result, the grant date numbers detailed below will not total 81 grant dates. The three reasons are:
 
  •  No Contemporaneous Documentation.  The review identified 68 grant dates for which Broadcom has been unable to locate contemporaneous documentation (beyond the “as of” dated unanimous written consents) confirming that a committee meeting occurred on the indicated grant date. We presumed that each grant date did not meet the measurement date criteria of APB 25 unless we could locate contemporaneous documentation confirming both that (1) a meeting occurred on the grant date and (2) the identification of employee-recipients and grant amounts were finalized by the grant date. The affected awards on these 68 grant dates involved 10,529 option grants covering 108.9 million shares. Of the options to purchase 108.9 million shares, options to purchase 0.4 million shares were granted to Section 16 Officers and options to purchase 108.5 million shares were granted to other employees. Among the 68 grant dates were three grant dates on which options were granted at times when the closing price of our Class A common stock was at or near the lowest price experienced during the applicable quarter or year. The three grant dates involved 1,128 option grants covering 12.5 million shares, none of which were granted to Section 16 Officers. Adjustments to the APB 25 measurement dates for the grants covered by the 68 grant dates resulted in the recording of additional deferred compensation of $1.037 billion.
 
  •  Date Selection.  For 18 grant dates, the review identified documents and/or unusual pricing procedures that indicated that the grant date for some options was selected after the date indicated on the unanimous written consent documenting the approval of those options. The affected awards on these 18 grant dates involved 6,205 option grants covering 90.3 million shares. Of the options to purchase 90.3 million shares, options to purchase 5.1 million shares were granted to Section 16 Officers and options to purchase


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  85.2 million shares were granted to other employees. Adjustments to the APB 25 measurement dates for these grants resulted in the recording of additional deferred compensation of $904.5 million.
 
  •  Subsequent Allocation.  In 1998, 2000, 2001 and 2002, we made large, broad-based grants of options to a substantial percentage (as high as 90%) of our employees. With respect to two of the broad-based grant dates, the review determined that we had not completed allocations of options to individual employees by the time the grant date was selected by the Equity Award or Compensation Committee. The affected awards on these two grant dates involved 4,271 option grants covering 33.7 million shares. Of the options to purchase 33.7 million shares, options to purchase 0.8 million shares were granted to Section 16 Officers and options to purchase 32.9 million shares were granted to other employees. Adjustments to the APB 25 measurement dates for these grants resulted in the recording of additional deferred compensation of $677.8 million.
 
The equity award review also revealed that, with respect to 14 of the grant dates discussed above, the Equity Award Committee awarded options but we intentionally did not notify some of the employee-recipients of their option grants for extended periods. We believe that notification is not an explicit criterion required by APB 25 to establish a measurement date. However, SFAS 123, if applicable, requires that there be a mutual understanding between the company and employee-recipient of the terms and conditions of option awards for there to be a grant date, and APB 25 indicates that the measurement date generally is on or after the grant date. Accordingly, we decided that for these 14 grant dates, the date of notification to the affected employees represented the best approximation of the appropriate measurement date under APB 25. The affected awards on these 14 grant dates involved 608 option grants covering 13.1 million shares. Of the options to purchase 13.1 million shares, options to purchase 1.3 million shares were granted to Section 16 Officers and options to purchase 11.8 million shares were granted to other employees. Adjustments to the APB 25 measurement dates for these grants resulted in the recording of deferred compensation of $251.1 million, included in the amounts above.
 
 
In addition, during the course of the equity award review, we identified some instances in which adjustments to deferred compensation were required that were not related to changes in measurement dates, as follows:
 
  •  Grants made to some consultants were erroneously accounted for under APB 25 as if they had been made to employees. To correctly account for these grants in accordance with SFAS 123, we recorded $33.8 million in additional deferred compensation during 1998 through 2002.
 
  •  Some grants were made to employees upon acceptance of their employment offers at Broadcom rather than as of or after the actual commencement of employment. To correctly account for these grants in accordance with APB 25 and SFAS 123, we recorded $12.1 million in additional deferred compensation during 1998 through 2002.
 
  •  With respect to 17 option grants, modifications were made to employee stock options that were not accounted for in accordance with APB 25. The modifications included the acceleration of the vesting period of options of terminated employees or the extension of the post-service exercise period for vested stock options of terminated employees. We recorded $9.5 million in additional deferred compensation, principally in 2001 through 2003, to properly account for these modifications.
 
In addition, other stock-based compensation expense previously recorded in prior periods was adjusted in connection with the restatement. In connection with the termination of some employees, we recorded stock-based compensation expense resulting from the extension of the post-service exercise period for vested stock options and for acceleration of the vesting period of stock options. These modifications were accounted for correctly pursuant to APB 25. However, as a result of other adjustments made in our restatement, the previously-recorded deferred compensation was reduced by $3.1 million.
 
 
The $2.672 billion total of the amounts shown above represents the aggregate gross additional deferred compensation that we recorded for the years 1998 through 2005 as a result of our equity award review. This amount does not reflect the elimination of $396.4 million in deferred compensation due to subsequent forfeitures related to


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employee terminations. In addition, the remaining amount of deferred compensation totaling $16.1 million at December 31, 2005 was eliminated in accordance with the provisions of SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, which we adopted effective January 1, 2006. After such reductions, we recorded net additional stock-based compensation expense of $2.259 billion for the years 1998 through 2005 in connection with our equity award review. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. The adjustments did not affect Broadcom’s previously-reported revenue, cash, cash equivalents or marketable securities balances in any of the restated periods.
 
Findings of the Conduct Review
 
In late July 2006, on the basis of its initial review, the Audit Committee decided to investigate the conduct and performance of Broadcom’s officers, employees and directors who were involved in the stock option granting process. That investigation is referred to in this Report as the conduct review.
 
During the four-and-a-half month conduct review, the Audit Committee met 28 times. Its independent counsel reviewed more than six million pages of documents and electronic information, and interviewed more than forty individuals, some more than once. The conduct review was accomplished with the full support and cooperation of Broadcom’s management and employees.
 
The Audit Committee determined that, after May 2003, Broadcom made significant corrective changes to its option granting and documentation processes. The measurement date for each grant made after May 2003 complied with prevailing accounting rules and is not subject to restatement. The Audit Committee found that Broadcom’s current processes are appropriate, that effective controls are now in place, and that there is currently no known material weakness in Broadcom’s option granting processes.
 
For the period from June 1998 through May 2003, however, the Audit Committee found that Broadcom’s informal option grant procedures and processes lacked adequate controls, and that its documentation and recordkeeping were insufficient to verify most of the original measurement dates.
 
The Audit Committee found that, for numerous option grants made between November 3, 1998 and May 19, 2003, certain Broadcom executives and employees selected grant dates after the fact.
 
The Audit Committee further found that, particularly with respect to annual broad-based option grants, allocations of grants to some individuals occurred after the grant dates.
 
The Audit Committee found that, reflecting the lack of adequate controls, there was, at times, uncertainty and confusion among certain individuals at Broadcom as to the rules relating to accounting for options, and certain individuals at Broadcom did not appreciate, or may not have appreciated, what the appropriate accounting rules were or whether appropriate accounting charges were or should have been taken.
 
Option grants were documented by unanimous written consents with “as of” dates. These unanimous written consents were often prepared weeks or months after the fact, and, apparently, a number of the “as of” unanimous written consents were presented for signature at the same time.
 
With respect to both the Equity Award Committee and the Compensation Committee, the Audit Committee found no evidence of any attempt to falsify execution dates of the “as of” unanimous written consents, or of any effort to assert that the date of actual execution of the “as of” unanimous written consents was on the grant date or measurement date.
 
The Audit Committee determined that all options and other equity awards granted to Broadcom’s co-founders and all current and former members of the Board of Directors were properly granted.
 
Based on the totality of the information available to it, the Audit Committee found that certain individuals were actively responsible for the lack of controls and the inappropriate grant practices. With respect to these individuals, the Audit Committee concluded:
 
  •  Dr. Henry T. Nicholas III, Broadcom’s former President and Chief Executive Officer, bears significant responsibility for the lack of adequate controls in the option granting process due to the tone and style of doing business he set. There is substantial evidence that Dr. Nicholas was at times involved with the


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  selection of grant dates after the fact and with subsequent allocations of grants. There is evidence that, on at least a couple of occasions, Dr. Nicholas sought the advice of the Chief Financial Officer and the Vice President of Human Resources regarding the process for certain option grants. He did not personally benefit from any of the restated grants. For reasons unrelated to stock options, Dr. Nicholas left Broadcom as an officer in January 2003 and did not stand for re-election as a director at the May 2003 Annual Meeting of Shareholders.
 
  •  William J. Ruehle, Broadcom’s Chief Financial Officer from March 1998 until September 19, 2006, was at the center of the flawed option granting process. Mr. Ruehle retired from Broadcom two days before he was to be interviewed as part of the conduct review. Mr. Ruehle bears a substantial measure of responsibility for the lack of adequate controls and appropriate documentation in the option granting process. There is substantial evidence he engaged in the selection of grant dates after the fact. There is also substantial evidence that he engaged in subsequent allocations of grants. Mr. Ruehle failed to provide proper advice concerning proper accounting standards or to establish proper procedures. He was involved with grants for which the grant date was selected after the fact, and personally received options included in some of such grants.
 
  •  Nancy M. Tullos, Broadcom’s former Vice President of Human Resources from August 1998 until June 30, 2003, also bears significant responsibility for the lack of controls and deficiencies in the option granting process. She was heavily involved in the flawed option granting process. While there is a lack of evidence that Ms. Tullos herself selected grant dates after the fact, there is substantial evidence she was heavily involved in that process, was fully aware of what was occurring, and encouraged, assisted in, and enabled it. There is also substantial evidence that Ms. Tullos was at the center of allocations of grants to individuals after the grants were made. She was involved with grants for which the grant date was selected after the fact, and personally received options included in some of such grants.
 
None of these individuals agreed to be interviewed by the Audit Committee’s independent counsel during the conduct review.
 
The Audit Committee also found that a former Treasurer initiated or implemented, together with Mr. Ruehle, the selection of a few grant dates after the fact in late 2002. This Broadcom employee retired in December 2006 from his then mid-level position in the Information Technology Department as a result of the conduct review.
 
With respect to these individuals who were, to varying degrees, actively responsible for the lack of controls and the inappropriate grant practices, the following remedial steps were recommended by the Audit Committee and taken by Broadcom’s Board of Directors in mid-December, 2006:
 
  •  Each of these individuals either left Broadcom in 2003 for reasons unrelated to stock option practices or has recently retired from Broadcom as a result of the conduct review.
 
  •  Broadcom has repriced and terminated all of Mr. Ruehle’s outstanding exercisable options granted after the company’s initial public offering. The net value prior to repricing of Mr. Ruehle’s terminated options on December 15, 2006 exceeded $32 million. Broadcom also purchased from Mr. Ruehle at fair market value his outstanding vested options granted prior to Broadcom’s initial public offering. A description of Broadcom’s agreement with Mr. Ruehle pertaining to his options is included in Part III, Item 11 of this Report.
 
  •  Broadcom has terminated all of Ms. Tullos’ outstanding exercisable options. The net value of Ms. Tullos’ terminated options on December 15, 2006 exceeded $4 million.
 
  •  Broadcom has repriced and terminated all of the outstanding exercisable options granted after 2002 to the former Treasurer who left Broadcom because of the conduct review, and has repriced his earlier-granted options. The net value prior to repricing of his terminated options on December 15, 2006 exceeded $450,000.


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  •  None of these former employees will receive any financial assistance that Broadcom may decide to make available to other employees to offset any tax consequences of the restatement.
 
  •  Dr. Nicholas has no outstanding options.
 
The Audit Committee also found that two other employees — who were not responsible for the selection of grant dates or initiating subsequent allocations, and who gave appropriate advice concerning option grants — could nonetheless have been more alert that option granting practices were, or may have been, questionable or lacking in adequate controls. The Audit Committee concluded that these employees did not follow up as fully as they could have to address inadequacies in the option granting process.
 
The Audit Committee and the Board of Directors confirmed their confidence in the ability of these individuals to fully perform their responsibilities in the future. These two individuals have voluntarily agreed to the repricing of their outstanding options to the fair market value of Broadcom’s stock on the correct measurement dates and not to be included in any financial assistance that Broadcom may make available to its other employees to offset any tax consequences of the restatement.
 
Compensation Committee members executed “as of” unanimous written consents effecting the grants. The Audit Committee found that these Compensation Committee members reasonably relied on the advice of the responsible officers and employees and that management would present them with appropriate documents for execution.
 
The Audit Committee also concluded that Dr. Henry Samueli, a member of the Equity Award Committee and currently Broadcom’s Chairman and Chief Technical Officer, while involved with the flawed option granting process, reasonably relied on management and other professionals regarding the correct option accounting treatment and grant approval process. The Audit Committee also found that all outside directors reasonably relied on management and other professionals regarding the correct option accounting treatment and grant approval process.
 
Finally, the Audit Committee concluded that both Scott A. McGregor, Broadcom’s current President and Chief Executive Officer (who joined Broadcom in 2005), and Bruce E. Kiddoo, Vice President, Corporate Controller and Acting Chief Financial Officer (who assumed his position as Acting Chief Financial Officer when Mr. Ruehle retired on September 19, 2006), are appropriate individuals to certify Broadcom’s financial statements.
 
On December 15 and 18, 2006, Broadcom’s Board of Directors considered and approved each of the Audit Committee’s findings and conclusions with respect to the conduct review.
 
Restatement of Our Consolidated Financial Statements
 
As a result of the findings of our equity award review, our consolidated financial statements for the three years ended December 31, 2005 have been restated. The restated consolidated financial statements include unaudited financial information for interim periods of 2005 and 2004 consistent with Article 10-01 of Regulation S-X. We also recorded additional stock-based compensation expense and associated tax adjustments affecting our previously-reported financial statements for 1998 through 2002, the effects of which are summarized in cumulative adjustments to our additional paid-in capital, deferred compensation and accumulated deficit accounts as of December 31, 2002, in the amounts of $2.282 billion, $486.0 million and $1.796 billion, respectively. See the Consolidated Statements of Shareholders’ Equity, included in Part IV, Item 15 of this Report.


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     The following table summarizes the additional deferred compensation recorded on an annual basis as a result of the equity award review, categorized by each of the three reasons that led to the determination that particular option grants failed to meet the measurement date criteria of APB 25, together with the other adjustments made that were not related to changes in measurement dates:
                                                                                 
                                  Cumulative
                      Cumulative
 
                                  Amount
                      Amount
 
    Years Ended December 31,     December 31,
    Years Ended December 31,     December 31,
 
    1998     1999     2000     2001     2002     2002     2003     2004     2005     2005  
    (In thousands)  
 
Additional Deferred Compensation Recorded
                                                                               
No contemporaneous documentation
  $ 19,984     $ 119,342     $ 572,114     $ 234,552     $ 77,057     $ 1,023,049     $  14,015     $     —     $       —     $ 1,037,064  
Date selection
          226,198       442,993       45,013       178,341       892,545       11,936                   904,481  
Subsequent allocation
                619,356             58,421       677,777                         677,777  
Other adjustments(a)
    18,916       11,182       13,513       6,944       4,770       55,325       (3,150 )     79       16       52,270  
                                                                                 
    $ 38,900     $ 356,722     $ 1,647,976     $ 286,509     $ 318,589     $ 2,648,696     $ 22,801     $ 79     $ 16     $ 2,671,592  
                                                                                 
 
(a) Represents the following adjustments to deferred compensation that were not directly related to changes in measurement dates: 1) grants to consultants; 2) grants related to incorrect commencement dates of employment; 3) modifications to the stock options of terminated employees reflecting either acceleration of the vesting period of such options or the extension of the post-service exercise period of vested stock options; and 4) additional adjustments for modifications that were previously accounted for correctly but that required additional adjustment due to revised measurement dates.
 
     The following table summarizes the activity in additional deferred compensation as well as additional stock-based compensation expense and related tax adjustments on an annual basis. This table does not include previously-recorded activity in deferred compensation or stock-based compensation expense:
 
                                                                                 
                                  Cumulative
                      Cumulative
 
                                  Adjustment
                      Adjustment
 
    Years Ended December 31,     December 31,
    Years Ended December 31,     December 31,
 
    1998     1999     2000     2001     2002     2002     2003     2004     2005     2005  
    (In thousands)  
 
Activity in Additional Deferred Compensation
                                                                               
Additional deferred compensation
                                                                               
— beginning balance
  $     $ 27,010     $ 304,443     $ 1,473,122     $ 692,689     $     $ 485,973     $ 129,666     $ 60,422     $  
Additional deferred compensation recorded
    38,900       356,722       1,647,976       286,509       318,589       2,648,696  (b)     22,801       79       16       2,671,592  
Additional stock-based compensation expense amortization
    (11,770 )     (74,927 )     (442,326 )     (347,283 )     (374,337 )     (1,250,643 )     (112,967 )     (63,239 )     (42,011 )     (1,468,860 )
Acceleration of additional stock-based compensation expense(a)
                      (569,596 )           (569,596 )     (220,642 )                 (790,238 )
Elimination due to employee terminations
    (120 )     (4,362 )     (36,971 )     (150,063 )     (150,968 )     (342,484 )(b)     (45,499 )     (6,084 )     (2,313 )     (396,380 )
                                                                                 
                                         
Additional deferred compensation
                                                                               
— ending balance
  $ 27,010     $ 304,443     $ 1,473,122     $ 692,689     $ 485,973     $ 485,973  (c)   $ 129,666     $ 60,422     $ 16,114     $ 16,114 (e)
                                                                                 
Additional Stock-Based Compensation Expense and Related Tax Adjustments
                               
Additional stock-based compensation expense
  $ 11,770     $ 74,927     $ 442,326     $ 916,879     $ 374,337     $ 1,820,239     $ 333,609     $ 63,239     $ 42,011     $ 2,259,098  
Other tax adjustments
                                        397       1,846       2,629       4,872  
                                                                                 
Additional operating expenses
    11,770       74,927       442,326       916,879       374,337       1,820,239       334,006       65,085       44,640       2,263,970  
Income tax expense (benefit)
    (3,664 )     (26,686 )     (167,771 )           174,113       (24,008 )(b)           (19,525 )           (43,533 )
                                                                                 
Net adjustment
  $ 8,106     $ 48,241     $ 274,555     $ 916,879     $ 548,450     $ 1,796,231  (d)   $ 334,006     $ 45,560     $ 44,640     $ 2,220,437  
                                                                                 
 
 
(a) Acceleration resulting from our 2001 and 2003 stock option exchanges — See Note 9 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
(b) The total of $2,282,204 represents the cumulative adjustment to additional paid-in capital at December 31, 2002.
(c) Represents the cumulative adjustment to deferred compensation at December 31, 2002.
(d) Represents the cumulative adjustment to accumulated deficit at December 31, 2002.
(e) In accordance with the provisions of SFAS 123R, all remaining recorded deferred compensation was eliminated effective January 1, 2006 with a corresponding reduction in additional paid-in capital.

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The following table summarizes the impact of the additional stock-based compensation expense and related income tax adjustments (but not “other tax adjustments”) resulting from the review of our equity award practices on our previously-reported stock-based compensation expense on an annual basis:
 
                         
    Stock- Based Compensation Expense  
    As Reported     Adjustments     As Restated  
          (In thousands)        
 
Year ended December 31, 2005
  $ 60,004     $ 42,011     $ 102,015  
Year ended December 31, 2004
    74,687       43,714       118,401  
Year ended December 31, 2003
    577,487       333,609       911,096  
Year ended December 31, 2002
    419,663       548,450       968,113  
Year ended December 31, 2001
    511,010       916,879       1,427,889  
Year ended December 31, 2000
    120,209       274,555       394,764  
Year ended December 31, 1999
    4,713       48,241       52,954  
Year ended December 31, 1998
    1,900       8,106       10,006  
                         
    $ 1,769,673     $ 2,215,565     $ 3,985,238  
                         
 
Except as otherwise stated, all financial information contained in this Annual Report on Form 10-K/A gives effect to this restatement. Information regarding the effect of the restatement on our financial position and results of operations is provided in Note 2 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report. Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K previously filed by Broadcom, the related opinions of our independent registered public accounting firm, and all earnings press releases and similar communications issued by us, for all periods ended on or before December 31, 2005 should not be relied upon and are superseded in their entirety by the information in this Annual Report on Form 10-K/A.
 
 
We have modified the disclosures presented in our original Annual Report on Form 10-K for the year ended December 31, 2005, or 2005 Form 10-K, to reflect the effects of the restatement of our consolidated financial statements and have modified or updated certain other information as discussed below. However, this amended Annual Report on Form 10-K/A does not reflect all events occurring after the original filing of the 2005 Form 10-K or modify or update all the disclosures affected by subsequent events. Information not modified or updated in this Report reflects the disclosures made at the time of the original filing of the Form 10-K on February 16, 2006. Accordingly, this amended Annual Report on Form 10-K/A should be read in conjunction with our periodic filings, including any amendments to those filings, as well as any Current Reports on Form 8-K filed with the Securities and Exchange Commission, or SEC, subsequent to the date of the original filing of the 2005 Form 10-K, provided that you should not rely on any financial information in our previous SEC filings as noted above. The following items have been amended as a result of the restatement:
 
Part I — Item 1 — Business;
 
Part I — Item 1A — Risk Factors;
 
Part I — Item 4 — Submission of Matters to a Vote of Security Holders;
 
Part II — Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities;
 
Part II — Item 6 — Selected Consolidated Financial Data;
 
Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations;
 
Part II — Item 8 — Financial Statements and Supplementary Data;
 
Part II — Item 9A — Controls and Procedures;


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Part III — Item 10 — Directors and Executive Officers of the Registrant;
 
Part III — Item 11 — Executive Compensation;
 
Part III — Item 13 — Certain Relationships and Related Transactions;
 
Part III — Item 14 — Principal Accounting Fees and Services; and
 
Part IV — Item 15 — Exhibits and Financial Statement Schedules.
 
In addition, in accordance with applicable SEC rules, this amended Annual Report on Form 10-K/A includes updated certifications from our Chief Executive Officer and Acting Chief Financial Officer as Exhibits 31.1, 31.2 and 32
 
Please refer to Note 2 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, for additional information concerning the restatement.


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PART I
 
Item 1.   Business
 
 
Broadcom Corporation is a global leader in semiconductors for wired and wireless communications. Our products enable the delivery of voice, video, data and multimedia to and throughout the home, the office and the mobile environment. Broadcom provides the industry’s broadest portfolio of state-of-the-art system-on-a-chip and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. Our diverse product portfolio includes solutions for digital cable, satellite and Internet Protocol (IP) set-top boxes and media servers; high definition television (HDTV); high definition DVD players and personal video recording (PVR) devices; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; System I/Otm server solutions; broadband network and security processors; wireless and personal area networking; cellular communications; mobile multimedia and applications processors; mobile power management; and Voice over Internet Protocol (VoIP) gateway and telephony systems.
 
Broadcom was incorporated in California in August 1991. Our principal executive offices are located at 16215 Alton Parkway, Irvine, California 92618-3616, and our telephone number at that location is 949.926.5000. Our Internet address is www.broadcom.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other SEC filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our Class A common stock trades on the Nasdaq Global Select Market under the symbol BRCM. The inclusion of our website address in this Report does not include or incorporate by reference into this Report any information on our website.
 
 
Over the past two decades communications technologies have evolved dramatically in response to the proliferation of the Internet, ubiquitous wireless and mobile networks, and the emergence of new data-intensive computing and communications applications. These applications include, among others, high-speed Internet web browsing, wireless networking, high definition television and DVD players, VoIP-enabled products, sophisticated Gigabit Ethernet corporate networks, portable media players that are able to play both audio and video, cellular handsets that act as a camera or camcorder, handle email and surf the Internet, and mobile TV and game platforms and other wireless-enabled consumer electronics and peripherals. This evolution has also changed the ways in which we communicate. Consumers and businesses continue to seek faster, more cost-effective ways to receive and transmit voice, video, data and multimedia to and throughout the home, the office and the mobile environment. We can now access and communicate information via wired and wireless networks through a variety of electronic devices, including personal desktop and laptop computers, digital cable and satellite set-top boxes, high definition televisions, handheld computing devices such as personal digital assistants, or PDAs, and cellular phones. These applications and devices require increasingly higher processing speeds and information transfer rates within the computing systems and the data storage devices that support them and across the network communication infrastructures that serve them.
 
This evolution has inspired equipment manufacturers and service providers to develop and expand existing wired and wireless communications markets, and has created the need for new generations of integrated circuits. Integrated circuits, or chips, are made using semiconductor wafers imprinted with a network of electronic components. They are designed to perform various functions such as processing electronic signals, controlling electronic system functions, and processing and storing data. Today all electronic products use integrated circuits, which are essential components of personal computers, wired and wireless voice and data communications devices, networking products and home entertainment equipment.
 
The broadband transmission of digital information over existing wired and wireless infrastructures requires very sophisticated semiconductor solutions to perform critical systems functions such as complex signal processing, converting digital data to and from analog signals, and switching and routing of packets of information over


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Internet Protocol, or IP, -based networks. Solutions that are based on multiple discrete analog and digital chips generally cannot achieve the cost-effectiveness, performance and reliability required by today’s communications markets. These requirements are best addressed by new generations of highly integrated mixed-signal devices that combine complex analog, digital, and in many cases, radio frequency functions onto a single integrated circuit, and can be manufactured in high volumes using cost-effective process technologies.
 
 
We design, develop and supply a diverse portfolio of products targeted to a variety of wired and wireless communications markets. Our semiconductor and software solutions are ubiquitous, embedded in cable and DSL modems and digital set-top boxes, digital televisions, high definition DVD players, networking equipment, wireless-enabled laptop and desktop computers, and advanced PDAs and cellular phones, among other wired and wireless equipment.
 
The following is a brief description of each of our target markets and the system-on-a-chip and software solutions that we provide for each market.
 
Broadband Communications
 
Broadcom offers manufacturers a range of broadband communications and consumer electronics systems-on-a-chip that enable voice, video and data services over residential wired and wireless networks. These highly integrated silicon solutions continue to enable advanced system solutions, which include broadband modems and residential gateways, digital cable, satellite and IP set-top boxes and media servers, high definition and digital televisions, and high definition DVD players and personal video recording devices.
 
 
Unlike traditional dial-up modems that provide online access through the telephone system, cable modems provide users high-speed Internet access through a cable television network. Although cable networks were originally established to deliver television programming to subscribers’ homes, cable television operators have generally upgraded their systems to support two-way communications, high-speed Internet access and telecommuting through the use of cable modems. These modems are designed to achieve downstream transmission speeds of up to 43 megabits per second, or Mbps (North American standard), or 56 Mbps (international standard), and upstream transmission to the network at speeds of up to 30 Mbps. The speeds achieved by cable modems are nearly 1,000 times faster than the fastest analog telephone modems, which transmit downstream at up to 56 kilobits per second, or Kbps, and upstream at up to 28.8 Kbps. Cable modems typically connect to a user’s PC through a standard 10/100BASE-T Ethernet card or Universal Serial Bus, also known as a USB, connection. A device called a cable modem termination system, or CMTS, located at a local cable operator’s network hub, communicates through television channels to cable modems in subscribers’ homes and controls access to cable modems on the network.
 
The cable industry’s adoption of an open standard, the Data Over Cable Service Interface Specification, commonly known as DOCSIS®, has made possible interoperability among various manufacturers’ cable modems and CMTS equipment used by different cable networks. The first specification, DOCSIS 1.0, was adopted in 1997 and enabled the cost-effective deployment of cable modems. In 1998 the DOCSIS 1.1 specification was announced. This specification enhanced DOCSIS 1.0 to include support for cable telephony using VoIP technology, streaming video and managed data services. In 2002 DOCSIS 2.0 was approved. DOCSIS 2.0 adds support for higher upstream transmission speeds of up to 30 Mbps and more symmetric IP services, and provides extra capacity for cable telephony. The recently released DOCSIS 3.0 specification, which is currently under development, provides enhanced data rates and security, while maintaining backwards compatibility with prior standards.
 
The high speeds of today’s cable modems can enable an entirely new generation of multimedia-rich content over the Internet and allow cable operators to expand their traditional video product offerings to include data and telephone services. The adoption of cable modem services and the continued proliferation of homes with multiple PCs have also generated the need for residential networking. Cable television operators have recognized the


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opportunity to include this feature in the equipment they utilize for cable modem services through either home telephone line or wireless solutions, and the cable industry has created a specification called CableHometm that defines how a home intranet interoperates with a cable operator’s Internet service.
 
We offer integrated semiconductor solutions for cable modems and cable modem termination systems. We currently have a leading market position in both equipment areas, with an extensive product offering for the high-speed, two-way transmission of voice, video and data services to residential customers. We offer a complete system-level solution that not only includes integrated circuits, but also reference design hardware and a full software suite to support our customers’ needs and accelerate their time to market.
 
Cable Modem Solutions.  All of our cable modem chips are built around our QAMLink® DOCSIS-compliant transceiver and media access controller, or MAC, technologies. These technologies enable downstream data rates up to 56 Mbps and upstream data rates up to 30 Mbps and are compliant with DOCSIS versions 1.0, 1.1 and 2.0. These devices provide a complete DOCSIS system solution in silicon, enabling quality of service to support constant bit rate services like VoIP and video streaming.
 
Residential Broadband Gateway Solutions.  The levels of integration and performance that we continue to achieve in our cable modem chips are reducing the cost and size of cable modems while providing consumers with easy to use features and seamless integration to other transmission media. As a result, cable modem functionality is evolving into a small silicon core that can be incorporated into other consumer devices for broader distribution of IP-based services throughout the home. Broadcom offers residential broadband gateway solutions that bring together a range of capabilities, including those for cable modems, digital set-top boxes, home networking, VoIP and Ethernet connectivity. These products allow cable operators worldwide to provide residential broadband gateways capable of delivering digital telephone service via the PacketCabletm specification, IP video, and cable modem Internet services, as well as data over in-home Ethernet or wireless networks.
 
CMTS Solutions.  We have a complete end-to-end DOCSIS 1.0, 1.1, 2.0 and 3.0 compliant cable modem semiconductor solution for both head-end and subscriber locations. Our CMTS chipset consists of downstream and upstream physical layer, or PHY, devices and a DOCSIS MAC. This cable modem termination system enables the exchange of information to and from the subscriber location, making it a key element in the delivery of broadband access over cable.
 
DSL
 
Digital subscriber line technologies, commonly known as DSL, represent a family of broadband technologies that use a greater range of frequencies over existing telephone lines than traditional telephone services. This provides greater bandwidth to send and receive information. DSL speeds range from 128 Kbps to 52 Mbps depending upon the particular DSL standard and the distance between the central office and the subscriber. These data rates allow local exchange carriers to provide, and end users to receive, a wide range of new broadband services.
 
DSL technology has a number of standards or line codes used worldwide. We support all standards-based line codes, such as asymmetric DSL, or ADSL, ADSL2, ADSL2+ and very-high-speed DSL, or VDSL, including the standard Annexes used in North America, Europe, Japan and China. In addition, we provide end-to-end technology, with solutions designed for both customer premises equipment, or CPE, and central office applications. Our DSL technologies enable local exchange carriers and enterprise networking vendors to deliver bundled broadband services, such as digital video, high-speed Internet access, VoIP, video teleconferencing and IP data business services, over existing telephone lines.
 
DSL Modem and Residential Gateway Solutions.  For DSL CPE applications, we provide products that address the wide variety of local area network, or LAN, connectivity options, including Ethernet, USB-powered solutions, VoIP-enabled access devices and IEEE 802.11 wireless access points with multiple Ethernet ports. These solutions also provide a fully scalable architecture to address emerging value-added services such as in-home voice and video distribution. Wide area network connectivity is provided using integrated, standards-compliant PHY technology.
 
DSL Central Office Solutions.  We also provide highly integrated semiconductor solutions for DSL central office applications. Our BladeRunnertm high-density central office DSL chipset supports all worldwide


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DSL standards using our proprietary Firepathtm 64-bit digital signal processor. We believe these solutions will enable equipment manufacturers of digital subscriber line access multiplexers, or DSLAMs, and next generation digital loop carriers to offer a significant increase in the number of DSL connections that can be supported within telecommunication companies’ tight heat, power and space constraints. We also provide the inter-networking software that is enabling DSLAM technology to transition from Asynchronous Transfer Mode to Internet Protocol.
 
VDSL Solutions.  For VDSL applications, we offer our QAM-based V-thernet® product family, which supports Ethernet transport over standard telephone wires and is instrumental in developing standards and products for next-generation VDSL2 applications.
 
 
The last decade has seen rapid growth in the quantity and diversity of television programming. Despite ongoing efforts to upgrade the existing cable infrastructure, an inadequate number of channels exists to provide the content demanded by consumers. In an effort to increase the number of channels and provide higher picture quality, cable service providers began offering digital programming in 1996 through the use of new digital cable set-top boxes. These digital cable set-top boxes facilitate high-speed digital communications between a subscriber’s television and the cable network. Digital cable set-top boxes are currently able to support downstream transmission speeds to the subscriber up to 43 Mbps (North American standard) or 56 Mbps (international standard), and several hundred MPEG-2 or MPEG-4 advanced video coding compressed digital television channels.
 
Direct broadcast satellite, or DBS, is the primary alternative to cable for providing digital television programming. DBS broadcasts video and audio data from satellites directly to digital set-top boxes in the home via dish antennas. Due to the ability of DBS to provide television programming where no cable infrastructure is in place, we believe that the global market for DBS set-top boxes will outpace the market for cable set-top boxes.
 
The Federal Communications Commission has stated that traditional terrestrial broadcast stations will be required to broadcast in digital format. Currently, the FCC is targeting 2009 for this mandated digital conversion. This conversion will ultimately require all television sets that are 13 inches or larger, DVD players and video cassette recorders to incorporate an HDTV receiver. We believe this conversion to digital broadcasting will create demand for new digital cable and satellite set-top boxes and digital television receivers. In addition, manufacturers continue to develop and introduce new generations of digital cable and satellite set-top boxes that incorporate enhanced functionalities, such as Internet access, personal video recording, or PVR, video on demand, interactive television, HDTV, 3-D gaming, audio players and various forms of home networking.
 
TV manufacturers also plan to incorporate digital cable-ready capability into television sets for the North American market by integrating today’s cable set-top box functionality directly into TV sets. The manufacturers of TVs, through their trade association, the Consumer Electronics Association, and in cooperation with North American cable operators, have created an industry specification called the “plug-n-play” agreement. This agreement and its associated specification define how to design digital cable-ready TVs for connection into the North American cable infrastructure.
 
Cable-TV Set-Top Box Solutions.  We offer a complete silicon platform for the digital cable-TV set-top box market. These highly integrated chips give manufacturers a broad range of features and capabilities for building standard digital cable-TV set-top boxes for digital video broadcasting, as well as high-end interactive set-top boxes. These high-end set-top boxes merge high-speed cable modem functionality with studio-quality graphics, text and video for both standard definition television, or SDTV, and HDTV formats.
 
Our cable-TV set-top box silicon consists of front-end transceivers with downstream, upstream and MAC functions, single-chip cable modems, advanced 2D/3D video-graphics encoders and decoders, radio frequency television tuners based on complementary metal oxide semiconductor, or CMOS, process technology, and digital visual interface chipsets. These cable-TV set-top box chips support most industry transmission and television standards, enabling universal interoperability and easy retail channel distribution. Peripheral modules incorporated into front-end devices also provide support for common set-top box peripheral devices, such as infrared remotes and keyboards, LED displays and keypads.


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Our chips provide a comprehensive silicon platform for high-end interactive set-top boxes, supporting the simultaneous viewing of television programming with Internet content capability in either HDTV or SDTV format. This capability offers consumers a true interactive environment, allowing them to access Internet content while watching television. By adding our home networking and VoIP technologies, these set-top boxes can also support the functions of a residential broadband gateway for receiving and distributing digital voice and data services throughout the home over Ethernet or wireless networks. In addition, our set-top box semiconductor solutions incorporate PVR functionality. This allows viewers to watch and record multiple programs and enables additional features such as selective viewing, fast forward, fast reverse, skip forward, skip back, and slow motion and frame-by-frame viewing.
 
DBS Solutions.  By leveraging our extensive investment and expertise in the cable-TV set-top box market, we have also developed comprehensive DBS solutions. These products include an advanced, high definition video graphics subsystem, which drives the audio, video and graphic interfaces in DBS set-top boxes and provides multi-stream control to support PVR capabilities; a CMOS satellite tuner, which allows our customers to provide additional channel offerings; front-end receiver chips for set-top boxes, including an advanced modulation system to increase satellite capacity; and a digital visual interface transmitter. In addition, we offer a complete end-to-end chipset for receiving and displaying HDTV. This chipset provides television and set-top box manufacturers with a high performance vestigial side band receiver and a 2D/3D video-graphics subsystem for SDTV and HDTV displays.
 
To meet the needs of the expanding broadband satellite market, we have also developed a complete satellite system solution that enables DBS providers to cost effectively deploy two-way broadband satellite services, enabling Internet access via satellite. This solution includes an advanced modulation digital satellite receiver, a digital satellite tuner/receiver and a high-performance broadband gateway modem, combining the functionality of a satellite modem, a firewall router and home networking into a single chip.
 
IP Set-Top Box Solutions.  In 2005 Broadcom also introduced a new family of next generation advanced video compression, high definition system-on-a-chip solutions for IP set-top boxes. These solutions include high definition video decoder/audio processor chips and a dual channel high definition and personal video recorder chip.
 
Digital TV Solutions.  We were an early developer of advanced television systems committee, or ATSC, demodulators used for the reception of terrestrial HDTV signals broadcast in North America. Capitalizing on the FCC HDTV mandate and the “plug-n-play” agreement, as well as on our extensive cable-TV set-top box technology portfolio, we have developed a highly integrated digital TV system-on-a-chip solution. This digital TV solution, when combined with our existing satellite, cable or terrestrial demodulators, forms a complete semiconductor solution for HDTV delivery platforms, including satellite, cable or terrestrial set-top boxes and integrated high definition televisions. Our integrated HDTV solution will allow television manufacturers to develop digital cable-ready televisions that connect directly to the North American cable infrastructure without the need for an external set-top box.
 
 
The DVD player market is currently undergoing a transition as a result of the increased adoption of HDTV sets by consumers and the advent of advanced video compression technologies, such as H.264 (also known as MPEG-4 Part 10/advanced video coding (AVC)) and VC-1 (SMPTE 421M), the SMPTE standard based on Microsoft® Windows Media® Video 9. These trends have led television broadcasters and movie studios to begin offering more high definition video content. In turn, consumer electronics manufacturers have begun offering high definition DVD players and recorders, with substantially greater storage capacity and the ability to effectively handle the significantly higher bit rates associated with high resolution HDTV content. However, similar to the battle between VHS versus Betamax in the 1970’s and 1980’s, two competing optical disc formats have emerged: the Blu-raytm and HD DVDtm formats. Both Blu-ray and HD DVD disc formats offer significantly greater storage capacity than the current DVD standard, but they differ in the depth of the recording layer inside the disc; like a standard DVD, the recoding layer in an HD DVD is midway through the disc, while in a Blu-ray disc it can be found much closer to the surface. This difference makes the two formats incompatible.


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Broadcom entered the high definition DVD player market through our acquisition of Sand Video, a developer of advanced video compression technology, in April 2004. Our initial product for this market is a high definition video decoder/audio processor chip that is fully compliant with both the Blu-ray and HD DVD disc formats. This single-chip solution also provides backwards compatibility for current DVD video titles as well as new HD DVD titles that may be authored in an MPEG-2 format. In addition, we offer a reference design for the development of Blu-ray and HD DVD media players that includes our HD audio/video decoder chip, as well as an HD digital video system chip and a software platform that afford our customers a wide range of integration options. In 2006 we introduced a universal optical disc platform that has an advanced feature set and a flexible optical disc software stack that is compliant with both Blu-ray and HD DVD specifications, providing customers with a complete platform for next generation media players that support both disc formats, as well as other home entertainment and network applications. The new platform incorporates the decoding, processing and memory functions for both Blu-ray and HD DVD media players, eliminating the need for manufacturers to build two hardware platforms. The platform supports a wide variety of mandatory audio and video compression standards required for Blu-ray and HD DVD optical disc formats, and also provides full backwards compatibility for current DVD video titles as well as DVD-R, DVD-VR and audio CDs.
 
Enterprise Networking
 
Broadcom designs and develops semiconductor solutions for PC, server and network equipment makers that provide products to handle the flow of information within small-to-medium- sized businesses, large enterprises and service provider networks. Our solutions enable these networks to offer higher capacity, faster, more cost-efficient transport and management of voice, data and video traffic across wired and wireless networks. For desktop computers and servers, we supply high-speed controllers, server I/O chipsets and RAID storage controllers. On the infrastructure side, Broadcom produces end-to-end networking products including Ethernet physical layer and switching devices, optical networking components, embedded processors, security processors and serializers/deserializers.
 
 
Local area networks, or LANs, consist of various types of equipment, such as servers, workstations and desktop and laptop computers, interconnected by copper, fiber or coaxial cables utilizing a common networking protocol, generally the Ethernet protocol. Ethernet scales in speed from 10 Mbps to 10 gigabits per second, or Gbps, providing both the bandwidth and scalability required in today’s dynamic networking environment. As the volume and complexity of network traffic continues to increase, communications bottlenecks have developed in corporate LANs. As a result, new technologies such as Gigabit Ethernet, a networking standard that supports data transfer rates of up to one Gbps, and the 10 Gigabit Ethernet standard, which supports data transfer rates of up to 10 Gbps, are replacing older technologies such as Fast Ethernet, which supports data transfer rates of up to 100 Mbps, and 10BASE-T Ethernet, which supports data transfer rates of 10 Mbps.
 
Gigabit Ethernet is emerging as the predominant networking technology for desktop and laptop computers. As Gigabit Ethernet is deployed to desktop and laptop computers, we expect server and backbone connections to continue to migrate to the new 10 Gigabit Ethernet standard. We further expect the continued use of switch connections in place of legacy repeater connections. Switches not only have the ability to provide dedicated bandwidth to each connection, but also provide routing functionality and possess the capability to deal with differentiated traffic such as voice, video and data. We anticipate that a significant portion of the installed base of 10/100BASE-T Ethernet switches as well as network interface cards, or NICs, will be upgraded to faster technologies.
 
Our 10/100 Mbps Ethernet and Gigabit Ethernet transceivers, controllers and switches are integrated, low-power semiconductor solutions for servers, workstations, desktop and laptop computers, VoIP phones and wireless access points that enable the high-speed transmission of voice, video and data services over the Category 5 unshielded twisted-pair copper wiring widely deployed in enterprise and small office networks. We also offer 10 Gigabit Ethernet transceivers for network infrastructure products. These high-speed connections are enabling users to share Internet access, exchange graphics and video presentations, receive VoIP and video conferencing services, and share peripheral equipment, such as printers and scanners. In addition, we incorporate intelligent


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networking functionality into our devices, enabling system vendors to deploy enhanced classes of services and applications, typically found only in the core of the network, to every corporate desktop.
 
Digital Signal Processing Communication Architecture.  Our complex Ethernet transceivers are built upon a proprietary digital signal processing, or DSP, communication architecture optimized for high-speed enterprise network connections. Our DSP silicon core enables interoperability and robust performance over a wide range of cable lengths and operating conditions, and delivers performance of greater than 250 billion operations per second. This proprietary DSP architecture facilitates the migration path to smaller process geometries and minimizes the development schedule and cost of our transceivers. It has been successfully implemented in .35, .25, .18 and .13 micron CMOS processes, and in chips with one, four, six and eight ports.
 
Fast Ethernet and Gigabit Ethernet Transceivers.  Our 10/100 Ethernet transceiver product line ranges from single-chip 10/100 Ethernet transceivers to single-chip octal 10/100 Ethernet transceivers. These devices allow information to travel over standard Category 5 copper cable at rates of 10 Mbps and 100 Mbps. Our Gigabit Ethernet transceivers are enabling manufacturers to make equipment that delivers data at Gigabit speeds over existing Category 5 cabling. We believe this equipment can significantly upgrade the performance of existing networks without the need to rewire the network infrastructure with fiber or enhanced copper cabling. Additionally, we have developed a family of semiconductor solutions incorporating four transceivers in a single chip, which is optimized for high-port-density Gigabit Ethernet switches and routers. Our QuadSquad® transceivers greatly reduce system costs by simplifying typical high-density board designs, further facilitating the deployment of Gigabit Ethernet bandwidth to the desktop.
 
Our Gigabit transceivers are driving the market toward lower power, smaller footprint solutions, making it easier and less expensive to build 10/100/1000 Ethernet NICs, switches, hubs and routers and to put networking chips directly on computer motherboards in LAN on motherboard, or LOM, configurations. We plan to continue to incorporate additional functionality into all of our transceivers, providing customers with advanced networking features, on-chip and cable diagnostic capabilities and higher performance capabilities.
 
10 Gigabit Ethernet Transceivers.  We have developed a family of 10 Gigabit Ethernet CMOS transceivers. When combined with serial 10 Gigabit optics, these devices can simultaneously transmit and receive at 10 Gbps data rates over 100 kilometers of existing single mode optical fiber. A 10 Gigabit Ethernet link over such distances extends the reach of Ethernet into local, regional and metropolitan fiber optic networks. We believe that significant cost, performance and latency advantages can be realized when the Ethernet protocol and other associated quality of service capabilities are available in these network domains. We anticipate that convergence around 10 Gigabit Ethernet will allow massive data flow from remote storage sites across the country over the metropolitan area network, or MAN, and into the corporate LAN, without unnecessary delays, costly buffering for speed mismatches or latency, or breaks in the quality of service protocol.
 
SerDes Technology and Products.  We have developed an extensive library of serializer/deserializer, or SerDes, cores for Ethernet, storage and telecommunications network infrastructures. The technology is available in stand- alone SerDes devices or integrated with our standard and custom products. New generations of SerDes architectures provide advanced on-chip diagnostic intelligence to allow system designers to monitor, test and control high-speed serial links for signal integrity and bit error rate performance to reduce development cycles and costly field maintenance support.
 
Gigabit Ethernet Controllers.  Built upon five generations of Gigabit Ethernet MAC technology, our NetXtreme® family of Gigabit Ethernet controllers supports peripheral component interconnect, or PCI®, PCI-X® and PCI Express® local bus interfaces for use in NICs and LOM implementations. The NetXtreme family includes comprehensive solutions for servers, workstations, and desktop and laptop computers. These devices incorporate an integrated Gigabit Ethernet PHY transceiver and are provided with an advanced software suite available for a variety of operating systems. The NetXtreme architecture also features a processor-based design that enables advanced management software to run in firmware so it can be remotely upgraded through simple downloads. Our NetXtreme IItm family of Ethernet controllers consists of converged network interface controllers that are designed to improve server performance by integrating a TCP/IP offload engine, remote direct memory access, iSCSI storage and remote management. NetXtreme II controllers simultaneously perform storage networking, high-performance clustering, accelerated data networking and remote system management pass-through functions. In 2005 Broadcom


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added new security features to our NetXtreme controllers, including integrated Trusted Platform Module 1.2 functionality, to enable PC manufacturers to offer hardware-based security as a standard feature on enterprise client personal computers. The entire NetXtreme product family is fabricated in a .13 micron or .18 micron CMOS process.
 
In 2005 Broadcom introduced its NetLink® family of Gigabit Ethernet controllers, which are based on the PCI Express bus architecture and optimized for small-to-medium-sized businesses. Designed for use in personal computers, NetLink controllers enable applications such as video editing and file transfer, LAN gaming, video conferencing, multimedia data sharing and desktop management, while at the same time offering very low power consumption.
 
Ethernet Switches.  We offer a broad switch-on-a-chip product line ranging from low-cost, unmanaged and managed, OSI Layer 2 eight port switch chips to high-end managed, Layer 3 through Layer 7 enterprise class switch chips.
 
Our ROBOswitch-plustm product family consists of Layer 2+ switch chips supporting five, eight, 16 and 24 port 10/100 Ethernet switches, and our ROBO-HStm product family supports single-chip networking solutions for Layer 2+ Gigabit Ethernet configurations of four, five, eight, 16 and 24 ports. We believe our switch chips make it economical for the remote office/business office and small office/home office network markets to have the same high-speed local connectivity as the large corporate office market. Our highly integrated family of switch products combines the switching fabric, MACs, 10/100 and Gigabit Ethernet transceivers, media independent interface and packet buffer memory in single-chip solutions. These chips give manufacturers multiple switch design options that combine plug and play ease-of-use, scalability, network management features and non-blocking switching performance at optimal price points for the remote office and branch office user. In 2005 we incorporated two new technologies into our ROBOSwitchtm products, CableCheckertm technology, which finds the location of wiring faults without disrupting live network traffic, and LoopDTechtm technology, which provides an immediate warning when a loop is introduced in the network, allowing the problem to be identified and remedied quickly. In 2006 we introduced a new family of ROBOswitch Gigabit Ethernet products, ranging from 16 to 48 Gigabit Ethernet ports, that features an integrated MIPS® processor, which reduces overall system cost, and WebSuperSmarttm software, an easy to use, web-based network configuration tool. The ROBOswitch family includes products for unmanaged, smart and managed solutions.
 
Our family of high-end StrataSwitch® products consists of wire-speed, multi-layer chips that combine multiservice provisioning capabilities with switching, routing and traffic classification functionality in single-chip solutions. Replacing as many as 10 chips with one, our StrataSwitch IItm family of chips incorporates 24 Fast Ethernet and two Gigabit Ethernet ports with advanced Layer 3 switching and multi-layer packet classification.
 
Our StrataXGS® product family provides the multi-layer switching capabilities of our StrataSwitch II technology with wire-speed Gigabit and 10 Gigabit Ethernet switching performance for enterprise business networks. These devices, in combination with our quad and octal Gigabit Ethernet transceivers, enable system vendors to build 12, 24 and 48 port multi-layer Gigabit Ethernet stackable switches, supporting systems with up to 1,536 Gigabit Ethernet ports. These multi-layer switches are capable of receiving, prioritizing and forwarding packets of voice, video and data at high speeds over existing corporate networks. The StrataXGS family also enables advanced network management capabilities in the switching infrastructure to track data flows and monitor or control bandwidth on any one of these flows. This results in a more intelligent use of network resources and enables a whole new set of network service applications that require high bandwidth, reliable data transmission, low latency and advanced quality service features such as streaming video and VoIP. In addition, our StrataXGS IIItm product family, introduced in 2005, incorporates advanced features such as IPv6 routing, unified wired and wireless switch management, advanced security and intrusion detection features, sophisticated traffic management, and scalable buffer and routing tables for high end applications.
 
 
With the proliferation of data being accessed and sorted by the Internet and corporate intranets, the demand for servers has increased substantially. As integral pieces of the overall communications infrastructure, servers are


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multiprocessor-based computers that are used to support users’ PCs over networks and to perform data intensive PC functions such as accessing, maintaining and updating databases.
 
Unlike mobile and desktop PCs, which are dominated by central processing units, or CPUs, server, storage and workstation platforms require highly-tuned core logic to provide high bandwidth, high performance and the reliability, availability and scalability that customers demand. The Internet has created a new market for servers, storage and workstation platforms as users access data and entertainment stored on servers from their PCs, handheld computers and wireless handsets.
 
Our SystemI/O semiconductor solutions act as the essential conduits for delivering high-bandwidth data in and out of servers, and coordinating all input/output, or I/O, transactions within server, storage and workstation platforms, including among external I/O devices, the main system memory and multiple CPUs.
 
We provide core logic technology that manages the flow of data to and from a system’s processors, memory and peripheral I/O devices. Our SystemI/O products are used to design low-end and mid-range servers with two to four CPUs, as well as storage, workstation, blades and networking platforms. These products also provide reliability, availability and serviceability features. In 2005 we introduced a HyperTransporttm-based server I/O controller that incorporates PCI Express, PCI-X, HyperTransport tunnel and Gigabit Ethernet interfaces. Our current generation of SystemI/O products supports the AMD Opteron® product line and IBM PowerPC processors.
 
 
To address the increasing volume of data traffic emanating from the growing number of broadband connections in homes and businesses, MANs and wide area networks, or WANs, will have to evolve at both the transport and switching layers. We believe that the CMOS fabrication process will be a key technology in this evolution by enabling the development of smaller optical modules and system components that cost less, consume less power and integrate greater functionality.
 
Electronic components for optical communications are a natural extension of our large portfolio of high-speed LAN chips, one that will allow us to provide end-to-end semiconductor solutions across the WAN, MAN and LAN that increase the performance, intelligence and cost-effectiveness of broadband communications networks.
 
We offer a portfolio of CMOS OC-48 and OC-192 transceiver and forward error correction solutions, chips for Synchronous Optical Networks and dense wave division multiplexing, or DWDM, applications, as well as a serial CMOS transceiver for 10 Gigabit Ethernet applications. Our use of the CMOS process allows substantially higher levels of integration and lower power consumption than competitive gallium arsenide, bipolar or silicon germanium solutions. Our DWDM transport processor combines an OC-192 transceiver, forward error correction, performance monitoring logic and G.709 digital wrapper into a single CMOS chip solution, occupying less than one half the space and consuming one-third the power of non-integrated solutions.
 
In addition, our latest generation of switch devices is designed for the Metro access and edge markets. These devices feature support for IPv4 and IPv6, MPLS, Ethernet over MPLS, advanced quality of service, and sophisticated packet classification and traffic management. They are also scalable to large systems with external memory.
 
 
The economies of scale derived from the Ethernet protocol have created emerging markets for Ethernet applications. Broadcom’s advanced switch products are being used in second and third generation cellular infrastructures, IP DSLAM, Metro Ethernet, blade servers in data centers, passive optical networks and residential Ethernet applications. In addition, our Ethernet transceivers are now being integrated into printers, gaming consoles, LAN on motherboard applications, audiovisual equipment and a number of other consumer devices.
 
 
Most corporations use the Internet for the transmission of data among corporate offices and remote sites and for a variety of e-commerce and business-to-business applications. To secure corporate networks from intrusive


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attacks and provide for secure communications among corporate sites and remote users, an increasing amount of networking equipment will include technology to establish virtual private networks, or VPNs, which use the Internet Protocol security, or IPSec, protocol. In addition to VPNs, secure socket layer, commonly referred to as SSL, is used to secure sensitive information among users and service providers for e-commerce applications. Personal authentication has also become a part of daily life — people present “credentials” to prove their identity and gain access to a place or thing, such as a corporate network, or to engage in financial transactions. Our identities have increasingly become a collection of electronic bits. While enabling unprecedented levels of convenience, digital transactions inherently expose individuals and companies to a greater risk of identity theft and invasion of privacy.
 
Our SSL family of CryptoNetX® high-speed security processors and adapters for enterprise networks is enabling companies to guard against Internet attacks without compromising the speed and performance of their networks. Our PCI 2.2-compliant adapters provide a range of performance from 800 to 10,000 SSL transactions per second. Our current generation of CryptoNetX processors, introduced in 2005, combine IP security, SSL protocol processing, cryptographic acceleration and hardware-based identity management and authentication into a single-chip. These processors are built upon a proprietary, scalable silicon architecture that performs standards-compliant cryptographic functions at data rates ranging from a few Mbps to 10 Gbps full duplex. This architecture is being deployed across all of our product lines, addressing the entire broadband security network spectrum from residential applications to enterprise networking equipment. This scalable architecture allows us to develop standalone security products for very high-speed networking applications and to integrate the IP security processor core into lower speed solutions for consumer products, such as cable and DSL modem applications.
 
In 2006 Broadcom introduced a secure applications processor with integrated radio frequency identification technology that is designed to facilitate secure personal authentication transactions associated with physical access, logical access (into a PC or network) and contactless payment applications.
 
 
Broadband processors are high performance devices enabling high-speed computations that help identify, optimize and control the flow of data within the broadband network. The continued growth of IP traffic, coupled with the increasing demand for new and improved services and applications such as security, high-speed access and quality of service, is placing additional processing demands on next-generation networking and communications infrastructures. From the enterprise to access network to the service provider edge, networking equipment must be able to deliver wire-speed performance from the OC-3 standard, which transmits data at 155 Mbps, through the OC-192 standard, which transmits data at 10 Gbps, as well as the scalability and flexibility required to support next-generation services and features. In the enterprise and data center markets, server and storage applications require high computational performance to support complex protocol conversions, and services such as virtualization. With the migration from second generation cellular mobile systems, or 2G, to the third generation cellular mobile systems, or 3G, networks and mobile infrastructure equipment must be able to support higher bandwidth rates utilizing low power resource levels.
 
Leveraging our expertise in high-performance, low-power very large scale integration design, we have developed a family of high performance, low power processor solutions designed specifically to meet the needs of next-generation networks. Our SiByte® family of processors delivers four key features essential for today’s embedded broadband network processors: very high performance, low power dissipation, high integration of network-centric functions, and programmability based on an industry-standard instruction set architecture. At the heart of the SiByte family of processors is the SB-1 core, a MIPS 64-bit superscalar CPU capable of operating at frequencies of 400 MHz to 1.2 GHz. These processors provide customers with a solution for high-speed network processing, including packet classification, queuing, forwarding and exception processing for wired and wireless networks. They enable complex applications such as deep content switching, routing and load balancing to be performed at wire speed. Our devices are also being designed for utilization in the fast growing network storage market, including network attached storage, storage area networking and RAID applications. Our general purpose processors are ideal for the complex protocol conversions, virtualization and proxy computations that storage applications require.


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Custom silicon products are devices for applications that customers are able to semi-customize by integrating their own intellectual property with our proprietary intellectual property cores. We have successfully deployed such devices into the LAN, WAN and PC markets. Our typical semi-custom devices are complex mixed-signal designs that leverage our advanced design processes.
 
Mobile & Wireless Networking
 
Broadcom’s mobile and wireless products allow manufacturers to develop leading edge mobile devices, enabling end-to-end wireless opportunities for the home, business and mobile markets. Products in this area include solutions in every major wireless market segment, including wireless local area, cellular and wide area, and personal area networking, as well as a comprehensive range of emerging next generation mobile technologies. Our portfolio of mobile and wireless products is enabling a new generation of portable devices including cellular handsets, mobile TV and game platforms and other wireless-enabled consumer electronics and peripherals, such as home gateways, printers, VoIP phones, PC cards and notebook computers.
 
 
Wireless local area networking, also known as wireless LAN or Wi-Fi® networking, allows equipment on a local area network to connect without the use of any cables or wires. Wireless local area networking adds the convenience of mobility to the powerful utility provided by high-speed data networks, and is a natural extension of broadband connectivity in the home and office.
 
The first widely adopted standard for Wi-Fi technology was the IEEE 802.11b specification, which is the wireless equivalent of 10 Mbps Ethernet, allowing transfer speeds up to 11 Mbps and spanning distances of up to 100 meters. However, the 802.11g specification, which provides almost five times the data rate of 802.11b networks, has replaced 802.11b as the mainstream wireless technology for both business and consumer applications. The 802.11a standard applies to wireless LANs that operate in the 5 GHz frequency range with a maximum data rate of 54 Mbps. In early 2008, we believe a fourth Wi-Fi standard, 802.11n, will be ratified. However, Broadcom is already developing products based on a draft version of that standard. 802.11n will deliver up to eight times the throughput and four times the range of 802.11g.
 
Wi-Fi technology was first utilized in applications such as computers and routers, and is now being embedded into a number of other electronic devices such as printers, digital cameras, gaming devices, PDAs, cellular phones and broadband modems. Our 54g® chipsets represent our implementation of the IEEE 802.11g wireless LAN standard that preserves full interoperability with 802.11b but provides connectivity at speeds of up to 54 Mbps. We offer a family of low power 54g chipsets that are specifically designed to allow PDAs, portable music players, cellular phones, and handheld games to connect to wireless home or enterprise networks using 802.11b, 802.11g or 802.11a/g dual-band technology. Our Intensi-fitm chipsets, introduced in 2006, are built to support the draft 802.11n standard, and are backward compatible to all previous WLAN standards: 802.11a, 802.11b, and 802.11g. These chipsets enable us to serve a new demand for video distribution in the home.
 
Continuous software and hardware performance enhancements have refined our wireless LAN product family, which now includes 125 High Speed Modetm technology, which increases the speed of wireless transmissions, BroadRangetm technology, which extends Wi-Fi coverage range, and SecureEasySetuptm, a software wizard that enables simple setup of a secure wireless network. All of our AirForce® products also offer advanced security features, including certified support for Wi-Fi Protected Accesstm, or WPA (versions 1 and 2), the Cisco Compatible Extensions, and hardware accelerated Advanced Encryption Standard, or AES, encryption. Our entire family of wireless LAN chips consists of all-CMOS solutions that are capable of self-calibrating based on usage temperature and other environmental conditions.
 
 
The cellular handset market is transitioning from pure voice to broadband multimedia and data, transforming the traditional cellular phone from a voice-only device into a multimedia gateway. Products emerging from this


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transition will allow end-users to wirelessly download e-mail, view web pages, stream audio and video, and conduct videoconferences with cellular phones, PDAs, laptops and other mobile devices.
 
The international Global System for Mobile Communication, or GSM, is currently the dominant standard for cellular mobile communications. Enhanced data communications standards derived from GSM include General Packet Radio Services, or GPRS, Enhanced Data Rates for GSM Evolution, or EDGE, and Universal Mobile Telecommunications System, or UMTS. UMTS technologies, including Wideband Code Division Multiple Access (WCDMA), High Speed Downlink Packet Access (HSDPA) and High Speed Uplink Packet Access (HSUPA), are typically referred to as 3G technologies. These standards have extended GSM to enable packet-based “always on” Internet applications and more efficient data transport with higher transmission rates for a new generation of data services such as Internet browsing, 3-D gaming and multimedia messaging with rich graphics and audio content.
 
We develop and market GSM, GPRS, EDGE and UMTS chipsets and reference designs with complete software and terminal solutions for use in cellular phones, cellular modem cards and wireless PDAs. Our CellAiritytm cellular products, introduced in 2006, include baseband processor solutions, which integrate both mixed signal and digital functions on a single chip, a cellular software suite that includes enhanced communications and multimedia functionality, and pre-integrated cellular phone reference designs that assist our customers in achieving easier and faster transitions from initial prototype designs to final production releases. We also provide a range of handset and cellular modem engineering design services to select customers, encompassing printed circuit board, RF and handset hardware design, software development and integration, product verification and certification, and manufacturing support.
 
 
The Bluetooth® short-range wireless networking standard is a low-cost wire-replacement technology that enables connectivity among a wide variety of mainstream consumer electronic devices including PCs, mobile phones, PDAs, headsets and automotive electronics. Bluetooth short-range wireless connectivity enables personal area networking, or PAN, at speeds up to three Mbps, and can cover distances up to 30 feet. Bluetooth technology allows devices to automatically synchronize and exchange data with other Bluetooth-enabled devices without the need for wires, and enables wireless headset connections to cellular phones and wireless mouse and keyboard applications.
 
Our Blutonium® family of single-chip Bluetooth devices and software profiles and stacks provides a complete solution that enables manufacturers to add Bluetooth functionality to almost any electronic device with a minimal amount of development time and resources. Our Bluetooth solutions, all of which have been qualified by the Bluetooth Qualification Board to meet version 1.2 or 2.0 of the Bluetooth specification, are incorporated in PCs, PDAs, wireless mouse and keyboard applications, GSM/GPRS/UMTS and CDMA mobile phones, and other end products.
 
Our Bluetooth solutions offer the industry’s highest levels of performance and integration with designs in standard CMOS, allowing them to be highly reliable while reducing manufacturing costs. In addition, we have developed InConcerttm coexistence technology to allow products enabled with our AirForce Wi-Fi and Blutonium Bluetooth chips to collaboratively coexist within the same radio frequency.
 
During 2006 Broadcom added several new, enhanced products to its Bluetooth product line, including a new device that integrates a complete Bluetooth radio and baseband with a high performance FM stereo radio receiver into a single chip, and a fully integrated Bluetooth smartphone software that provides Windows-based mobile smartphone devices with industry leading Bluetooth functionality that was only previously available in desktop and notebook computers.
 
 
Multimedia is becoming increasingly prevalent in handheld devices such as cellular phones. To support new multimedia features including imaging, graphics, camera image capture, audio capture, music playback, music streaming, video streaming, video capture, gaming, mobile TV, and more, Broadcom offers a line of video and multimedia processors based on a low power, high performance architecture referred to as Videocore®.


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Unlike hard-wired processor cores, Videocore devices are built to provide customers the benefit of total software flexibility and programmability. Videocore supports a wide variety of standard and non-standard software and codecs including, but not limited to, extremely low power implementations of MPEG-4 and H.264 for video, MP3 and AAC for audio, and MIDI. Providing the base codecs to our key customers allows them to rapidly develop next-generation products while maintaining backward compatibility of applications software. Because the fully programmable architecture of our mobile multimedia processors enables a complete range of multimedia functions to be executed in software, the system designer can quickly move to production without the costly overhead and time-to-market uncertainty of hardware accelerators. The scalability of the architecture allows features or new industry standard codecs to be added shortly before product release or through firmware upgrades in the field.
 
Our Videocore processors can be used either as standalone multimedia processors or as co-processors in conjunction with a host processor such as a GSM, EDGE or UMTS baseband. Videocore-enabled video and multimedia processors for advanced handheld multimedia products are designed and optimized for video record/playback, mobile TV and 3D mobile gaming. Videocore technology is designed to create power efficient, high performance processors focused on multimedia for cellular handsets, but we are also deploying Videocore processors into a number of other portable applications, where battery life and performance are important.
 
 
The increasing popularity of multimedia features in cellular phones and other portable devices, such as mobile televisions and portable audio, video and gaming devices, is generating a demand for high-end applications optimized to work with video and camera capabilities at prices affordable to consumers. In 2006 we introduced a family of mobile application processors, which integrate our Videocore multimedia processor and an ARM11® applications processor, software, and reference designs, to enable an array of multimedia features, including support for an 8 mega-pixel digital camera, MPEG-4/H.264 VGA video decoding at 30 frames per second, video encoding at 30 frames per second, and NTSC/PAL TV signal output via composite, component and S-video connections, and to support advanced mobile device applications such as email, web browsing, file management and graphical user interfaces.
 
 
As cellular networks evolve to so-called 2.5G and 3G technologies, increasingly sophisticated functionality and applications are becoming available in new cellular handsets and other portable devices. The convergence of complex multimedia functionality, including high-resolution digital still camera capabilities, mobile gaming, MP3 and video playback, Internet access, Global Positioning System receivers, and mobile television, is becoming standard on many portable devices. However, each of these applications adds to the power management complexity of the overall system, creating a need for more sophisticated battery charging, monitoring, and system power management. Portable device makers are seeking advanced power management solutions that reduce total system cost, occupy very little board space and are flexible and scalable enough to manage even the most demanding power requirements. Broadcom provides a family of power management devices, introduced in 2006, that intelligently manage power consumption in mobile devices to optimize system operation and maximize battery life in cellular phones, MP3 players, portable navigation products, portable media and game players and security applications.
 
 
Mobile digital TV refers to a series of new broadcast technology standards targeted specifically at mobile platforms. As incorporation of video into mobile devices becomes more prevalent, broadcast technologies offer improved viewing quality and lower network loading as compared to video over 3G IP transfers. Of these standards, the Digital Video Broadcasting — Handheld (DVB-H) standard currently offers broad geographic coverage worldwide. DVB-H is based on the DVB-T standard with lower power features.


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In 2006 we introduced our first tuner that supports both the DVB-T and DVB-H standards. This tuner can be combined with off-the-shelf demodulators from third parties to provide a complete mobile digital TV solution for DVB-H and DVB-T.
 
 
Voice over Internet Protocol refers to the transmission of voice over any IP packet-based network. VoIP is stimulating dramatic changes in the traditional public switched and enterprise telephone networks. Packet-based networks provide significant economic advantages over traditional circuit-switched voice networks. The trend to IP networks for voice has been driven by the significant build out of the Internet and deregulation of long distance and local phone service.
 
The enterprise equipment market is being radically affected by the convergence of corporate data networks and voice communications. A host of new enterprise services can be enabled when a LAN-based Ethernet switching infrastructure is used to carry both data and voice. We provide both silicon and software to enable our enterprise equipment customers to provide cost-effective IP phones.
 
Within residential markets, VoIP is gaining momentum as a viable alternative to traditional public telephone networks. In addition to enabling cost savings for long-distance calls, VoIP creates a number of consumer product opportunities and applications for equipment vendors and service providers.
 
IP Phone Processors.  Our IP phone silicon and software solutions integrate packet processing, voice processing and switching technologies to provide the quality of service, high fidelity and reliability necessary for enterprise telephony applications. Our processors have enabled the development of new XML-based IP phones that can perform a wide variety of functions that traditional phones cannot support. Originally focused on Fast Ethernet, these processors now include support for Gigabit Ethernet as well to support the growing deployment of Gigabit Ethernet throughout enterprises.
 
Residential Terminal Adapter Processors.  Our terminal adapter VoIP solutions enable existing analog phones to be connected to broadband modems via Ethernet. These products support residential VoIP services that are now being offered by a variety of broadband service providers.
 
Wi-Fi Phone Processors.  In 2004 we introduced our first Wi-Fi phone processor that enables the development of next generation, cordless phone replacement devices. These Wi-Fi phones are beginning to be deployed in both enterprises and homes as the use of broadband and Wi-Fi applications increases in these markets.
 
All of our VoIP processors support our BroadVoice® technology, which features a wideband high fidelity mode that significantly improves the clarity and quality of telephony voice service.
 
 
We also develop reference platforms designed around our integrated circuit products that represent example system-level applications for incorporation into our customers’ equipment. These reference platforms generally include a fairly extensive suite of software drivers as well as protocol and application layer software to assist our customers in developing their own end products. By providing these reference platforms, we can assist our customers in achieving easier and faster transitions from initial prototype designs to final production releases. These reference platforms enhance the customer’s confidence that our products will meet its market requirements and product introduction schedules.
 
 
We sell our products to leading manufacturers of wired and wireless 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 markets.
 
Customers currently shipping wired and wireless communications equipment incorporating our products include Alcatel, Apple, Askey, Cisco, D-Link, Dell, EchoStar, Hewlett-Packard, IBM, LG, Motorola, Netgear, Nintendo, Nortel Networks, Samsung, and Thomson CE, among others. To meet the current and future technical


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needs in our target markets, we have also established strategic relationships with multiservice operators that provide wired and wireless communications services to consumers and businesses.
 
As part of our business strategy, we periodically establish strategic relationships with certain key customers. In September 1997 we entered into a development, supply and license agreement with General Instrument, now a wholly-owned subsidiary of Motorola, which provided that we would develop and supply chips for General Instrument’s digital cable set-top boxes. We subsequently modified that agreement to include sales of our cable modem chips, and have entered into further amendments from time to time to amend and/or extend General Instrument’s minimum purchase requirements of chips for cable modems and digital set-top boxes.
 
A small number of customers have historically accounted for a substantial portion of our net revenue. Sales to our five largest customers represented 45.3%, 51.1% and 51.6% of our net revenue in 2005, 2004 and 2003, respectively. See Note 14 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report. Sales to our five largest customers represented 46.5% of our net revenue in the nine months ended September 30, 2006 (unaudited).
 
We expect that our key customers will continue to account for a substantial portion of our net revenue in 2006 and in the foreseeable future. These customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period. We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty, and currently do not have agreements with any of our key customers that contain long-term commitments to purchase specified volumes of our products.
 
 
Using proprietary technologies and advanced design methodologies, we design, develop and supply complete system-on-a-chip solutions and related hardware and software applications for our target markets. Our proven system-on-a-chip design methodology has enabled us to be first to market with advanced chips that are highly integrated and cost-effective, and that facilitate the easy integration of our customers’ intellectual property. Our design methodology leverages industry-standard, state-of-the-art electronic design automation tools, and generally migrates easily to new silicon processes and technology platforms. It also allows for the easy integration of acquired or licensed technology, providing customers with a broad range of silicon options with differentiated networking and performance features.
 
We believe our key competitive advantages include superior engineering execution and our broad base of core technologies encompassing the complete design space from systems to silicon. We have developed and continue to build on the following technology foundations:
 
  •  proprietary communications systems algorithms and protocols;
 
  •  advanced DSP hardware architectures;
 
  •  system-on-a-chip design methodologies and advanced library development for both standard cell and full-custom integrated circuit design;
 
  •  high performance radio frequency, analog and mixed-signal circuit design using industry-standard CMOS processes;
 
  •  high performance custom microprocessor architectures and circuit designs; and
 
  •  extensive software reference platforms and board-level hardware reference platforms to enable complete system-level solutions.
 
 
We have assembled a large team of experienced engineers and technologists, many of whom are leaders in their particular field or discipline. As of December 31, 2005 we had 3,011 research and development employees. As of December 31, 2006 we had 3,808 research and development employees, the majority of whom hold advanced degrees, including 439 employees with Ph.Ds. These key employees are involved in advancing our core


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technologies, as well as applying them to our product development activities. Because the system-on-a-chip solutions for many of our target markets benefit from the same underlying core technologies, we are able to address a wide range of wired and wireless communications markets with a relatively focused investment in research and development.
 
We believe that the achievement of higher levels of integration and the timely introduction of new products in our target markets is essential to our growth. Our current plans are to maintain our significant research and development staffing levels in 2006 and for the foreseeable future. In addition to our principal design facilities in Irvine, California and Santa Clara County, California, we have design centers in Tempe, Arizona; San Diego County, California; Colorado Springs, Fort Collins, and Longmont, Colorado; Duluth, Georgia; Germantown, Maryland; Andover, Massachusetts; Matawan, New Jersey; Austin, Texas and Seattle, Washington, among other locations. Internationally, we also have design facilities in Belgium, Canada, China, Denmark, France, Greece, India, Israel, Japan, Korea, the Netherlands, Singapore, Taiwan and the United Kingdom, among other locations. We anticipate establishing additional design centers in the United States and in other countries.
 
Our research and development expense was $681.0 million, $598.7 million and $732.4 million in 2005, 2004 and 2003, respectively. These amounts include stock-based compensation expense for employees engaged in research and development of $68.6 million, $102.3 million and $298.1 million in 2005, 2004 and 2003, respectively.
 
 
 
We manufacture our products using standard CMOS process techniques. The standard nature of these processes permits us to engage independent silicon foundries to fabricate our integrated circuits. By subcontracting our manufacturing requirements, we are able to focus our resources on design and test applications where we believe we have greater competitive advantages. This strategy also eliminates the high cost of owning and operating semiconductor wafer fabrication facilities.
 
Our operations and quality engineering teams closely manage the interface between manufacturing and design engineering. While our design methodology typically creates a smaller than average die for a given function, it also generates full-custom integrated circuit designs. As a result, we are responsible for the complete functional and parametric performance testing of our devices, including quality. We employ a fully staffed operations and quality organization similar to that of a vertically integrated semiconductor manufacturer. We also arrange with our foundries to have online work-in-progress control. Our approach makes the manufacturing subcontracting process transparent to our customers.
 
We depend on five independent foundry subcontractors located in Asia to manufacture substantially all of our products. Our key silicon foundries are Taiwan Semiconductor Manufacturing Corporation in Taiwan, Chartered Semiconductor Manufacturing in Singapore, Semiconductor Manufacturing International Corporation in China, Silterra Malaysia Sdn. Bhd. in Malaysia and United Microelectronics Corporation in Taiwan, several of which maintain multiple fabrication facilities in various locations. Any inability of one of our five independent foundry subcontractors to provide the necessary capacity or output for our products could result in significant production delays and could materially and adversely affect our business, financial condition and results of operations. While we currently believe we have adequate capacity to support our current sales levels, we continue to work with our existing foundries to obtain more production capacity, and we intend to qualify new foundries to provide additional production capacity. It is possible that from time to time adequate foundry capacity may not be available on acceptable terms, if at all. In the event a foundry experiences financial difficulties, or if a foundry suffers any damage to or destruction of its facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner.
 
Our products are currently fabricated with .35 micron, quad layer metal; .22 micron, five layer metal; .18 micron, five and six layer metal; and .13 micron, six and seven layer metal structures. We continuously evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies, and are designing most new products to 90 and 65 nanometer, seven to eight layer metal, feature sizes. Although our


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experience to date with the migration of products to smaller processes geometries has been predominantly favorable, the transition to 65-namometer geometry process technology has resulted in significantly higher mask and prototyping costs, as well as additional expenditures for engineering design tools and related computer hardware. We may face similar expenses and difficulties or delays as we continue to transition our products to smaller geometry processes. Other companies in our industry have experienced difficulty transitioning to new manufacturing processes and, consequently, have suffered reduced yields or delays in product deliveries. We believe that the transition of our products to smaller geometries will be important for us to remain competitive. Our business, financial condition and results of operations could be materially and adversely affected if any such transition is substantially delayed or inefficiently implemented.
 
 
Our wafer probe testing is conducted by either our independent foundries or independent wafer probe test subcontractors. Following completion of the wafer probe tests, the die are assembled into packages and the finished products are tested by one of our seven key subcontractors: ASAT Ltd. in Hong Kong; STATSChipac in Singapore, Korea, Malaysia and China; Siliconware Precision in Taiwan; United Test and Assembly Center in Singapore; Signetics in Korea; Amkor in Korea, Philippines and China; and Global Advance Packaging & Test in China. While we have not experienced material disruptions in supply from assembly subcontractors to date, we and others in our industry have experienced shortages in the supply of packaging materials from time to time, and we could experience shortages or assembly problems in the future. The availability of assembly and testing services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties, or if a subcontractor suffers any damage to or destruction of its facilities, or in the event of any other disruption of assembly and testing capacity.
 
 
Manufacturers of wired and wireless communications equipment demand high quality and reliable semiconductors for incorporation into their products. We focus on product reliability from the initial stage of the design cycle through each specific design process, including layout and production test design. In addition, we subject our designs to in-depth circuit simulation at temperature, voltage and processing extremes before initiating the manufacturing process.
 
We prequalify each assembly and foundry subcontractor. This prequalification process consists of a series of industry standard environmental product stress tests, as well as an audit and analysis of the subcontractor’s quality system and manufacturing capability. We also participate in quality and reliability monitoring through each stage of the production cycle by reviewing electrical and parametric data from our wafer foundry and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yield levels. In cases where we purchase wafers on a fixed price-basis, any improvement in yields can reduce our cost per chip.
 
As part of our total quality program, we received ISO 9002 certification, a comprehensive International Standards Organization specified quality system acknowledgement, for our Singapore facility. All of our principal independent foundries and package assembly facilities are currently ISO 9001 certified.
 
While every effort is made to monitor and meet the quality requirements of our customers, including the use of industry standard procedures and other methods, it is possible that an unanticipated quality problem may result in interruptions or delays in product shipments. In that event, our reputation may be damaged and customers may be reluctant to buy our products, and we may be required to apply significant capital and other resources to remedy any quality problem with our products.
 
 
We are also focusing on managing the environmental impact of our products. Our manufacturing flow is registered to ISO 14000, the international standard related to environmental management, by our subcontractors. Due to environmental concerns, the need for lead-free solutions in electronic components and systems is receiving increasing attention within the semiconductor industry and many companies are moving towards becoming compliant with the Restriction of Hazardous Substances Directive, the European legislation that restricts the use of a number of substances, including lead, effective July 2006. We believe that our products are compliant with the


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RoHS Directive and that materials will be available to meet these emerging regulations. However, it is possible that unanticipated supply shortages or delays may occur as a result of these new regulations.
 
 
Initially we distributed products to our customers through an operations and distribution center located in Irvine, California. In 1999 we established an international distribution center in Singapore. This facility put us closer to our suppliers and many key customers and improved our ability to meet customers’ needs. Our Irvine facility continues to ship products to U.S. destinations, while our Singapore facility distributes products to international destinations. Net revenue derived from actual shipments to international destinations, primarily in Asia, represented 84.5%, 79.0% and 77.7% of our net revenue in 2005, 2004 and 2003, respectively. Net revenue derived from actual shipments to international destinations, primarily in Asia, represented 86.7% of our net revenue in the nine months ended September 30, 2006 (unaudited).
 
 
Our sales and marketing strategy is to achieve design wins with technology leaders in each of our targeted wired and wireless communications markets by providing quality, state-of-the-art products, superior engineering execution and superior sales, field application and engineering support. We market and sell our products in the United States through a direct sales force, distributors and manufacturers’ representatives. The majority of our sales occur through our direct sales force, which is based in offices located in California, Colorado, Florida, Georgia, Illinois, Maine, Maryland, Massachusetts, Michigan, New York, New Jersey, North Carolina, Ohio, Texas and Virginia. We have also engaged independent distributors, Arrow Electronics and Avnet, Inc., to service the North American and South American markets.
 
We dedicate sales managers to principal customers to promote close cooperation and communication. We also provide our customers with reference platform designs for most products. We believe this enables our customers to achieve easier and faster transitions from the initial prototype designs through final production releases. We believe these reference platform designs also significantly enhance customers’ confidence that our products will meet their market requirements and product introduction schedules.
 
We market and sell our products internationally through regional offices located in Canada, China, Finland, France, Germany, Japan, Korea, the Netherlands, Singapore, Sweden, Taiwan and the United Kingdom, among other locations, as well as through a network of independent distributors and representatives in Australia, Canada, Germany, Hong Kong, India, Israel, Japan, Korea, Singapore and Taiwan. We select these independent entities based on their ability to provide effective field sales, marketing communications and technical support to our customers. All international sales to date have been denominated in U.S. dollars. For information regarding revenue from independent customers by geographic area, see Note 14 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
 
 
Our sales are made primarily pursuant to standard purchase orders for delivery of products. Due to industry practice that allows customers to cancel or change orders with limited advance notice prior to shipment, we do not believe that backlog is a reliable indicator of future revenue levels.
 
 
Wired and wireless communications markets and the semiconductor industry are intensely competitive and are characterized by rapid change, evolving standards, short product life cycles and price erosion. We believe that the principal factors of competition for integrated circuit providers in our target markets include:
 
  •  product quality;
 
  •  product capabilities;
 
  •  level of integration;
 
  •  engineering execution;


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  •  reliability;
 
  •  price;
 
  •  time-to-market;
 
  •  market presence;
 
  •  standards compliance;
 
  •  system cost;
 
  •  intellectual property;
 
  •  customer interface and support; and
 
  •  reputation.
 
We believe that we compete favorably with respect to each of these factors.
 
We compete with a number of major domestic and international suppliers of integrated circuits and related applications in our target markets. We also compete with suppliers of system-level and motherboard-level solutions incorporating integrated circuits that are proprietary or sourced from manufacturers other than Broadcom. This competition has resulted and will continue to result in declining average selling prices for our products. In all of our target markets, we also may face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers that choose to develop their own silicon solutions. We also expect to encounter further consolidation in the markets in which we compete.
 
Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties, and may refuse to provide us with information necessary to permit the interoperability of our products with theirs. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, competitors may develop technologies that more effectively address our markets with products that offer enhanced features, lower power requirements or lower costs. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.
 
 
Our success and future revenue growth depend, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. However, these measures may not provide meaningful protection for our intellectual property.
 
As of the date of the filing of the original 2005 Form 10-K, we held more than 1,250 U.S. patents and had filed more than 3,600 additional U.S. patent applications. We currently hold more than 1,900 U.S. patents and more than 750 foreign patents and have filed approximately 5,900 additional U.S. and foreign patent applications. We may not receive any additional patents as a result of these applications or future applications. Even if additional patents are issued, any claims allowed may not be sufficiently broad to protect our technology. In addition, any existing or future patents could be challenged, invalidated or circumvented, and any rights granted under such patents may not provide us with meaningful protection. We may not have foreign patents or pending applications corresponding to our U.S. patents and applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. The failure of any patents to adequately protect our technology would make it easier for our competitors to offer similar products. In connection with our participation in the


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development of various industry standards, we may be required to license certain of our patents to other parties, including competitors, that develop products based upon the adopted industry standards.
 
We also generally enter into confidentiality agreements with our employees and strategic partners, and typically control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products, services or technology without authorization, to develop similar technology independently, or to design around our patents. In addition, effective copyright, trademark and trade secret protection may not be available or may be limited in certain foreign countries. We have also entered into agreements with certain of our customers and granted these customers the right to use our proprietary technology in the event we default in our contractual obligations, including product supply obligations, and fail to cure the default within a specified time period. In addition, we often incorporate the intellectual property of our strategic customers into our designs, and therefore have certain obligations with respect to the non-use and non-disclosure of their intellectual property. It is possible that the steps taken by us to prevent misappropriation or infringement of our intellectual property or our customers’ intellectual property may not be successful. Moreover, we are currently engaged in litigation and may need to engage in additional litigation to enforce our intellectual property rights or the rights of our customers, to protect our trade secrets, or to determine the validity and scope of proprietary rights of others, including our customers. Such litigation will result in substantial costs and diversion of our resources and could materially and adversely affect our business, financial condition and results of operations.
 
Companies in the semiconductor industry often aggressively protect and pursue their intellectual property rights. From time to time, we have received, and may continue to receive, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Moreover, we have in the past and continue to be engaged in litigation with parties who claim that we have infringed their patents or misappropriated or misused their trade secrets. We may also be sued by parties who may seek to invalidate one or more of our patents. Any intellectual property claims may materially and adversely affect our business, financial condition and results of operations. For example, in a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market or to redesign certain products offered for sale or under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology. We may also have to indemnify certain customers and strategic partners under our agreements with such parties if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party’s proprietary rights. Even if claims against us are not valid or successfully asserted, the defense of these claims could result in significant costs and a diversion of management and personnel resources. In any of these events, our business, financial condition and results of operations may be materially and adversely affected. Additionally, we have sought and may in the future seek to obtain a license under a third party’s intellectual property rights and have granted and may grant a license to certain of our intellectual property rights to a third party in connection with a cross-license agreement or a settlement of claims or actions asserted against us. However, we may not be able to obtain a license on commercially reasonable terms, if at all.
 
 
As of December 31, 2005, we had 4,287 full-time, contract and temporary employees, including 3,011 individuals engaged in research and development, 514 engaged in sales and marketing, 313 engaged in manufacturing operations, and 449 engaged in finance, legal and general administration activities. As of December 31, 2006 we had 5,233 full-time, contract and temporary employees, including 3,808 individuals engaged in research and development, 555 engaged in sales and marketing, 364 engaged in manufacturing operations, and 506 engaged in finance, legal and general administration activities. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.


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Item 1A.   Risk Factors
 
Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our amended and subsequent reports on Forms 10-Q/A, 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on Broadcom, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our Class A common stock will likely decline, and you may lose all or part of your investment.
 
Our operating results for 2006 and prior periods have been materially and adversely impacted by the results of the voluntary review of our past equity award practices. Any related action by a governmental agency could result in civil or criminal sanctions against certain of our former officers, directors and/or employees and might result in such sanctions against us and/or certain of our current officers, directors and/or employees. Such matters and civil litigation relating to our past equity award practices or the January 2007 restatement of our financial statements could result in significant costs and the diversion of attention of our management and other key employees.
 
In connection with our previously announced equity award review, we restated our financial statements for each of the years ended December 31, 1998 through December 31, 2005, and have restated our financial statements for the first quarter of 2006 as well. Accordingly, you should not rely on financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K previously filed by Broadcom, and the related opinions of our independent registered public accounting firm, and all earnings press releases and similar communications issued by us, for all periods ended on or before December 31, 2005, which have been superseded in their entirety by the information contained in this Report.
 
Based on the results of the equity award review, the Audit Committee concluded that, pursuant to APB 25 and related interpretations, the accounting measurement dates for most of the stock option grants awarded between June 1998 and May 2003, covering options to purchase 232.9 million shares of our Class A or Class B common stock, differed from the measurement dates previously used for such awards. As a result, revised measurement dates were applied to the affected option grants and Broadcom recorded a total of $2.259 billion in additional stock-based compensation expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being amortized over the service period relating to each option, typically four years, with approximately 95% of the total expense being recorded in years prior to 2004. Additional stock-based compensation expense will be recorded in the first quarter of 2006 and thereafter pursuant to the provisions of SFAS 123R.
 
These expenses had the effect of decreasing income from operations, net income, and net income per share (basic and diluted) in affected periods in which we reported a profit, and increasing loss from operations, net loss, and net loss per share in affected periods in which we reported a loss. Information regarding the effect of the restatement on our financial statements for various periods is provided in Note 2 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
 
In June 2006 we received an informal request for information from the staff of the Los Angeles regional office of the Securities and Exchange Commission regarding our option granting practices. In December 2006 we were informed that the SEC issued a formal order of investigation in the matter. We are cooperating with the SEC investigation, but do not know when or how it will be resolved or what, if any, actions the SEC may require us to take as part of the resolution of that matter.
 
Broadcom has also been informally contacted by the U.S. Attorney’s Office for the Central District of California and has been asked to produce on a voluntary basis documents, many of which we previously provided to the SEC. We are cooperating with this request. Any action by the SEC, the U.S. Attorney’s Office or other governmental agency could result in civil or criminal sanctions against certain of our former officers, directors


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and/or employees and might result in such sanctions against us and/or certain of our current officers, directors and/or employees.
 
Additionally, as discussed in Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, we currently are engaged in civil litigation with parties that claim, among other allegations, that certain of our current and former officers improperly dated stock option grants to enhance their own profits on the exercise of such options or for other improper purposes. Although we and the other defendants intend to defend these claims vigorously, there are many uncertainties associated with any litigation, and we cannot assure you that these actions will be resolved without substantial costs and/or settlement charges. We have entered into indemnification agreements with each of our present and former directors and officers. Under those agreements, Broadcom is required to indemnify each such director or officer against expenses, including attorneys’ fees, judgments, fines and settlements, paid by such individual in connection with the pending litigation (other than indemnified liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest).
 
The resolution of the pending investigations by the SEC and U.S. Attorney’s Office, the defense of our pending civil litigation and any additional litigation relating to our past equity award practices or the January 2007 restatement of our financial statements could result in significant costs and diversion of the attention of management and other key employees.
 
 
We adopted SFAS 123R effective January 1, 2006. SFAS 123R requires all share-based payment awards to employees, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition.
 
The adoption of SFAS 123R will have a significant adverse impact on our reported results of operations because the stock-based compensation expense is charged directly against our reported earnings. Stock-based compensation expense and unearned stock-based compensation will increase to the extent that we increase our work force, grant additional equity awards to employees or assume unvested equity awards in connection with acquisitions.
 
Any other subsequent changes in the accounting rules applicable to Broadcom may also have an adverse effect on our results of operations.
 
We had a material weakness in internal control over financial reporting and cannot assure you that additional material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.
 
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of Broadcom’s internal control over financial reporting.
 
In assessing the findings of the voluntary review as well as the restatement, our management concluded that there was a material weakness, as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 2, in our internal control over financial reporting as of December 31, 2005. Management believes this material weakness was remediated as of September 19, 2006 and, accordingly, no longer exists as of the date of this filing. See the discussion included in Part II, Item 9A of this Report for additional information regarding our internal control over financial reporting.


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Our management, including our Chief Executive Officer and Acting Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
 
Our quarterly operating results may fluctuate significantly. As a result, we may fail to meet the expectations of securities analysts and investors, which could cause our stock price to decline.
 
Our quarterly net revenue and operating results have fluctuated significantly in the past and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our Class A common stock will likely decline. Fluctuations in our operating results may be due to a number of factors, including, but not limited to, those listed below and those identified throughout this “Risk Factors” section:
 
  •  the overall cyclicality of, and changing economic, political and market conditions in, the semiconductor industry and wired and wireless communications markets, including seasonality in sales of consumer products into which our products are incorporated;
 
  •  the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;
 
  •  the gain or loss of a key customer, design win or order;
 
  •  intellectual property disputes, customer indemnification claims and other types of litigation risks;
 
  •  changes in accounting rules, such as the change requiring the recording of expenses for employee stock options and other stock-based compensation expense commencing with the first quarter of 2006;
 
  •  our ability to timely and effectively transition to smaller geometry process technologies or achieve higher levels of design integration;
 
  •  our dependence on a few significant customers for a substantial portion of our revenue;
 
  •  our ability to scale our operations in response to changes in demand for our existing products and services or demand for new products requested by our customers;
 
  •  our ability to retain, recruit and hire key executives, technical personnel and other employees in the positions and numbers, with the experience and capabilities, and at the compensation levels that we need to implement our business and product plans;


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  •  our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a cost-effective and timely manner;
 
  •  the rate at which our present and future customers and end users adopt our technologies and products in our target markets;
 
  •  the availability and pricing of third party semiconductor foundry, assembly and test capacity and raw materials;
 
  •  our ability to timely and accurately predict market requirements and evolving industry standards and to identify and capitalize upon opportunities in new markets;
 
  •  competitive pressures and other factors such as the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products;
 
  •  changes in our product or customer mix;
 
  •  the volume of our product sales and pricing concessions on volume sales; and
 
  •  the effects of public health emergencies, natural disasters, terrorist activities, international conflicts and other events beyond our control.
 
We expect new product lines to continue to account for a high percentage of our future sales. Some of these markets are immature and/or unpredictable or are new markets for Broadcom, and we cannot assure you that these markets will develop into significant opportunities or that we will continue to derive significant revenue from these markets. Based on the limited amount of historical data available to us, it is difficult to anticipate our future revenue streams from, and the sustainability of, such newer markets.
 
Additionally, as an increasing number of our chips are being incorporated into consumer products, such as desktop and notebook computers, cellular phones and other mobile communication devices, other wireless-enabled consumer electronics, and satellite and digital cable set-top boxes, we anticipate greater seasonality and fluctuations in the demand for our products, which may result in greater variations in our quarterly operating results.
 
Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical nature of and volatility in the semiconductor industry. As a result, the market price of our Class A common stock may decline.
 
We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From time to time, the semiconductor industry has experienced significant downturns. These downturns are characterized by decreases in product demand, excess customer inventories, and accelerated erosion of prices. These factors could cause substantial fluctuations in our revenue and in our results of operations. Any downturns in the semiconductor industry may be severe and prolonged, and any failure of the industry or wired and wireless communications markets to fully recover from downturns could seriously impact our revenue and harm our business, financial condition and results of operations. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause large fluctuations in our stock price.
 
Additionally, in the last four years, general worldwide economic conditions have experienced a downturn due to slower economic activity, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the wired and wireless communications markets, the ongoing effects of the war in Iraq, recent international conflicts and terrorist and military activity, and the impact of natural disasters and public health emergencies. These conditions make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our products and services, which would delay and lengthen sales cycles. We experienced a slowdown in orders in the third quarter of 2006 as well as a reduction in net revenue in the fourth quarter of 2004 that we believe were attributable in substantial part to excess inventory held by certain of our customers, and we may experience a similar slowdown in


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the future. We cannot predict the timing, strength or duration of any economic recovery, worldwide, or in the wired and wireless communications markets. If the economy or the wired and wireless communications markets in which we operate do not continue at their present levels, our business, financial condition and results of operations will likely be materially and adversely affected.
 
We are subject to order and shipment uncertainties, and if we are unable to accurately predict customer demand, we may hold excess or obsolete inventory, which would reduce our profit margin. Conversely, we may have insufficient inventory, which would result in lost revenue opportunities and potentially in loss of market share and damaged customer relationships.
 
We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally cancel or defer purchase orders on short notice without incurring a significant penalty. In the recent past, some of our customers have developed excess inventories of their own products and have, as a consequence, deferred purchase orders for our products. We currently do not have the ability to accurately predict what or how many products our customers will need in the future. Anticipating demand is difficult because our customers face volatile pricing and unpredictable demand for their own products, are increasingly focused more on cash preservation and tighter inventory management, and may be involved in legal proceedings that could affect their ability to buy our products. Our ability to accurately forecast customer demand may also be impaired by the delays inherent in our lengthy sales cycle. After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customers may need three to more than six months to test, evaluate and adopt our product and an additional three to more than nine months to begin volume production of equipment that incorporates our product. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we have no assurance that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increase the risk that a customer will decide to cancel or curtail, reduce or delay its product plans. If we incur significant marketing expenses and investments in inventory in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, as an increasing number of our chips are being incorporated into consumer products, we anticipate greater fluctuations in demand for our products, which makes it even more difficult to forecast customer demand.
 
We place orders with our suppliers based on forecasts of customer demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multiple assumptions, each of which may introduce error into our estimates. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect to, if at all. As a result, we would hold excess or obsolete inventory, which would reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity is available, we would forego revenue opportunities and potentially lose market share and damage our customer relationships. In addition, any future significant cancellations or deferrals of product orders or the return of previously sold products could materially and adversely affect our profit margins, increase product obsolescence and restrict our ability to fund our operations. Furthermore, we generally recognize revenue upon shipment of products to a customer. If a customer refuses to accept shipped products or does not timely pay for these products, we could incur significant charges against our income. We have also recently entered into consigned or customer managed inventory arrangements with certain of our customers, although we have not shipped a significant amount of product under those arrangements as of December 31, 2006. Pursuant to these arrangements we deliver products to a warehouse of the customer or a designated third party based upon the customer’s projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its end products. If a customer does not take product under such an arrangement in accordance with the schedule it originally provided us, our predicted future revenue stream could vary substantially from our forecasts and our results of operations could be materially and adversely affected.


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Intellectual property risks and third party claims of infringement, misappropriation of proprietary rights or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and seriously harm our operating results. In addition, the defense of such claims could result in significant costs and divert the attention of our management or other key employees.
 
Companies in and related to the semiconductor industry often aggressively protect and pursue their intellectual property rights. There are often intellectual property risks associated with developing and producing new products and entering new markets, and we may not be able to obtain, at reasonable cost and upon commercially reasonable terms, licenses to intellectual property of others that is alleged to read on such new or existing products. From time to time, we have received, and may continue to receive, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Moreover, in the past we have been and we currently are engaged in litigation with parties that claim that we infringed their patents or misappropriated or misused their trade secrets. In addition, we or our customers may be sued by other parties that claim that our products have infringed their patents or misappropriated or misused their trade secrets, or which may seek to invalidate one or more of our patents. An adverse determination in any of these types of disputes could prevent us from manufacturing or selling some of our products, limit or restrict the type of work that employees involved in such litigation may perform for Broadcom, increase our costs of revenue and expose us to significant liability. Any of these claims may materially and adversely affect our business, financial condition and results of operations. For example, in a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market, redesign certain products offered for sale or under development, or restrict employees from performing work in their areas of expertise. We may also be liable for damages for past infringement and royalties for future use of the technology, and we may be liable for treble damages if infringement is found to have been willful. In addition, governmental agencies may commence investigations or criminal proceedings against our employees, former employees and/or the company relating to claims of misappropriation or misuse of another party’s proprietary rights. We may also have to indemnify some customers and strategic partners under our agreements with such parties if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another party’s proprietary rights. We have received requests from certain customers and strategic partners to include increasingly broad indemnification provisions in our agreements with them. These indemnification provisions may, in some circumstances, extend our liability beyond the products we provide to include liability for combinations of components or system level designs and for consequential damages and/or lost profits. Even if claims against us are not valid or successfully asserted, these claims could result in significant costs and a diversion of the attention of management and other key employees to defend. Additionally, we have sought and may in the future seek to obtain a license under a third party’s intellectual property rights and have granted and may in the future grant a license to certain of our intellectual property rights to a third party in connection with a cross-license agreement or a settlement of claims or actions asserted against us. However, we may not be able to obtain such a license on commercially reasonable terms.
 
Our products may contain technology provided to us by other parties such as contractors, suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. Our contractors, suppliers and licensors may not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages. In addition, we may have little or no ability to correct errors in the technology provided by such contractors, suppliers and licensors, or to continue to develop new generations of such technology. Accordingly, we may be dependent on their ability and willingness to do so. In the event of a problem with such technology, or in the event that our rights to use such technology become impaired, we may be unable to ship our products containing such technology, and may be unable to replace the technology with a suitable alternative within the time frame needed by our customers.


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Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We primarily rely on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. Despite our efforts to protect our proprietary technologies and processes, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. We currently hold more than 1,900 U.S. patents and more than 750 foreign patents and have filed approximately 5,900 additional U.S. and foreign patent applications. However, we cannot assure you that any additional patents will be issued. Even if a new patent is issued, the claims allowed may not be sufficiently broad to protect our technology. In addition, any of our existing or future patents may be challenged, invalidated or circumvented. As such, any rights granted under these patents may not provide us with meaningful protection. We may not have foreign patents or pending applications corresponding to our U.S. patents and patent applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. If our patents do not adequately protect our technology, our competitors may be able to offer products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Some or all of our patents have in the past been licensed and likely will in the future be licensed to certain of our competitors through cross-license agreements. Moreover, because we have participated in developing various industry standards, we may be required to license some of our patents to others, including competitors, who develop products based on those standards.
 
Certain of our software (as well as that of our customers) may be derived from so-called “open source” software that is generally made available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, or GPL, which impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license customarily used to protect our intellectual property. In addition, there is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the determination of which works are subject to the terms of such licenses. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software as described above. Despite these restrictions, parties may combine Broadcom proprietary software with open source software without our authorization, in which case we might nonetheless be required to release the source code of our proprietary software.
 
We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also try to control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. Also, current or former employees may seek employment with our business partners, customers or competitors, and we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, current, departing or former employees or third parties could attempt to penetrate our computer systems and networks to misappropriate our proprietary information and technology or interrupt our business. Because the techniques used by computer hackers and others to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be unable to anticipate, counter or ameliorate these techniques. As a result, our technologies and processes may be misappropriated, particularly in countries where laws may not protect our proprietary rights as fully as in the United States.
 
In addition, some of our customers have entered into agreements with us that grant them the right to use our proprietary technology if we fail to fulfill our obligations, including product supply obligations, under those agreements, and if we do not correct the failure within a specified time period. Moreover, we often incorporate the


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intellectual property of strategic customers into our own designs, and have certain obligations not to use or disclose their intellectual property without their authorization.
 
We cannot assure you that our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers will succeed. We have in the past been and currently are engaged in litigation to enforce or defend our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others, including our customers. Such litigation (and the settlement thereof) has been and will likely continue to be very expensive and time consuming. Additionally, any litigation can divert the attention of management and other key employees from the operation of the business, which could negatively impact our business and results of operations.
 
 
To remain competitive, we expect to continue to transition our semiconductor products to increasingly smaller line width geometries. This transition requires us to modify the manufacturing processes for our products and to redesign some products as well as standard cells and other integrated circuit designs that we may use in multiple products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs. Currently most of our products are manufactured in .25 micron, .22 micron, .18 micron, .13 micron and 90 nanometer geometry processes. In addition, we are now designing a number of new products in 65-nanometer process technology. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, which resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. In addition, the transition to 65-nanometer geometry process technology has resulted in significantly higher mask and prototyping costs, as well as additional expenditures for engineering design tools and related computer hardware. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. We are dependent on our relationships with our foundry subcontractors to transition to smaller geometry processes successfully. We cannot assure you that the foundries that we use will be able to effectively manage the transition in a timely manner, or at all, or that we will be able to maintain our existing foundry relationships or develop new ones. If any of our foundry subcontractors or we experience significant delays in this transition or fail to efficiently implement this transition, we could experience reduced manufacturing yields, delays in product deliveries and increased expenses, all of which could harm our relationships with our customers and our results of operations. As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, if at all. Moreover, even if we are able to achieve higher levels of design integration, such integration may have a short-term adverse impact on our operating results, as we may reduce our revenue by integrating the functionality of multiple chips into a single chip.
 
Because we depend on a few significant customers for a substantial portion of our revenue, the loss of a key customer could seriously impact our revenue and harm our business. In addition, if we are unable to continue to sell existing and new products to our key customers in significant quantities or to attract new significant customers, our future operating results could be adversely affected.
 
We have derived a substantial portion of our past revenue from sales to a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations.
 
Sales to our five largest customers, including sales to their manufacturing subcontractors, represented 46.5% and 45.3% of our net revenue in the nine months ended September 30, 2006 (unaudited) and the year ended December 31, 2005, respectively. We expect that our largest customers will continue to account for a substantial portion of our net revenue during the balance of 2006 and for the foreseeable future. The identities of our largest 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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We may not be able to maintain or increase sales to certain of our key customers for a variety of reasons, including the following:
 
  •  most of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty;
 
  •  our agreements with our customers typically do not require them to purchase a minimum quantity of our products;
 
  •  many of our customers have pre-existing or concurrent relationships with our current or potential competitors that may affect the customers’ decisions to purchase our products;
 
  •  our customers face intense competition from other manufacturers that do not use our products; and
 
  •  some of our customers offer or may offer products that compete with our products.
 
These relationships often require us to develop new products that may involve significant technological challenges. Our customers frequently place considerable pressure on us to meet their tight development schedules. Accordingly, we may have to devote a substantial amount of our resources to our strategic relationships, which could detract from or delay our completion of other important development projects. Delays in development could impair our relationships with strategic customers and negatively impact sales of the products under development.
 
In addition, our longstanding relationships with some larger customers may also deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing customers, we may offer certain customers favorable prices on our products. We may have to offer the same lower prices to certain of our customers who have contractual “most favored nation” pricing arrangements. In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in sales to any key customer, or our inability to attract new significant customers could seriously impact our revenue and materially and adversely affect our results of operations.
 
 
To achieve our business objectives, we anticipate that we will need to continue to expand. We have experienced a period of rapid growth and expansion in the past. Through internal growth and acquisitions, we significantly increased the scope of our operations and expanded our workforce from 2,580 employees, including contractors, as of December 31, 2002 to 5,233 employees, including contractors, as of December 31, 2006. Nonetheless, we may not be able to expand our workforce and operations in a sufficiently timely manner to respond effectively to changes in demand for our existing products and services or to the demand for new products requested by our customers. In that event, we may be unable to meet competitive challenges or exploit potential market opportunities, and our current or future business could be materially and adversely affected.
 
Conversely, if we expand our operations and workforce too rapidly in anticipation of increased demand for our products, and such demand does not materialize at the pace at which we expect, the rate of increase in our operating expenses may exceed the rate of increase, if any, in our revenue. Moreover, if we experience another slowdown in the broadband communications markets in which we operate, we may not be able to scale back our operating expenses in a sufficiently timely or effective manner. In that event, our business, financial condition and results of operations would be materially and adversely affected.
 
Our past growth has placed, and any future growth is expected to continue to place, a significant strain on our management personnel, systems and resources. To implement our current business and product plans, we will need to continue to expand, train, manage and motivate our workforce. All of these endeavors will require substantial management effort. In the past we have implemented an enterprise resource planning, or ERP, system to help us improve our planning and management processes and a new human resources management, or HRM, system. More recently we have implemented a new equity administration system to support our more complex equity programs as well as the adoption of SFAS 123R. We anticipate that we will also need to continue to implement a variety of new and upgraded operational and financial systems, as well as additional procedures


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and other internal management systems. In general, the accuracy of information delivered by these systems may be subject to inherent programming quality. In addition, to support our growth, in December 2004 we signed a $183.0 million lease agreement under which we will relocate our headquarters and Irvine operations to new, larger facilities that will enable us to centralize all of our Irvine employees and operations on one campus. This relocation is currently anticipated to occur in the first quarter of 2007. We may also engage in other relocations of our employees or operations from time to time. Such relocations could result in temporary disruptions of our operations or a diversion of our management’s attention and resources. If we are unable to effectively manage our expanding operations, we may be unable to scale our business quickly enough to meet competitive challenges or exploit potential market opportunities, or conversely, we may scale our business too quickly and the rate of increase in our expenses may exceed the rate of increase in our revenue, either of which would materially and adversely affect our current or future business.
 
 
Our future success depends to a significant extent upon the continued service of our key senior management personnel, including our co-founder, Chairman of the Board and Chief Technical Officer, Henry Samueli, Ph.D., our Chief Executive Officer, Scott A. McGregor, and other senior executives. We have an employment agreement with Mr. McGregor; however it does not govern the length of his service. We do not have employment agreements with any other executives, or any other key employees, although we do have limited retention arrangements in place with certain executives. The loss of the services of Dr. Samueli, Mr. McGregor or certain other key senior management or technical personnel could materially and adversely affect our business, financial condition and results of operations. For instance, if any of these individuals were to leave our company unexpectedly, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity during the search for and while any such successor is integrated into our business and operations.
 
Furthermore, our future success depends on our ability to continue to attract, retain and motivate senior management and qualified technical personnel, particularly software engineers, digital circuit designers, RF and mixed-signal circuit designers and systems applications engineers. Competition for these employees is intense. If we are unable to attract, retain and motivate such personnel in sufficient numbers and on a timely basis, we will experience difficulty in implementing our current business and product plans. In that event, we may be unable to successfully meet competitive challenges or to exploit potential market opportunities, which could adversely affect our business and results of operations.
 
Equity awards generally comprise a significant portion of our compensation packages for all employees. At the present time, pending the filing of our amended and delayed SEC periodic reports, we are not able to issue shares of our common stock pursuant to equity awards. In 2003 we conducted a stock option exchange offer to address the substantial decline in the price of our Class A common stock over the preceding two years and to improve our ability to retain key employees. However, we cannot be certain that we will be able to continue to attract, retain and motivate employees if we are unable to issue shares of our common stock pursuant to equity awards for a sustained period or if our Class A common stock experiences another substantial price decline.
 
We have also modified our compensation policies by increasing cash compensation to certain employees and instituting awards of restricted stock units, while simultaneously reducing awards of stock options. This modification of our compensation policies and the applicability of the SFAS 123R requirement to expense the fair value of stock options awarded to employees will increase our operating expenses. We cannot be certain that the changes in our compensation policies will improve our ability to attract, retain and motivate employees. Our inability to attract and retain additional key employees and the increase in stock-based compensation expense could each have an adverse effect on our business, financial condition and results of operations.


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Our future success is dependent upon our ability to develop new semiconductor solutions for existing and new markets, introduce these products in a cost-effective and timely manner, and convince leading equipment manufacturers to select these products for design into their own new products. Our products are generally incorporated into our customers’ products at the design stage. We often incur significant expenditures on the development of a new product without any assurance that an equipment manufacturer will select our product for design into its own product. Once an equipment manufacturer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. Even if an equipment manufacturer designs one of our products into its product offering, we have no assurances that its product will be commercially successful or that we will receive any revenue from sales of that product. Sales of our products largely depend on the commercial success of our customers’ products. Our customers are typically not obligated to purchase our products and can choose at any time to stop using our products if their own products are not commercially successful or for any other reason.
 
Our historical results have been, and we expect that our future results will continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to customers. The development of new silicon devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products and lower than anticipated manufacturing yields in the early production of such products. If we were to experience any similar delays in the successful completion of a new product or similar reductions in our manufacturing yields for a new product in the future, our customer relationships, reputation and business could be seriously harmed.
 
Our ability to develop and deliver new products successfully will depend on various factors, including our ability to:
 
  •  timely and accurately predict market requirements and evolving industry standards;
 
  •  accurately define new products;
 
  •  timely and effectively identify and capitalize upon opportunities in new markets;
 
  •  timely complete and introduce new product designs;
 
  •  scale our operations in response to changes in demand for our products and services or the demand for new products requested by our customers;
 
  •  license any desired third party technology or intellectual property rights;
 
  •  timely qualify and obtain industry interoperability certification of our products and the products of our customers into which our products will be incorporated;
 
  •  obtain sufficient foundry capacity and packaging materials;
 
  •  achieve high manufacturing yields; and
 
  •  shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration.
 
In some of our businesses, our ability to develop and deliver next-generation products successfully and in a timely manner may depend in part on access to information, or licenses of technology or intellectual property rights, from companies that are our competitors. We cannot assure you that such information or licenses will be made available to us on a timely basis, if at all, or at reasonable cost and on commercially reasonable terms.
 
If we are not able to develop and introduce new products successfully and in a cost-effective and timely manner, we will be unable to attract new customers or to retain our existing customers, as these customers may


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transition to other companies that can meet their product development needs, which would materially and adversely affect our results of operations.
 
 
Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards and our customers’ changing demands. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration and smaller process geometries. Our past sales and profitability have resulted, to a large extent, from our ability to anticipate changes in technology and industry standards and to develop and introduce new and enhanced products incorporating the new standards and technologies. Our ability to adapt to these changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards. In addition, our target markets continue to undergo rapid growth and consolidation. A significant slowdown in any of these wired and wireless communications markets could materially and adversely affect our business, financial condition and results of operations. These rapid technological changes and evolving industry standards make it difficult to formulate a long-term growth strategy because the semiconductor industry and wired and wireless communications markets may not continue to develop to the extent or in the time periods that we anticipate. We have invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. If new markets do not develop as we anticipate, or if our products do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be materially and adversely affected.
 
 
Highly complex products such as the products that we offer frequently contain defects and bugs when they are first introduced or as new versions are released. Our products have previously experienced, and may in the future experience, these defects and bugs. If any of our products contains defects or bugs, or has reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. In addition, these defects or bugs could interrupt or delay sales or shipment of our products to our customers. To alleviate these problems, we may have to invest significant capital and other resources. Although our products are tested by us and our suppliers and customers, it is possible that our new products will contain defects or bugs. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or field replacement costs. These problems may divert our technical and other resources from other development efforts and could result in claims against us by our customers or others, including possible claims for consequential damages and/or lost profits. In addition, system and handset providers that purchase components may require that we assume liability for defects associated with products produced by their manufacturing subcontractors and require that we provide a warranty for defects or other problems which may arise at the system level. Moreover, we would likely lose, or experience a delay in, market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers.


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Our acquisition strategy may be dilutive to existing shareholders, result in unanticipated accounting charges or otherwise adversely affect our results of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses.
 
A key element of our business strategy involves expansion through the acquisitions of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. Between January 1, 1999 and December 31, 2006, we acquired 34 companies and certain assets of one other business. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property.
 
Acquisitions may require significant capital infusions, typically entail many risks, and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We have in the past and may in the future experience delays in the timing and successful integration of an acquired company’s technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation and increase our expenses. These challenges are magnified as the size of the acquisition increases. Furthermore, these challenges would be even greater if we acquired a business or entered into a business combination transaction with a company that was larger and more difficult to integrate than the companies we have historically acquired.
 
Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, deferred compensation charges, and the recording and later amortization of amounts related to deferred compensation and certain purchased intangible assets, any of which items could negatively impact our results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our Class A common stock to decline.
 
Acquisitions or asset purchases made entirely or partially for cash may reduce our cash reserves. We may seek to obtain additional cash to fund an acquisition by selling equity or debt securities. Any issuance of equity or convertible debt securities may be dilutive to our existing shareholders. In addition, the equity or debt securities that we may issue could have rights, preferences or privileges senior to those of our common stock. For example, as a consequence of the prior pooling-of-interests accounting rules, the securities issued in nine of our prior acquisitions were shares of Class B common stock, which have voting rights superior to those of our publicly traded Class A common stock.
 
We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize any anticipated benefits from these acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our Class A common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions.
 
 
We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers located outside the United States. In addition, 28.5% and 25.8% of our net revenue in the nine months ended September 30, 2006 (unaudited) and the year ended December 31, 2005, respectively, was derived from sales to independent customers outside the United States, excluding foreign subsidiaries or manufacturing subcontractors of customers that are headquartered in the United States. We also frequently ship products to our domestic customers’ international manufacturing divisions and subcontractors. Products shipped to international destinations, primarily


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in Asia, represented 86.7% and 84.5% of our net revenue in the nine months ended September 30, 2006 (unaudited) and the year ended December 31, 2005, respectively. We also undertake design and development activities in Belgium, Canada, China, Denmark, France, Greece, India, Israel, Japan, Korea, the Netherlands, Taiwan and the United Kingdom, among other locations. In addition, we undertake various sales and marketing activities through regional offices in a number of countries. We intend to continue to expand our international business activities and to open other design and operational centers abroad. The continuing effects of the war in Iraq and terrorist attacks in the United States and abroad, the resulting heightened security, and the increasing risk of extended international military conflicts may adversely impact our international sales and could make our international operations more expensive. International operations are subject to many other inherent risks, including but not limited to:
 
  •  political, social and economic instability;
 
  •  exposure to different business practices and legal standards, particularly with respect to intellectual property;
 
  •  natural disasters and public health emergencies;
 
  •  nationalization of business and blocking of cash flows;
 
  •  trade and travel restrictions;
 
  •  the imposition of governmental controls and restrictions;
 
  •  burdens of complying with a variety of foreign laws;
 
  •  import and export license requirements and restrictions of the United States and each other country in which we operate;
 
  •  unexpected changes in regulatory requirements;
 
  •  foreign technical standards;
 
  •  changes in taxation and tariffs;
 
  •  difficulties in staffing and managing international operations;
 
  •  fluctuations in currency exchange rates;
 
  •  difficulties in collecting receivables from foreign entities or delayed revenue recognition; and
 
  •  potentially adverse tax consequences.
 
Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales.
 
We currently operate under tax holidays and favorable tax incentives in certain foreign jurisdictions. For instance, in Singapore we operate under tax holidays that reduce our taxes in that country on certain non-investment income. Such tax holidays and incentives often require us to meet specified employment and investment criteria in such jurisdictions. However, we cannot assure you that we will continue to meet such criteria or enjoy such tax holidays and incentives, or realize any net tax benefits from tax holidays or incentives. If any of our tax holidays or incentives are terminated, our results of operations may be materially and adversely affected.
 
The economic conditions in our primary overseas markets, particularly in Asia, may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.


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The semiconductor industry and the wired and wireless communications markets are intensely competitive. We expect competition to continue to increase as industry standards become well known and as other competitors enter our target markets. We currently compete with a number of major domestic and international suppliers of integrated circuits and related applications in our target markets. We also compete with suppliers of system-level and motherboard-level solutions incorporating integrated circuits that are proprietary or sourced from manufacturers other than Broadcom. In all of our target markets we also may face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers who choose to develop their own semiconductor solutions. We expect to encounter further consolidation in the markets in which we compete.
 
Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their products. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of integration or lower cost. Increased competition has resulted in and is likely to continue to result in declining average selling prices, reduced gross margins and loss of market share in certain markets. We cannot assure you that we will be able to continue to compete successfully against current or new competitors. If we do not compete successfully, we may lose market share in our existing markets and our revenues may fail to increase or may decline.
 
 
We do not own or operate a fabrication facility. Five third-party foundry subcontractors located in Asia manufacture substantially all of our semiconductor devices in current production. Availability of foundry capacity has at times in the past been reduced due to strong demand. In addition, a recurrence of severe acute respiratory syndrome, or SARS, the occurrence of a significant outbreak of avian influenza among humans, or another public health emergency in Asia could further affect the production capabilities of our manufacturers by resulting in quarantines or closures. If we are unable to secure sufficient capacity at our existing foundries, or in the event of a quarantine or closure at any of these foundries, our revenues, cost of revenues and results of operations would be negatively impacted.
 
In September 1999 two of our foundries’ principal facilities were affected by a significant earthquake in Taiwan. As a consequence of this earthquake, they suffered power outages and equipment damage that impaired their wafer deliveries, which, together with strong demand, resulted in wafer shortages and higher wafer pricing industrywide. If any of our foundries experiences a shortage in capacity, suffers any damage to its facilities, experiences power outages, suffers an adverse outcome in pending or future litigation, or encounters financial difficulties or any other disruption of foundry capacity, we may encounter supply delays or disruptions, and we may need to qualify an alternative foundry. Even our current foundries need to have new manufacturing processes qualified if there is a disruption in an existing process. We typically require several months to qualify a new foundry or process before we can begin shipping products from it. If we cannot accomplish this qualification in a timely manner, we may experience a significant interruption in supply of the affected products.
 
Because we rely on outside foundries with limited capacity, we face several significant risks, including:
 
  •  a lack of guaranteed wafer supply and potential wafer shortages and higher wafer prices;


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  •  limited control over delivery schedules, quality assurance, manufacturing yields and production costs; and
 
  •  the unavailability of, or potential delays in obtaining access to, key process technologies.
 
In addition, the manufacture of integrated circuits is a highly complex and technologically demanding process. Although we work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries have from time to time experienced lower than anticipated manufacturing yields. This often occurs during the production of new products or the installation and start-up of new process technologies. Poor yields from our foundries could result in product shortages or delays in product shipments, which could seriously harm our relationships with our customers and materially and adversely affect our results of operations.
 
The ability of each foundry to provide us with semiconductor devices is limited by its available capacity and existing obligations. Although we have entered into contractual commitments to supply specified levels of products to some of our customers, we do not have a long-term volume purchase agreement or a significant guaranteed level of production capacity with any of our foundries. Foundry capacity may not be available when we need it or at reasonable prices. Availability of foundry capacity has in the recent past been reduced from time to time due to strong demand. Foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that foundry customers that are larger and better financed than we are, or that have long-term agreements with our main foundries, may induce our foundries to reallocate capacity to them. This reallocation could impair our ability to secure the supply of components that we need. Although we use five independent foundries to manufacture substantially all of our semiconductor products, each component is typically manufactured at only one or two foundries at any given time, and if any of our foundries is unable to provide us with components as needed, we could experience significant delays in securing sufficient supplies of those components. Also, our third party foundries typically migrate capacity to newer, state-of-the-art manufacturing processes on a regular basis, which may create capacity shortages for our products designed to be manufactured on an older process. We cannot assure you that any of our existing or new foundries will be able to produce integrated circuits with acceptable manufacturing yields, or that our foundries will be able to deliver enough semiconductor devices to us on a timely basis, or at reasonable prices. These and other related factors could impair our ability to meet our customers’ needs and have a material and adverse effect on our operating results.
 
Although we may utilize new foundries for other products in the future, in using new foundries we will be subject to all of the risks described in the foregoing paragraphs with respect to our current foundries.
 
We depend on third-party subcontractors to assemble, obtain packaging materials for, and test substantially all of our current products. If we lose the services of any of our subcontractors or if these subcontractors are unable to obtain sufficient packaging materials, shipments of our products may be disrupted, which could harm our customer relationships and adversely affect our net sales.
 
We do not own or operate an assembly or test facility. Seven third-party subcontractors located in Asia assemble, obtain packaging materials for, and test substantially all of our current products. Because we rely on third-party subcontractors to perform these functions, we cannot directly control our product delivery schedules and quality assurance. This lack of control has resulted, and could in the future result, in product shortages or quality assurance problems that could delay shipments of our products or increase our manufacturing, assembly or testing costs.
 
In the past we and others in our industry experienced a shortage in the supply of packaging substrates that we use for our products. If our third-party subcontractors are unable to obtain sufficient packaging materials for our products in a timely manner, we may experience a significant product shortage or delay in product shipments, which could seriously harm our customer relationships and materially and adversely affect our net sales.
 
We do not have long-term agreements with any of our assembly or test subcontractors and typically procure services from these suppliers on a per order basis. If any of these subcontractors experiences capacity constraints or financial difficulties, suffers any damage to its facilities, experiences power outages or any other disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner. Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our


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components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our results of operations. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above.
 
 
The market price of our Class A common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. Since January 1, 2002 our Class A common stock has traded at prices as low as $6.35 and as high as $50.00 per share. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:
 
  •  quarter-to-quarter variations in our operating results;
 
  •  changes in accounting rules, particularly those related to the expensing of stock options;
 
  •  newly-instituted litigation or an adverse decision or outcome in litigation;
 
  •  announcements of changes in our senior management;
 
  •  the gain or loss of one or more significant customers or suppliers;
 
  •  announcements of technological innovations or new products by our competitors, customers or us;
 
  •  the gain or loss of market share in any of our markets;
 
  •  general economic and political conditions and specific conditions in the semiconductor industry and the wired and wireless communications markets, including seasonality in sales of consumer products into which our products are incorporated;
 
  •  continuing international conflicts and acts of terrorism;
 
  •  changes in earnings estimates or investment recommendations by analysts;
 
  •  changes in investor perceptions; or
 
  •  changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.
 
In addition, the market prices of securities of Internet-related, semiconductor and other technology companies have been volatile. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, we and other companies that have experienced volatility in the market price of their securities have been, and in the future we may be, the subject of securities class action litigation.
 
 
Two of the five third-party foundries upon which we rely to manufacture substantially all of our semiconductor devices are located in Taiwan. Taiwan has experienced significant earthquakes in the past and could be subject to additional earthquakes. Any earthquake or other natural disaster, such as a tsunami, in a country in which any of our foundries is located could significantly disrupt our foundries’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage, of wafers and possibly in higher wafer prices.
 
Our California facilities, including our principal executive offices and major design centers, are located near major earthquake fault lines. Our international distribution center is located in Singapore, which could also be subject to an earthquake, tsunami or other natural disaster. If there is a major earthquake or any other natural disaster in a region where one or more of our facilities are located, our operations could be significantly disrupted.


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Although we have established business interruption plans to prepare for any such event, we cannot guarantee that we will be able to effectively address all interruptions that such an event could cause.
 
Any supply disruption or business interruption could materially and adversely affect our business, financial condition and results of operations.
 
 
Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere could materially and adversely affect our business.
 
The effects of regulation on our customers or the industries in which they operate may materially and adversely impact our business. For example, the Federal Communications Commission has broad jurisdiction over each of our target markets in the United States. Although current FCC regulations and the laws and regulations of other federal or state agencies are not directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. FCC regulatory policies that affect the ability of cable or satellite operators or telephone companies to offer certain services to their customers or other aspects of their business may impede sales of our products in the United States. For example, in the past we have experienced delays when products incorporating our chips failed to comply with FCC emissions specifications.
 
In addition, we and our customers are subject to various import and export regulations of the United States government. Changes in or violations of such regulations could materially and adversely affect our business, financial condition and results of operations. Additionally, various government export regulations apply to the encryption or other features contained in some of our products. We have made numerous filings and applied for and received a number of export licenses under these regulations. However, if we fail to continue to receive licenses or otherwise comply with these regulations, we may be unable to manufacture the affected products at our foreign foundries or to ship these products to certain customers located outside of the United States.
 
We and our customers may also be subject to regulation by countries other than the United States. Foreign governments may impose tariffs, duties and other import restrictions on components that we obtain from non-domestic suppliers and may impose export restrictions on products that we sell internationally. These tariffs, duties or restrictions could materially and adversely affect our business, financial condition and results of operations.
 
Due to environmental concerns, the use of lead and other hazardous substances in electronic components and systems is receiving increased attention. In response, the European Union passed the Restriction on Hazardous Substances (“RoHS”) Directive, legislation that limits the use of lead and other hazardous substances in electrical equipment. The RoHS Directive became effective July 1, 2006. We believe that, absent any unforeseen delays, our current product designs and material supply chains will allow production to continue in compliance with the RoHS Directive and without interruption. However, it is possible that unanticipated supply shortages or delays may occur as a result of these new regulations.
 
 
As of December 31, 2006 our co-founders, directors, executive officers and their respective affiliates beneficially owned 14.1% of our outstanding common stock and held 59.9% of the total voting power held by our shareholders. Accordingly, these shareholders currently have enough voting power to control the outcome of matters that require the approval of our shareholders. These matters include the election of our Board of Directors, the issuance of additional shares of Class B common stock, and the approval of most significant corporate transactions, including certain mergers and consolidations and the sale of substantially all of our assets. In particular, as of December 31, 2006 our two founders, Dr. Henry T. Nicholas III, who is no longer an officer or director of Broadcom, and Dr. Henry Samueli, our Chairman of the Board and Chief Technical Officer, beneficially owned a total of 13.3% of our outstanding common stock and held 59.4% of the total voting power held by our shareholders. Because of their significant voting stock ownership, we will not be able to engage in


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certain transactions, and our shareholders will not be able to effect certain actions or transactions, without the approval of one or both of these shareholders. These actions and transactions include changes in the composition of our Board of Directors, certain mergers, and the sale of control of our company by means of a tender offer, open market purchases or other purchases of our Class A common stock, or otherwise. Repurchases of shares of our Class A common stock under our share repurchase program will result in an increase in the total voting power of our co-founders, directors, executive officers and their affiliates, as well as other continuing shareholders.
 
 
Our articles of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if the acquisition would be beneficial to our shareholders. In addition, we have in the past issued and may in the future issue shares of Class B common stock in connection with certain acquisitions, upon exercise of certain stock options, and for other purposes. Class B shares have superior voting rights entitling the holder to ten votes for each share held on matters that we submit to a shareholder vote (as compared to one vote per share in the case of our Class A common stock) as well as the right to vote separately as a class (i) as required by law and (ii) in the case of a proposed issuance of additional shares of Class B common stock, unless such issuance is approved by at least two-thirds of the members of the Board of Directors then in office. Our Board of Directors also has the authority to fix the rights and preferences of shares of our preferred stock and to issue shares of common or preferred stock without a shareholder vote. It is possible that the provisions in our charter documents, the exercise of supervoting rights by holders of our Class B common stock, our co-founders’, directors’ and officers’ ownership of a majority of the Class B common stock, or the ability of our Board of Directors to issue preferred stock or additional shares of Class B common stock may prevent or discourage third parties from acquiring us, even if the acquisition would be beneficial to our shareholders. In addition, these factors may discourage third parties from bidding for our Class A common stock at a premium over the market price for our stock. These factors may also materially and adversely affect voting and other rights of the holders of our common stock and the market price of our Class A common stock.
 
Item 1B.   Unresolved Staff Comments
 
None
 
Item 2.   Properties
 
We lease facilities in Irvine (our corporate headquarters) and Santa Clara County, California. Each of these facilities includes administration, sales and marketing, research and development and operations functions. In addition to our principal design facilities in Irvine and Santa Clara County, we lease additional design facilities in Tempe, Arizona; San Diego County, California; Colorado Springs, Fort Collins, and Longmont, Colorado; Duluth, Georgia; Germantown, Maryland; Andover, Massachusetts; Matawan, New Jersey; Austin, Texas and Seattle, Washington, among other locations.
 
Internationally, we lease a distribution center that includes engineering design and administrative facilities in Singapore as well as engineering design and administrative facilities in Belgium, Canada, China, Denmark, France, Greece, India, Israel, Japan, Korea, the Netherlands, Taiwan and the United Kingdom, among other locations.
 
In addition, we lease various sales and marketing facilities in the United States and several other countries.
 
The leased facilities comprise an aggregate of approximately 2.0 million square feet. Our principal facilities have lease terms expiring between 2006 and 2017. We believe that the facilities under lease by us will be adequate for at least the next 12 months. In December 2004 we entered into a lease agreement under which our corporate headquarters will move from our present location to a new, larger facility in Irvine, which will consist of eight buildings with an aggregate of approximately 0.7 million square feet. The lease term is a period of ten years and two months beginning after the completion of the first two buildings and related tenant improvements, which is anticipated to occur in the first quarter of 2007.


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For additional information regarding our obligations under property leases, see Note 7 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
 
Item 3.   Legal Proceedings
 
The information set forth under Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Item 1A of this Report.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the quarter ended December 31, 2005.
 
(a) Our 2006 Annual Meeting of Shareholders, or the 2006 Annual Meeting, was held April 27, 2006.
 
(b) At the 2006 Annual Meeting, the shareholders elected each of the following nominees as directors, to serve on our Board of Directors until the next annual meeting of shareholders and/or until their successors are duly elected and qualified. The vote for each director was as follows:
 
                                 
    Class A
                   
    Shares/
    Class B
    Class B
       
    Votes     Shares     Votes     Total Votes  
 
George L. Farinsky
    358,035,138       75,730,323       757,303,230       1,115,338,368  
Maureen E. Grzelakowski
    372,738,415       75,730,323       757,303,230       1,130,041,645  
Nancy H. Handel
    372,755,056       75,730,323       757,303,230       1,130,058,286  
John Major
    338,958,511       75,730,323       757,303,230       1,096,261,741  
Scott A. McGregor
    362,621,985       75,730,013       757,300,130       1,119,922,115  
Alan E. Ross
    362,190,396       75,730,323       757,303,230       1,119,493,626  
Henry Samueli, Ph.D. 
    362,220,963       75,730,323       757,303,230       1,119,524,193  
Robert E. Switz
    358,064,109       75,730,323       757,303,230       1,115,367,339  
Werner F. Wolfen
    330,490,184       75,730,323       757,303,230       1,087,793,414  
 
(c) At the 2006 Annual Meeting, the Shareholders also voted on the following four proposals and cast their votes as follows:
 
(1) To approve Second Amended and Restated Articles of Incorporation of Broadcom to (i) increase the aggregate number of authorized shares of Class A common stock from 800,000,000 shares to 2,500,000,000 shares, and (ii) eliminate all statements referring to the rights, preferences, privileges and restrictions of Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock and Series E preferred stock.
 
                                 
    Class A
                   
    Shares/
    Class B
    Class B
       
    Votes     Shares     Votes     Total Votes  
 
For
    309,597,589       75,726,951       757,269,510       1,066,867,099  
Against
    74,167,179       5,284       52,840       74,220,019  
Abstain
    2,615,183                   2,615,183  
Broker Non-Votes
    N/A       N/A       N/A       N/A  


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(2) To approve an amendment to our Bylaws, as previously amended and restated, to increase the authorized number of directors from a range of five (5) to nine (9) to a range of six (6) to eleven (11) directors.
 
                                 
    Class A
                   
    Shares/
    Class B
    Class B
       
    Votes     Shares     Votes     Total Votes  
 
For
    372,744,511       75,730,323       757,303,230       1,130,047,741  
Against
    12,039,504       1,912       19,120       12,058,624  
Abstain
    2,408,737                   2,408,737  
Broker Non-Votes
    N/A       N/A       N/A       N/A  
 
(3) To approve an amendment and restatement of Broadcom’s 1998 Stock Incentive Plan, as previously amended and restated, which revises the automatic equity grant program in effect for new and continuing non-employee Board members and makes certain technical revisions and improvements.
 
                                 
    Class A
                   
    Shares/
    Class B
    Class B
       
    Votes     Shares     Votes     Total Votes  
 
For
    47,712,419       75,670,025       756,700,250       804,412,669  
Against
    284,845,298       53,726       537,260       285,382,558  
Abstain
    2,428,490       1,912       19,120       2,447,610  
Broker Non-Votes
    52,206,547       6,572       65,720       52,272,267  
 
(4) To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2006.
 
                                 
    Class A
                   
    Shares/
    Class B
    Class B
       
    Votes     Shares     Votes     Total Votes  
 
For
    384,497,719       75,730,323       757,303,230       1,141,800,949  
Against
    330,992                   330,992  
Abstain
    2,364,041       1,912       19,120       2,383,161  
Broker Non-Votes
    N/A       N/A       N/A       N/A  


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Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
Our Class A common stock is traded on the Nasdaq Global Select Market (previously the Nasdaq National Market) under the symbol BRCM. The following table sets forth, for the periods indicated, the high and low sale prices for our Class A common stock on the Nasdaq Global Select Market:
 
                 
    High     Low  
 
Year Ended December 31, 2006
               
Fourth Quarter
  $ 37.50     $ 26.80  
Third Quarter
    31.27       21.98  
Second Quarter
    46.97       28.71  
First Quarter
    50.00       30.96  
Year Ended December 31, 2005
               
Fourth Quarter
  $ 33.28     $ 26.38  
Third Quarter
    31.41       23.77  
Second Quarter
    25.67       18.25  
First Quarter
    22.71       19.40  
Year Ended December 31, 2004
               
Fourth Quarter
  $ 22.99     $ 17.07  
Third Quarter
    31.17       16.83  
Second Quarter
    31.37       24.34  
First Quarter
    30.00       22.72  
 
As of December 31, 2006 and 2005 there were 1,448 and 1,725 record holders of our Class A common stock and 213 and 263 record holders of our Class B common stock, respectively. On January 19, 2007 the last reported sale price of our Class A common stock on the Nasdaq Global Select Market was $30.18 per share.
 
Our Class B common stock is not publicly traded. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock and in most instances automatically converts upon sale or other transfer.
 
 
We have never declared or paid cash dividends on shares of our capital stock. We currently intend to retain all of our earnings, if any, for use in our business and in acquisitions of other businesses, assets, products or technologies, and for purchases of our common stock from time to time. We do not anticipate paying any cash dividends in the foreseeable future.
 
 
The information under the caption “Equity Compensation Plan Information,” appearing in the Proxy Statement, is hereby incorporated by reference. For additional information on our stock incentive plans and activity, see Note 9 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
 
 
In the three months ended December 31, 2006 and 2005, we issued an aggregate of 0.1 million shares and 2.2 million shares, respectively, of our Class A common stock upon conversion of a like number of shares of our Class B common stock. The offers and sales of those securities were effected without registration in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act.


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In February 2005 our Board of Directors authorized a program to repurchase shares of our Class A common stock. The Board approved the repurchase of shares having an aggregate value of up to $250 million from time to time over a period of one year, depending on market conditions and other factors.
 
The following table details the repurchases that were made under the program during the three months ended December 31, 2005:
 
                                 
                      Approximate Dollar
 
    Total
          Total Number of
    Value of Shares
 
    Number
          Shares Purchased
    That may yet be
 
    of Shares
    Average Price
    as Part of Publicly
    Purchased Under
 
Period
  Purchased     per Share     Announced Plan     the Plan  
    (In thousands)           (In thousands)     (In thousands)  
 
October 3, 2005 – October 31, 2005
    933     $ 29.15       933          
November 1, 2005 – November 30, 2005
    622       30.02       622          
December 1, 2005 – December 30, 2005
    374       32.07       374          
                                 
Total
    1,929     $ 30.00       1,929     $ 96,248 (1)
                                 
 
 
(1) This amount represents the approximate dollar value available under the program for repurchases of additional shares of our Class A common stock at December 31, 2005, prior to the amendment of the program described below.
 
Under the program, through January 25, 2006 we repurchased a total of 5.6 million shares of our Class A common stock at a weighted average price of $28.09 per share.
 
On January 25, 2006 the Board of Directors approved an amendment to the share repurchase program extending the program through January 26, 2007 and authorizing the repurchase of additional shares of the our Class A common stock having a total market value of up to $500 million from time to time during the period beginning January 26, 2006 and ending January 26, 2007. Repurchases under the program will be made in open market or privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, subject to market conditions, applicable legal requirements and other factors. The program does not obligate Broadcom to acquire any particular amount of Class A common stock and may be suspended at any time at our discretion.
 
The following table details the repurchases that were made under the program during the year ended December 31, 2006:
 
                                 
                      Approximate Dollar
 
    Total
          Total Number of
    Value of Shares
 
    Number
          Shares Purchased
    That may yet be
 
    of Shares
    Average Price
    as Part of Publicly
    Purchased Under
 
Period
  Purchased     per Share     Announced Plan     the Plan  
    (In thousands)           (In thousands)     (In thousands)  
 
January 3, 2006 – January 31, 2006
    116     $ 38.07       116          
February 1, 2006 – February 28, 2006
    907     $ 45.65       907          
March 1, 2006 – March 31, 2006
    1,062     $ 45.20       1,062          
April 3, 2006 – April 28, 2006
    939     $ 43.85       939          
May 1, 2006 – May 31, 2006
    1,484     $ 37.17       1,484          
June 1, 2006 – June 30, 2006
    1,790     $ 31.27       1,790          
July 3, 2006 – July 20, 2006
    1,050     $ 28.22       1,050          
August 1, 2006 – December 31, 2006
                         
                                 
Total
    7,348     $ 37.53       7,348     $ 226,524  
                                 
 
From the time the program was first implemented through December 31, 2006, we repurchased a total of 12.8 million shares of our Class A common stock at a weighted average price of $33.47 per share.
 
On July 24, 2006 our Board of Directors decided to suspend purchasing shares of our Class A common stock under the share repurchase program.


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Item 6.   Selected Consolidated Financial Data
 
We recently completed a voluntary review of our equity award practices. The voluntary review, which covered all option grants and other equity awards made since our initial public offering in April 1998, was directed by the Audit Committee of our Board of Directors, with the assistance of outside counsel and forensic accountants.
 
Based on the results of the review, the Audit Committee concluded that, pursuant to APB 25 and related interpretations, the accounting measurement dates for most stock option grants awarded between June 1998 and May 2003, covering options to purchase 232.9 million shares of our Class A common stock, differed from the measurement dates previously used for such awards. As a result, revised measurement dates were applied to the affected option grants and Broadcom has recorded $2.259 billion in additional stock-based compensation expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being amortized over the service period relating to each option, typically four years, with approximately 95% of the expense being recorded in years prior to 2004.
 
The selected consolidated financial data has been restated as a result of this review. See the Explanatory Note included before Part I, Item 1 of this Report, the discussion included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Report, and Note 2 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
 
                                         
    Years Ended December 31,  
    2005     2004     2003     2002     2001  
    (Restated)     (Restated)     (Restated)     (Restated)     (Restated)  
    (In thousands, except per share data)  
 
Consolidated Statements of Operations Data
                       
Net revenue
  $ 2,670,788     $ 2,400,610     $ 1,610,095     $ 1,082,948     $ 961,821  
Cost of revenue(1)
    1,267,799       1,196,767       866,359       623,005       605,492  
                                         
Gross profit
    1,402,989       1,203,843       743,736       459,943       356,329  
Operating expense:
                                       
Research and development(1)
    681,047       598,697       732,386       1,000,303       1,013,228  
Selling, general and administrative(1)
    274,260       244,037       259,258       342,287       394,362  
Amortization of purchased intangible assets
    4,033       3,703       3,504       22,387       27,192  
Settlement costs
    110,000       68,700       194,509       3,000       3,000  
In-process research and development
    43,452       63,766                   109,710  
Impairment of goodwill and other intangible assets
    500       18,000       439,611       1,265,038       1,181,649  
Restructuring costs (reversal)
    (2,500 )           2,932       119,680       34,281  
Amortization of goodwill
                            753,042  
Stock option exchange(1)
                413,161             547,665  
                                         
Income (loss) from operations
    292,197       206,940       (1,301,625 )     (2,292,752 )     (3,707,800 )
Interest income, net
    51,207       15,010       6,828       12,183       23,019  
Other income (expense), net
    3,465       7,317       26,053       (32,750 )     (30,875 )
                                         
Income (loss) before income taxes
    346,869       229,267       (1,268,744 )     (2,313,319 )     (3,715,656 )
Provision (benefit) for income taxes
    (20,220 )     56,082       25,127       471,707       (56,729 )
                                         
Net income (loss)
  $ 367,089     $ 173,185     $ (1,293,871 )   $ (2,785,026 )   $ (3,658,927 )
                                         
Net income (loss) per share (basic)(2)
  $ 0.72     $ 0.36     $ (2.95 )   $ (6.93 )   $ (9.60 )
                                         
Net income (loss) per share (diluted)(2)
  $ 0.66     $ 0.33     $ (2.95 )   $ (6.93 )   $ (9.60 )
                                         


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    December 31,  
    2005     2004     2003     2002     2001  
    (Restated)     (Restated)     (Restated)     (Restated)     (Restated)  
    (In thousands)  
 
Consolidated Balance Sheet Data
                                       
Cash and cash equivalents
  $ 1,437,276     $ 858,592     $ 558,669     $ 389,555     $ 403,758  
Working capital
    1,736,382       1,085,099       491,830       187,767       439,220  
Goodwill and purchased intangible assets, net
    1,156,934       1,079,262       834,319       1,252,639       2,338,740  
Total assets
    3,752,199       2,885,839       2,017,622       2,216,153       3,805,522  
Long-term debt, including current portion
                      113,470       118,046  
Total shareholders’ equity
    3,140,567       2,363,743       1,489,408       1,644,521       3,381,523  
 
 
(1) Includes stock-based compensation expense resulting from stock options and restricted stock units we issued or assumed in acquisitions, as well as the effects of our stock option exchange programs in 2003 and 2001. See Note 9 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
 
(2) See Notes 1 and 3 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report, for an explanation of the calculation of net income (loss) per share.
 
The following table presents details of the total stock-based compensation expense that is included in each functional line item in the consolidated statements of operations data above:
 
                                         
    Years Ended December 31,  
    2005     2004     2003     2002     2001  
    (Restated)     (Restated)     (Restated)     (Restated)     (Restated)  
    (In thousands)  
 
Supplemental Data on Stock-Based Compensation Expense
Cost of revenue
  $ 4,177     $ 4,776     $ 44,522     $ 31,525     $ 63,660  
Research and development
    68,606       102,253       298,081       538,499       566,580  
Selling, general and administrative
    29,232       30,897       69,053       177,020       238,914  
Stock option exchange
                410,381             547,665  
                                         
    $ 102,015     $ 137,926     $ 822,037     $ 747,044     $ 1,416,819  
                                         
 
The consolidated statement of operations data set forth above for the three years ended December 31, 2005 and the consolidated balance sheet data as of December 31, 2005 and 2004, are derived from, and qualified by reference to, the audited restated financial statements appearing elsewhere in this Report. The consolidated statement of operations data for the years ended December 31, 2002 and 2001, and the consolidated balance sheet data as of December 31, 2003, 2002 and 2001, are derived from unaudited financial statements not included herein and have also been restated to reflect the results of the equity award review.
 
See “Impact of the Additional Stock-Based Compensation Expense-Related Adjustments on the Consolidated Financial Statements” included in, ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in Part II, Item 7 of this Report, for tables presenting the adjustments to our previously-reported consolidated statements of operations for the five years ended December 31, 2005.
 
The information that has been previously filed or otherwise reported in our quarterly reports on Form 10-Q or any of our annual reports on Form 10-K for the periods affected by the restatement is superseded by the information in this Report, and the previously filed financial statements and related financial information and opinions of our independent registered public accounting firm contained in such reports should no longer be relied upon. The restated consolidated financial statements include unaudited financial information for interim periods of 2005 and 2004 consistent with Article 10-01 of Regulation S-X. That information is presented in Note 2 to Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report.
 
Certain amounts in the selected consolidated financial data above have been reclassified to conform to the 2005 presentation. The consolidated financial statements include the results of operations of acquisitions


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commencing on their respective acquisition dates. See Note 4 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this Report. All historical share information has been adjusted to reflect the three-for-two stock split effected February 21, 2006 through the payment of a stock dividend.
 
You should read this selected consolidated financial data together with the Explanatory Note and Consolidated Financial Statements and related Notes contained in this Report and in our subsequent reports filed with the SEC, as well as the section of this Report and our other reports entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto included in Part IV, Item 15 of this Report and the “Risk Factors” included in Part I, Item 1A of this Report, as well as other cautionary statements and risks described elsewhere in this Report, before deciding to purchase, hold or sell our common stock.
 
 
We recently completed a voluntary review of our equity award practices. The voluntary review, which commenced in May 2006 and covered all grants of options and other equity awards made since our initial public offering in April 1998, was directed by the Audit Committee of our Board of Directors. The voluntary review consisted of two components: (1) an equity award review to determine whether we used appropriate measurement dates for option grants and other equity awards made under our extensive employee equity award programs, which was conducted with the assistance of outside legal counsel Irell & Manella LLP and forensic accountants FTI Consulting Inc., and (2) an investigation of the conduct and performance of Broadcom’s officers, employees and directors who were involved in the stock option granting process, which was conducted with the assistance of independent legal counsel Kaye Scholer LLP and forensic accountants LECG, LLC.
 
Based on the results of the equity award review, the Audit Committee concluded that, pursuant to APB 25 and related interpretations, the accounting measurement dates for most of the stock option grants awarded between June 1998 and May 2003, covering options to purchase 232.9 million shares of our Class A or Class B common stock, differed from the measurement dates previously used for such awards. As a result, revised measurement dates were applied to the affected option grants and Broadcom has recorded a total of $2.259 billion in additional stock-based compensation expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being amortized over the service period relating to each option, typically four years, with approximately 95% of the expense being recorded in years prior to 2004.
 
As a consequence of these adjustments, our audited consolidated financial statements and related disclosures for the three years ended December 31, 2005 and our consolidated statements of operations and consolidated balance sheet data for the five years ended December 31, 2005, included in “Selected Consolidated Financial Data” in Part II, Item 6 of this Report, have been restated. In addition, the unaudited quarterly financial information for interim periods of 2005 and 2004, included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” has been restated. We have also restated the stock-based compensation expense footnote information calculated under SFAS 123 and SFAS 148, under the disclosure-only alternatives of those pronouncements for the years 2003 through 2005 and for the interim periods of 2005 and 2004. The restated footnote information has been included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in the Consolidated Financial Statements in Part II, Item 15 of this Report.
 
The adjustments did not affect Broadcom’s previously-reported revenue, cash, cash equivalents or marketable securities balances in any of the restated periods.
 
Share and per share information presented in this Report has been adjusted to reflect all splits and dividends of our common stock subsequent to April 16, 1998, including the three-for-two stock split effected February 21, 2006 through the payment of a stock dividend.


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Findings of the Equity Award Review
 
From our initial public offering through May 2003, Broadcom’s option grant processes and procedures were not formalized or consistently followed. During this period, option grants awarded to employees who were not then Section 16 Officers were approved by our Equity Award Committee (then known as the Option Committee). The committee consisted of two directors who were also Section 16 Officers, pursuant to authority delegated by the Board of Directors under the 1998 Plan and our 1999 Special Stock Option Plan. The Equity Award Committee did not conduct formal meetings with respect to all option grants; rather, the committee members often held informal discussions, either in person or telephonically, to determine whether option grants should be approved and priced as of that day. The Equity Award Committee members conferred frequently (often weekly) during 1998 and 1999. From 2000 through 2002, the Equity Award Committee members conferred less frequently and sometimes made option grants only once a quarter. No formal, contemporaneous written records of the Equity Award Committee discussions or meetings were kept. Instead, the Equity Award Committee relied upon, and option grant approvals were documented by, unanimous written consents, which were dated “as of” a specified date but were generally prepared after that date and signed at a later time. Thus, Broadcom has been unable to locate affirmative, contemporaneous documentation of Equity Award Committee meetings related to many past option grants.
 
During the equity award review, we determined that 18 grant dates were selected after the “as of” date indicated on the unanimous written consents documenting the approvals for some or all of the options granted. Accordingly, during the equity award review process, we presumed that each of the 96 grant dates from our initial public offering through May 2003 did not meet the measurement date criteria of APB 25 unless we could locate contemporaneous documentation confirming both that (1) a meeting occurred on a specified grant date and (2) the identification of employee-recipients and grant amounts were finalized by that grant date. Because we applied this presumption, a significant portion of the restatement adjustments are based upon our inability to locate such documentation.
 
During the same period, from our initial public offering through May 2003, option grants to Section 16 Officers and members of the Board of Directors were approved by the Board of Directors or the Compensation Committee or made pursuant to the Automatic Director Grant Program under the 1998 Plan. Like the Equity Award Committee, the Compensation Committee relied upon, and option grant approvals were documented by, unanimous written consents, which were dated “as of” a specified date but were generally prepared after that date and signed at a later time. We have been unable to locate affirmative, contemporaneous documentation of Compensation Committee meetings related to several Section 16 Officer option grants. At the time of two grant dates to Section 16 Officers, a vacancy on the Compensation Committee existed; however, the vacancy had been formally filled by the time the unanimous written consents were executed by the committee members. Most grants to directors were made automatically on the dates specified under the 1998 Plan.
 
None of the grants requiring measurement date adjustments was made to our co-founders or any current or former member of our Board of Directors.
 
In June 2003 we implemented revisions to our stock option grant processes and procedures. As a result, the processes were formalized and a consistent procedure was implemented for the Equity Award and Compensation Committees. In addition, the composition of the Equity Award Committee was changed to include an independent director. Our review of the equity award practices in effect since June 2003 has determined that our equity granting processes and practices are sound and have been consistently adhered to, and we have not identified any instances of inappropriate measurement dates under APB 25 for option grants or other equity awards made since May 2003.
 
Currently, the Compensation Committee and Equity Award Committee each hold monthly equity award meetings based upon a predetermined schedule. The process requires that any proposed equity awards be reviewed in advance by both our Shareholder Services and Human Resources Departments, and requires communication of the details of proposed equity awards to committee members prior to each monthly meeting, as well as to award recipients promptly after the meeting. Equity awards are priced and valued based upon the closing price of our Class A common stock on the date of the meeting. Decisions of each committee meeting are documented by minutes.


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During the course of the equity award review, we identified three reasons that led to the determination that 81 grant dates failed to meet the measurement date criteria of APB 25. None of the grants requiring measurement date adjustments was made to our co-founders or any current or former member of our Board of Directors. For some of the 81 grant dates, more than one reason applied; as a result, the grant date numbers detailed below will not total 81 grant dates. The three reasons are:
 
  •  No Contemporaneous Documentation.  The review identified 68 grant dates for which Broadcom has been unable to locate contemporaneous documentation (beyond the “as of” dated unanimous written consents) confirming that a committee meeting occurred on the indicated grant date. We presumed that each grant date did not meet the measurement date criteria of APB 25 unless we could locate contemporaneous documentation confirming both that (1) a meeting occurred on the grant date and (2) the identification of employee-recipients and grant amounts were finalized by the grant date. The affected awards on these 68 grant dates involved 10,529 option grants covering 108.9 million shares. Of the options to purchase 108.9 million shares, options to purchase 0.4 million shares were granted to Section 16 Officers and options to purchase 108.5 million shares were granted to other employees. Among the 68 grant dates were three grant dates on which options were granted at times when the closing price of our Class A common stock was at or near the lowest price experienced during the applicable quarter or year. The three grant dates involved 1,128 option grants covering 12.5 million shares, none of which were granted to Section 16 Officers. Adjustments to the APB 25 measurement dates for the grants covered by the 68 grant dates resulted in the recording of additional deferred compensation of $1.037 billion.
 
  •  Date Selection.  For 18 grant dates, the review identified documents and/or unusual pricing procedures that indicated that the grant date for some options was selected after the date indicated on the unanimous written consent documenting the approval of those options. The affected awards on these 18 grant dates involved 6,205 option grants covering 90.3 million shares. Of the options to purchase 90.3 million shares, options to purchase 5.1 million shares were granted to Section 16 Officers and options to purchase 85.2 million shares were granted to other employees. Adjustments to the APB 25 measurement dates for these grants resulted in the recording of additional deferred compensation of $904.5 million.
 
  •  Subsequent Allocation.  In 1998, 2000, 2001 and 2002, we made large, broad-based grants of options to a substantial percentage (as high as 90%) of our employees. With respect to two of the broad-based grant dates, the review determined that we had not completed allocations of options to individual employees by the time the grant date was selected by the Equity Award or Compensation Committee. The affected awards on these two grant dates involved 4,271 option grants covering 33.7 million shares. Of the options to purchase 33.7 million shares, options to purchase 0.8 million shares were granted to Section 16 Officers and options to purchase 32.9 million shares were granted to other employees. Adjustments to the APB 25 measurement dates for these grants resulted in the recording of additional deferred compensation of $677.8 million.
 
The equity award review also revealed that, with respect to 14 of the grant dates discussed above, the Equity Award Committee awarded options but we intentionally did not notify some of the employee-recipients of their option grants for extended periods. We believe that notification is not an explicit criterion required by APB 25 to establish a measurement date. However, SFAS 123, if applicable, requires that there be a mutual understanding between the company and employee-recipient of the terms and conditions of option awards for there to be a grant date, and APB 25 indicates that the measurement date generally is on or after the grant date. Accordingly, we decided that for these 14 grant dates, the date of notification to the affected employees represented the best approximation of the appropriate measurement date under APB 25. The affected awards on these 14 grant dates involved 608 option grants covering 13.1 million shares. Of the options to purchase 13.1 million shares, options to purchase 1.3 million shares were granted to Section 16 Officers and options to purchase 11.8 million shares were granted to other employees. Adjustments to the APB 25 measurement dates for these grants resulted in the recording of deferred compensation of $251.1 million, included in the amounts above.


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In addition, during the course of the equity award review, we identified some instances in which adjustments to deferred compensation were required that were not related to changes in measurement dates, as follows:
 
  •  Grants made to some consultants were erroneously accounted for under APB 25 as if they had been made to employees. To correctly account for these grants in accordance with SFAS 123, we recorded $33.8 million in additional deferred compensation during 1998 through 2002.
 
  •  Some grants were made to employees upon acceptance of their employment offers at Broadcom rather than as of or after the actual commencement of employment. To correctly account for these grants in accordance with APB 25 and SFAS 123, we recorded $12.1 million in additional deferred compensation during 1998 through 2002.
 
  •  With respect to 17 option grants, modifications were made to employee stock options that were not accounted for in accordance with APB 25. The modifications included the acceleration of the vesting period of options of terminated employees or the extension of the post-service exercise period for vested stock options of terminated employees. We recorded $9.5 million in additional deferred compensation, principally in 2001 through 2003, to properly account for these modifications.
 
In addition, other stock-based compensation expense previously recorded in prior periods was adjusted in connection with the restatement. In connection with the termination of some employees, we recorded stock-based compensation expense resulting from the extension of the post-service exercise period for vested stock options and for acceleration of the vesting period of stock options. These modifications were accounted for correctly pursuant to APB 25. However, as a result of other adjustments made in our restatement, the previously-recorded deferred compensation was reduced by $3.1 million.
 
 
In our restatements for 1998, 1999, and 2000 we recorded income tax benefits of $3.7 million, $26.7 million, and $167.8 million, respectively, with respect to additional stock-based compensation expense relating to U.S. based income. At December 31, 2000 we had additional deferred tax assets of $174.1 million for additional stock-based compensation expense related to outstanding and unexercised stock options because we believed such amounts would more likely than not be realized given our expected future income from ordinary and recurring operations and tax planning strategies. No tax benefits were recorded for additional stock-based compensation expense recorded during 2001 as such amounts were offset by a valuation allowance because we did not believe such additional deferred tax assets were more likely than not to be realized. At December 31, 2002 we concluded that a full valuation allowance against our deferred tax assets was appropriate as a result of our cumulative losses as of December 31, 2002, which caused a presumption that any deferred tax assets would be difficult to realize, and reversed the $174.1 million recorded in 2000, thereby increasing our 2002 income tax expense by $174.1 million and eliminating all previously recorded deferred tax assets. We recorded an income tax benefit of $19.5 million in 2004 related to income tax benefits realized from employee stock option exercises in 2004 that reduced our tax liabilities. Prior to the restatement, such income tax benefits were credited to additional paid-in capital because there was no associated stock-based compensation expense related to such employee stock options. No income tax benefits were recorded for additional stock-based compensation in 2003 and 2005 because of our domestic tax losses prior to deductions related to employee stock options. As a result, the cumulative net income tax benefit we recorded through December 31, 2005 was $43.5 million. We also recorded other non-income tax adjustments of $4.9 million, resulting in total related tax adjustments of $38.7 million.
 
 
The $2.672 billion total of the amounts shown above represents the aggregate gross additional deferred compensation that we recorded for the years 1998 through 2005 as a result of our equity award review. This amount does not reflect the elimination of $396.4 million in deferred compensation due to subsequent forfeitures related to employee terminations. In addition, the remaining amount of deferred compensation totaling $16.1 million at December 31, 2005 was eliminated in accordance with the provisions of SFAS 123R, which we adopted


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effective January 1, 2006. After such reductions, we recorded net additional stock-based compensation expense of $2.259 billion for the years 1998 through 2005 in connection with our equity award review. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. The adjustments did not affect Broadcom’s previously-reported revenue, cash, cash equivalents or marketable securities balances in any of the restated periods.
 
Findings of the Conduct Review
 
In late July 2006, on the basis of its initial review, the Audit Committee decided to investigate the conduct and performance of Broadcom’s officers, employees and directors who were involved in the stock option granting process. That investigation is referred to in this Report as the conduct review.
 
During the four-and-a-half month conduct review, the Audit Committee met 28 times. Its independent counsel reviewed more than six million pages of documents and electronic information, and interviewed more than forty individuals, some more than once. The conduct review was accomplished with the full support and cooperation of Broadcom’s management and employees.
 
The Audit Committee determined that, after May 2003, Broadcom made significant corrective changes to its option granting and documentation processes. The measurement date for each grant made after May 2003 complied with prevailing accounting rules and is not subject to restatement. The Audit Committee found that Broadcom’s current processes are appropriate, that effective controls are now in place, and that there is currently no known material weakness in Broadcom’s option granting processes.
 
For the period from June 1998 through May 2003, however, the Audit Committee found that Broadcom’s informal option grant procedures and processes lacked adequate controls, and that its documentation and recordkeeping were insufficient to verify most of the original measurement dates.
 
The Audit Committee found that, for numerous option grants made between November 3, 1998 and May 19, 2003, certain Broadcom executives and employees selected grant dates after the fact.
 
The Audit Committee further found that, particularly with respect to annual broad-based option grants, allocations of grants to some individuals occurred after the grant dates.
 
The Audit Committee found that, reflecting the lack of adequate controls, there was, at times, uncertainty and confusion among certain individuals at Broadcom as to the rules relating to accounting for options, and certain individuals at Broadcom did not appreciate, or may not have appreciated, what the appropriate accounting rules were or whether appropriate accounting charges were or should have been taken.
 
Option grants were documented by unanimous written consents with “as of” dates. These unanimous written consents were often prepared weeks or months after the fact, and, apparently, a number of the “as of” unanimous written consents were presented for signature at the same time.
 
With respect to both the Equity Award Committee and the Compensation Committee, the Audit Committee found no evidence of any attempt to falsify execution dates of the “as of” unanimous written consents, or of any effort to assert that the date of actual execution of the “as of” unanimous written consents was on the grant date or measurement date.
 
The Audit Committee determined that all options and other equity awards granted to Broadcom’s co-founders and all current and former members of the Board of Directors were properly granted.
 
Based on the totality of the information available to it, the Audit Committee found that certain individuals were actively responsible for the lack of controls and the inappropriate grant practices. With respect to these individuals, the Audit Committee concluded:
 
  •  Dr. Henry T. Nicholas III, Broadcom’s former President and Chief Executive Officer, bears significant responsibility for the lack of adequate controls in the option granting process due to the tone and style of doing business he set. There is substantial evidence that Dr. Nicholas was at times involved with the selection of grant dates after the fact and with subsequent allocations of grants. There is evidence that, on at least a couple of occasions, Dr. Nicholas sought the advice of the Chief Financial Officer and the Vice


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  President of Human Resources regarding the process for certain option grants. He did not personally benefit from any of the restated grants. For reasons unrelated to stock options, Dr. Nicholas left Broadcom as an officer in January 2003 and did not stand for re-election as a director at the May 2003 Annual Meeting of Shareholders.
 
  •  William J. Ruehle, Broadcom’s Chief Financial Officer from March 1998 until September 19, 2006, was at the center of the flawed option granting process. Mr. Ruehle retired from Broadcom two days before he was to be interviewed as part of the conduct review. Mr. Ruehle bears a substantial measure of responsibility for the lack of adequate controls and appropriate documentation in the option granting process. There is substantial evidence he engaged in the selection of grant dates after the fact. There is also substantial evidence that he engaged in subsequent allocations of grants. Mr. Ruehle failed to provide proper advice concerning proper accounting standards or to establish proper procedures. He was involved with grants for which the grant date was selected after the fact, and personally received options included in some of such grants.
 
  •  Nancy M. Tullos, Broadcom’s former Vice President of Human Resources from August 1998 until June 30, 2003, also bears significant responsibility for the lack of controls and deficiencies in the option granting process. She was heavily involved in the flawed option granting process. While there is a lack of evidence that Ms. Tullos herself selected grant dates after the fact, there is substantial evidence she was heavily involved in that process, was fully aware of what was occurring, and encouraged, assisted in, and enabled it. There is also substantial evidence that Ms. Tullos was at the center of allocations of grants to individuals after the grants were made. She was involved with grants for which the grant date was selected after the fact, and personally received options included in some of such grants.
 
None of these individuals agreed to be interviewed by the Audit Committee’s independent counsel during the conduct review.
 
The Audit Committee also found that a former Treasurer initiated or implemented, together with Mr. Ruehle, the selection of a few grant dates after the fact in late 2002. This Broadcom employee retired in December 2006 from his then mid-level position in the Information Technology Department as a result of the conduct review.
 
With respect to these individuals who were, to varying degrees, actively responsible for the lack of controls and the inappropriate grant practices, the following remedial steps were recommended by the Audit Committee and taken by Broadcom’s Board of Directors in mid-December, 2006:
 
  •  Each of these individuals either left Broadcom in 2003 for reasons unrelated to stock option practices or has recently retired from Broadcom as a result of the conduct review.
 
  •  Broadcom has repriced and terminated all of Mr. Ruehle’s outstanding exercisable options granted after the Company’s initial public offering. The net value prior to repricing of Mr. Ruehle’s terminated options on December 15, 2006 exceeded $32 million. Broadcom also purchased from Mr. Ruehle at fair market value his outstanding vested options granted prior to Broadcom’s initial public offering. A description of Broadcom’s agreement with Mr. Ruehle pertaining to his options is included in Part III, Item 11 of this Report.
 
  •  Broadcom has terminated all of Ms. Tullos’ outstanding exercisable options. The net value of Ms. Tullos’ terminated options on December 15, 2006 exceeded $4 million.
 
  •  Broadcom has repriced and terminated all of the outstanding exercisable options granted after 2002 to the former Treasurer who left Broadcom because of the conduct review, and has repriced his earlier-granted options. The net value prior to repricing of his terminated options on December 15, 2006 exceeded $450,000.
 
  •  None of these former employees will receive any financial assistance that Broadcom may decide to make available to other employees to offset any tax consequences of the restatement.
 
  •  Dr. Nicholas has no outstanding options.


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The Audit Committee also found that two other employees — who were not responsible for the selection of grant dates or initiating subsequent allocations, and who gave appropriate advice concerning option grants — could nonetheless have been more alert that option granting practices were, or may have been, questionable or lacking in adequate controls. The Audit Committee concluded that these employees did not follow up as fully as they could have to address inadequacies in the option granting process.
 
The Audit Committee and the Board of Directors confirmed their confidence in the ability of these individuals to fully perform their responsibilities in the future. These two individuals have voluntarily agreed to the repricing of their outstanding options to the fair market value of Broadcom’s stock on the correct measurement dates and not to be included in any financial assistance Broadcom may make available to its other employees to offset any tax consequences of the restatement.
 
Compensation Committee members executed “as of” unanimous written consents effecting the grants. The Audit Committee found that these Compensation Committee members reasonably relied on the advice of the responsible officers and employees and that management would present them with appropriate documents for execution.
 
The Audit Committee also concluded that Dr. Henry Samueli, a member of the Equity Award Committee and currently Broadcom’s Chairman and Chief Technical Officer, while involved with the flawed option granting process, reasonably relied on management and other professionals regarding the correct option accounting treatment and grant approval process. The Audit Committee also found that all outside directors reasonably relied on management and other professionals regarding the correct option accounting treatment and grant approval process.
 
Finally, the Audit Committee concluded that both Scott A. McGregor, Broadcom’s current President and Chief Executive Officer (who joined Broadcom in 2005), and Bruce E. Kiddoo, Vice President, Corporate Controller and Acting Chief Financial Officer (who assumed his position as Acting Chief Financial Officer when Mr. Ruehle retired on September 19, 2006), are appropriate individuals to certify Broadcom’s financial statements.
 
On December 15 and 18, 2006, Broadcom’s Board of Directors considered and approved each of the Audit Committee’s findings and conclusions with respect to the conduct review.
 
Restatement of Our Consolidated Financial Statements
 
As a result of the findings of our equity award review, our consolidated financial statements for the three years ended December 31, 2005 have been restated. The restated consolidated financial statements include unaudited financial information for interim periods of 2005 and 2004 consistent with Article 10-01 of Regulation S-X. We also recorded additional stock-based compensation expense and associated tax adjustments affecting our previously-reported financial statements for 1998 through 2002, the effects of which are summarized in cumulative adjustments to our additional paid-in capital, deferred compensation and accumulated deficit accounts as of December 31, 2002, in the amounts of $2.282 billion, $486.0 million and $1.796 billion, respectively. See the Consolidated Statements of Shareholders’ Equity, included in Part IV, Item 15 of this Report.


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     The following table summarizes the additional deferred compensation recorded on an annual basis as a result of the equity award review, categorized by each of the three reasons that led to the determination that particular option grants failed to meet the measurement date criteria of APB 25, together with the other adjustments made that were not related to changes in measurement dates:
                                                                                 
                                  Cumulative
                      Cumulative
 
                                  Amount
                      Amount
 
    Years Ended December 31,     December 31,
    Years Ended December 31,     December 31,
 
    1998     1999     2000     2001     2002     2002     2003     2004     2005     2005  
    (In thousands)  
 
Additional Deferred Compensation Recorded
                                                                               
No contemporaneous documentation
  $ 19,984     $ 119,342     $ 572,114     $ 234,552     $ 77,057     $ 1,023,049     $  14,015     $     —     $       —     $ 1,037,064  
Date selection
          226,198       442,993       45,013       178,341       892,545       11,936                   904,481  
Subsequent allocation
                619,356             58,421       677,777                         677,777  
Other adjustments(a)
    18,916       11,182       13,513       6,944       4,770       55,325       (3,150 )     79       16       52,270  
                                                                                 
    $ 38,900     $ 356,722     $ 1,647,976     $ 286,509     $ 318,589     $ 2,648,696     $ 22,801     $ 79     $ 16     $ 2,671,592  
                                                                                 
 
(a) Represents the following adjustments to deferred compensation that were not directly related to changes in measurement dates: 1) grants to consultants; 2) grants related to incorrect commencement dates of employment; 3) modifications to the stock options of terminated employees reflecting either acceleration of the vesting period of such options or the extension of the post-service exercise period of vested stock options; and 4) additional adjustments for modifications that were previously accounted for correctly but that required additional adjustment due to revised measurement dates.
 
     The following table summarizes the activity in additional deferred compensation as well as additional stock-based compensation expense and related tax adjustments on an annual basis. This table does not include previously-recorded activity in deferred compensation or stock-based compensation expense.
 
                                                                                 
                                  Cumulative
                      Cumulative
 
                                  Adjustment
                      Adjustment
 
    Years Ended December 31,     December 31,
    Years Ended December 31,     December 31,
 
    1998     1999     2000     2001     2002     2002     2003     2004     2005     2005  
    (In thousands)  
 
Activity in Additional Deferred Compensation
                                                                               
Additional deferred compensation
                                                                               
— beginning balance
  $     $ 27,010     $ 304,443     $ 1,473,122     $ 692,689     $     $ 485,973     $ 129,666     $ 60,422     $  
Additional deferred compensation recorded
    38,900       356,722       1,647,976       286,509       318,589       2,648,696  (b)     22,801       79       16       2,671,592  
Additional stock-based compensation expense amortization
    (11,770 )     (74,927 )     (442,326 )     (347,283 )     (374,337 )     (1,250,643 )     (112,967 )     (63,239 )     (42,011 )     (1,468,860 )
Acceleration of additional stock-based compensation expense(a)
                      (569,596 )           (569,596 )     (220,642 )                 (790,238 )
Elimination due to employee terminations
    (120 )     (4,362 )     (36,971 )     (150,063 )     (150,968 )     (342,484 )(b)     (45,499 )     (6,084 )     (2,313 )     (396,380 )
                                                                                 
Additional deferred compensation
                                                                               
— ending balance
  $ 27,010     $ 304,443     $ 1,473,122     $ 692,689     $ 485,973     $ 485,973  (c)   $ 129,666     $ 60,422     $ 16,114     $ 16,114 (e)
                                                                                 
                 
Additional Stock-Based Compensation Expense and Related Tax Adjustments
                               
Additional stock-based compensation expense
  $ 11,770     $ 74,927     $ 442,326     $ 916,879     $ 374,337     $ 1,820,239     $ 333,609     $ 63,239     $ 42,011     $ 2,259,098  
Other tax adjustments
                                        397       1,846       2,629       4,872  
                                                                                 
Additional operating expenses
    11,770       74,927       442,326       916,879       374,337       1,820,239       334,006     <