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Broadcom 10-Q 2010
e10vq
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission file number: 000-23993
(BROADCOM LOGO)
Broadcom Corporation
(Exact Name of Registrant as Specified in Its Charter)
     
California   33-0480482
(State or Other Jurisdiction   (I.R.S. Employer
of Incorporation or Organization)   Identification No.)
5300 California Avenue
Irvine, California 92617-3038

(Address of Principal Executive Offices) (Zip Code)
(949) 926-5000
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     As of September 30, 2010 the registrant had 456.5 million shares of Class A common stock, $0.0001 par value, and 55.2 million shares of Class B common stock, $0.0001 par value, outstanding.
 
 

 


 

BROADCOM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
             
        Page
PART I. FINANCIAL INFORMATION     2  
  Financial Statements     2  
 
  Unaudited Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009     2  
 
  Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009     3  
 
  Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009     4  
 
  Notes to Unaudited Condensed Consolidated Financial Statements     5  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
  Quantitative and Qualitative Disclosures about Market Risk     52  
  Controls and Procedures     53  
 
           
PART II. OTHER INFORMATION     54  
  Legal Proceedings     54  
  Risk Factors     54  
  Unregistered Sales of Equity Securities and Use of Proceeds     62  
  Defaults upon Senior Securities     63  
  (Removed and Reserved)     63  
  Other Information     63  
  Exhibits     63  
     Broadcom® and the pulse logo 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.
© 2010 Broadcom Corporation. All rights reserved.

 


 

PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements
BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 1,245,940     $ 1,397,093  
Short-term marketable securities
    1,148,139       532,281  
Accounts receivable, net
    798,266       508,627  
Inventory
    534,855       362,428  
Prepaid expenses and other current assets
    105,661       113,903  
 
           
Total current assets
    3,832,861       2,914,332  
Property and equipment, net
    253,339       229,317  
Long-term marketable securities
    520,276       438,616  
Goodwill
    1,410,542       1,329,614  
Purchased intangible assets, net
    205,183       150,927  
Other assets
    50,810       64,436  
 
           
Total assets
  $ 6,273,011     $ 5,127,242  
 
           
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 567,822     $ 437,353  
Wages and related benefits
    193,216       190,315  
Deferred revenue and income
    59,221       87,388  
Accrued liabilities
    404,260       433,294  
 
           
Total current liabilities
    1,224,519       1,148,350  
Long-term deferred revenue
    792       608  
Other long-term liabilities
    85,240       86,438  
Commitments and contingencies
               
Shareholders’ equity:
               
Common stock
    51       50  
Additional paid-in capital
    11,394,236       11,153,060  
Accumulated deficit
    (6,443,458 )     (7,259,069 )
Accumulated other comprehensive income (loss)
    11,631       (2,195 )
 
           
Total shareholders’ equity
    4,962,460       3,891,846  
 
           
Total liabilities and shareholders’ equity
  $ 6,273,011     $ 5,127,242  
 
           
See accompanying notes.

2


 

BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
Net revenue:
                               
Product revenue
  $ 1,748,692     $ 1,194,745     $ 4,700,131     $ 2,989,292  
Income from Qualcomm Agreement
    51,674       51,674       155,022       118,937  
Licensing revenue
    5,651       7,778       17,611       39,348  
 
                       
Total net revenue
    1,806,017       1,254,197       4,872,764       3,147,577  
Costs and expenses:
                               
Cost of product revenue
    871,951       615,349       2,328,502       1,580,300  
Research and development
    447,577       391,170       1,290,063       1,138,664  
Selling, general and administrative
    145,849       142,480       421,844       394,938  
Amortization of purchased intangible assets
    4,405       4,159       12,892       12,457  
Impairment of other long-lived assets
    1,785       7,634       1,785       18,895  
Restructuring costs, net
          4,772       111       12,330  
Settlement costs (gains), net
                3,816       (57,256 )
Charitable contribution
                      50,000  
 
                       
Total operating costs and expenses
    1,471,567       1,165,564       4,059,013       3,150,328  
Income (loss) from operations
    334,450       88,633       813,751       (2,751 )
Interest income, net
    3,180       2,978       8,042       11,362  
Other income (expense), net
    (1,113 )     (178 )     3,679       2,487  
 
                       
Income before income taxes
    336,517       91,433       825,472       11,098  
Provision for income taxes
    9,388       6,837       9,861       5,041  
 
                       
Net income
  $ 327,129     $ 84,596     $ 815,611     $ 6,057  
 
                       
Net income per share (basic)
  $ 0.64     $ 0.17     $ 1.63     $ 0.01  
 
                       
Net income per share (diluted)
  $ 0.60     $ 0.16     $ 1.52     $ 0.01  
 
                       
Weighted average shares (basic)
    508,957       495,491       501,835       493,599  
 
                       
Weighted average shares (diluted)
    544,251       521,443       536,572       508,559  
 
                       
 
                               
Dividends per share
  $ 0.08     $     $ 0.24     $  
 
                       
     The following table presents details of total stock-based compensation expense included in each functional line item in the unaudited condensed consolidated statements of income above:
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
            (In thousands)        
Cost of product revenue
  $ 5,122     $ 6,579     $ 16,850     $ 18,584  
Research and development
    80,171       90,829       252,977       266,698  
Selling, general and administrative
    27,927       31,290       88,647       89,817  
See accompanying notes.

3


 

BROADCOM CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
    (In thousands)  
Operating activities
               
Net income
  $ 815,611     $ 6,057  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    57,970       47,314  
Stock-based compensation expense:
               
Stock options and other awards
    87,131       126,461  
Restricted stock units
    271,343       248,638  
Acquisition-related items:
               
Amortization of purchased intangible assets
    36,074       24,558  
Impairment of long-lived assets
    1,785       18,895  
Non-cash restructuring costs (reversals)
    (313 )     2,721  
Gain on sale of marketable securities
          (1,046 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (284,063 )     (169,276 )
Inventory
    (165,081 )     58,890  
Prepaid expenses and other assets
    35,103       19,972  
Accounts payable
    128,992       112,525  
Deferred revenue and income
    (27,983 )     80,822  
Accrued settlement costs
    (166,380 )     6,900  
Other accrued and long-term liabilities
    129,132       71,534  
 
           
Net cash provided by operating activities
    919,321       654,965  
 
           
Investing activities
               
Net purchases of property and equipment
    (82,030 )     (48,774 )
Net cash received from (paid for) acquired companies
    (150,398 )     842  
Purchases of strategic investments
    (8,000 )     (2,000 )
Purchases of marketable securities
    (1,416,736 )     (1,057,972 )
Proceeds from sales and maturities of marketable securities
    722,460       737,377  
 
           
Net cash used in investing activities
    (934,704 )     (370,527 )
 
           
Financing activities
               
Repurchases of Class A common stock
    (275,464 )     (206,517 )
Dividends paid
    (120,680 )      
Payment of assumed debt
    (14,560 )      
Proceeds from issuance of common stock
    371,683       137,229  
Minimum tax withholding paid on behalf of employees for restricted stock units
    (96,749 )     (60,574 )
 
           
Net cash used in financing activities
    (135,770 )     (129,862 )
 
           
Increase (decrease) in cash and cash equivalents
    (151,153 )     154,576  
Cash and cash equivalents at beginning of period
    1,397,093       1,190,645  
 
           
Cash and cash equivalents at end of period
  $ 1,245,940     $ 1,345,221  
 
           
See accompanying notes.

4


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
1. Summary of Significant Accounting Policies
     Our Company
          Broadcom Corporation (including our subsidiaries, referred to collectively in this Report as “Broadcom,” “we,” “our” and “us”) is a major technology innovator and global leader in semiconductors for wired and wireless communications. Our system-on-a-chip, or SoC and software solutions enable the delivery of voice, video, data and rich multimedia content to mobile devices, consumer electronics, or CE devices in the home and business networking products for the workplace, data centers, service providers and carriers. We provide the industry’s broadest portfolio of cutting-edge SoC solutions to manufacturers of computing and networking equipment, CE and broadband access products, and mobile devices.
     Basis of Presentation
          The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the SEC February 3, 2010.
          The interim unaudited condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position at September 30, 2010 and December 31, 2009, and our consolidated results of operations for the three and nine months ended September 30, 2010 and 2009 and cash flows for the nine months ended September 30, 2010 and 2009. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for future quarters or the full year.
          Certain prior period amounts in the unaudited condensed consolidated statements of income have been reclassified to conform to the current period presentation of the separate display of income from the Qualcomm Agreement and licensing revenue as described below.
     Use of Estimates
          The preparation of financial statements in accordance with United States GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of total net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, self-insurance, restructuring costs or reversals, litigation and other loss contingencies. These estimates and assumptions are based on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results we experience may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and actual results, our future results of operations will be affected.

5


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Revenue Recognition
          Our product revenue consists principally of sales of semiconductor devices and, to a lesser extent, software licenses and royalties, development, support and maintenance agreements, data services and cancellation fees. The majority of our product sales occur through the efforts of our direct sales force. The remaining balance of product sales occurs through distributors. Our licensing revenue and income from the Qualcomm Agreement is generated from the licensing of intellectual property. See Note 2 for a summary of the composition of our net revenue.
     Product Revenue
          We recognize product revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the resulting receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, we do not recognize revenue when any significant obligations remain. We record reductions of revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time. We accrue 100% of potential rebates at the time of sale and do not apply a breakage factor. We reverse the accrual for unclaimed rebate amounts as specific rebate programs contractually end or when we believe unclaimed rebates are no longer subject to payment and will not be paid. See Note 2 for a summary of our rebate activity.
          A portion of our product sales is made through distributors under agreements allowing for pricing credits and/or rights of return. These pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of the inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the criterion listed in (iii) in the paragraph above has not been met at the time we deliver products to our distributors. Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their customers. We also maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements we deliver products to a customer or a designated third party warehouse based upon the customers’ projected needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to be incorporated into its products.
          Revenue from software licenses is recognized when all revenue recognition criteria are met and, if applicable, when vendor specific objective evidence, or VSOE, exists to allocate the total license fee to each element of multiple-element software arrangements, including post-contract customer support. Post-contract support is recognized ratably over the term of the related contract. When a contract contains multiple elements wherein the only undelivered element is post-contract customer support and VSOE of the fair value of post-contract customer support does not exist, revenue from the entire arrangement is recognized ratably over the support period. Software royalty revenue is recognized based upon reports received from licensees during the period, unless collectability is not reasonably assured, in which case revenue is recognized when payment is received from the licensee. Revenue from cancellation fees is recognized when cash is received from the customer.
          In September 2009 the Financial Accounting Standards Board, or FASB, reached a consensus on Accounting Standards Update, or ASU, 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements, or ASU 2009-13 and ASU 2009-14, Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements, or ASU 2009-14. ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither VSOE nor third-party evidence, or TPE, is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU

6


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. We adopted the provisions of these ASUs effective January 1, 2010 and they did not have a material impact on our results of operations.
     Income from the Qualcomm Agreement
          On April 26, 2009 we entered into a four-year Settlement and Patent License and Non-Assert Agreement, or the Qualcomm Agreement, with Qualcomm Incorporated, or Qualcomm. The Qualcomm Agreement is a multiple element arrangement which includes: (i) an exchange of intellectual property rights, including in certain circumstances, by a series of covenants not to assert claims of patent infringement under future patents issued within one to four years of the execution date of the agreement, (ii) the assignment of certain existing patents by Broadcom to Qualcomm with Broadcom retaining a royalty-free license under these patents, and (iii) the settlement of all outstanding litigation and claims between us and Qualcomm. The proceeds of the Qualcomm Agreement were allocated amongst the principal elements of the transaction. A gain of $65.3 million from the settlement of litigation was immediately recognized as a reduction in settlement costs that approximates the value of awards determined by the United States District Court for the Central District of California. The remaining consideration was predominantly associated with the transfer of current and future intellectual property rights and is being recognized within net revenue over the performance period of four years as a single unit of accounting. However this income will be limited to the lesser of the cumulative straight-line amortization over the four year performance period or the cumulative cash proceeds received.
     Licensing of Intellectual Property
          Revenue and related income from the licensing of intellectual property is recognized based upon either the performance period of the license or upon receipt of licensee reports as applicable in our various intellectual property arrangements.
     Deferred Revenue and Income
          We defer revenue and income when advance payments are received from customers before performance obligations have been completed and/or services have been performed. Deferred revenue and income do not include amounts from products delivered to distributors that the distributors have not yet sold through to their end customers.
     Stock-Based Compensation
          Broadcom has in effect stock incentive plans under which incentive stock options have been granted to employees and restricted stock units and non-qualified stock options have been granted to employees and non-employee members of the Board of Directors. We also have an employee stock purchase plan for all eligible employees. We are required to estimate the fair value of share-based awards on the date of grant. The value of the award is principally recognized as an expense ratably over the requisite service periods. The fair value of our restricted stock units is based on the closing market price of our Class A common stock on the date of grant less our expected dividend yield. We have estimated the fair value of stock options and stock purchase rights as of the date of grant or assumption using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award, the expected volatility of our stock price and the expected dividend yield. We evaluate the assumptions used to value stock options and stock purchase rights on a quarterly basis. The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of our equity awards, as it does not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements and limited transferability.

7


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Fair Value of Financial Instruments
          Our financial instruments consist principally of cash and cash equivalents, short- and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
               Level 1:   Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
               Level 2:   Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
               Level 3:   Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
          The fair value of the majority of our cash equivalents and marketable securities was determined based on “Level 1” inputs. The fair value of certain marketable securities was determined based on “Level 2” inputs. We do not have any marketable securities in the “Level 3” category. We believe that the recorded values of all our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
     Cash, Cash Equivalents and Marketable Securities
          We consider all highly liquid investments that are readily convertible into cash and have an original maturity of three months or less at the time of purchase to be cash equivalents. The cost of these investments approximates their fair value. We maintain an investment portfolio of various security holdings, types and maturities. Broadcom defines marketable securities as income yielding securities that can be readily converted into cash. Marketable securities’ short-term and long-term classifications are based on remaining maturities at each reporting period. Examples of marketable securities include U.S. Treasury and agency obligations, commercial paper and corporate notes and bonds. We place our cash investments in instruments that meet credit quality standards and concentration exposures as specified in our investment policy. It is our policy to invest in instruments that have a final maturity not to exceed three years and a portfolio weighted average maturity not to exceed 18 months. We do not use derivative financial instruments. The average credit rating of the marketable securities portfolio is Aa1/AA+ by major credit rating agencies.
          We account for our investments in debt and equity instruments as available-for-sale. Management determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. Cash equivalents and marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax. We assess whether our investments with unrealized loss positions are other than temporarily impaired. Unrealized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the unaudited condensed consolidated statements of income.
     Goodwill and Other Long-Lived Assets
          Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Other long-lived assets primarily represent purchased intangible assets including developed technology, customer relationships and in-process research and

8


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
development, or IPR&D. We currently amortize our intangible assets with definitive lives over periods ranging from one to fifteen years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method. We capitalize IPR&D projects acquired as part of a business combination. On completion of each project, IPR&D assets will be amortized over their estimated useful lives. If any of the projects are abandoned, we would be required to impair the related IPR&D asset.
     Guarantees and Indemnifications
          In some agreements to which we are a party, we have agreed to indemnify the other party for certain matters such as product liability. We include intellectual property indemnification provisions in our standard terms and conditions of sale for our products and have also included such provisions in certain agreements with third parties. We have and will continue to evaluate and provide reasonable assistance for these other parties. This may include certain levels of financial support to minimize the impact of the litigation in which they are involved. To date, there have been no known events or circumstances that have resulted in any material costs related to these indemnification provisions and no liabilities therefor have been recorded in the accompanying unaudited condensed consolidated financial statements. However, the maximum potential amount of the future payments we could be required to make under these indemnification obligations could be significant.
          We have obligations to indemnify certain of our present and former directors, officers and employees to the maximum extent not prohibited by law. Under these obligations, Broadcom is required (subject to certain exceptions) to indemnify each such director, officer and employee against expenses, including attorneys’ fees, judgments, fines and settlements, paid by such individual. The potential amount of the future payments we could be required to make under these indemnification obligations could be significant. We maintain directors’ and officers’ insurance policies that may generally limit our exposure and enable us to recover a portion of the amounts paid with respect to such obligations; however, we will not be able to effect any further recoveries under such policies with respect to currently pending litigation concerning our prior equity award practices.
     Recent Accounting Pronouncements
          In January 2010 the FASB issued guidance that eliminates the concept of a “qualifying special-purpose entity”, or QSPE, revises conditions for reporting a transfer of a portion of a financial asset as a sale (e.g., loan participations), clarifies the derecognition criteria, eliminates special guidance for guaranteed mortgage securitizations, and changes the initial measurement of a transferor’s interest in transferred financial assets. This guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009. We adopted the provisions of this guidance effective January 1, 2010, which did not have a material impact on our financial statements.
          In January 2010 the FASB issued guidance that revises analysis for identifying the primary beneficiary of a variable interest entity, or VIE, by replacing the previous quantitative-based analysis with a framework that is based more on qualitative judgments. The new guidance requires the primary beneficiary of a VIE to be identified as the party that both (i) has the power to direct the activities of a VIE that most significantly impact its economic performance and (ii) has an obligation to absorb losses or a right to receive benefits that could potentially be significant to the VIE. This guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009. We adopted the provisions of this guidance effective January 1, 2010, which did not have a material impact on our financial statements.
          In January 2010 the FASB issued guidance that expands the interim and annual disclosure requirements of fair value measurements, including the information about movement of assets between Level 1 and 2 of the three-tier fair value hierarchy established under its fair value measurement guidance. This guidance also requires separate disclosure for purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs using Level 3 methodologies. Except for the detailed disclosure in the Level 3 reconciliation, which is effective for the fiscal years beginning after December 15, 2010, we adopted the relevant

9


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
provisions of this guidance effective January 1, 2010, which did not have a material impact on our financial statements.
          In April 2010 the FASB reached a consensus on the Milestone Method of Revenue Recognition which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The updated guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. We adopted the provisions of this guidance effective July 1, 2010, which did not have a material impact on our unaudited condensed consolidated financial statements.
2. Supplemental Financial Information
     Net Revenue
          The following table presents details of our product revenue:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Product sales made through direct sales force (1)
    77.6 %     76.8 %     78.2 %     79.0 %
Product sales made through distributors(2)
    22.4       23.2       21.8       21.0  
 
                       
 
    100.0 %     100.0 %     100.0 %     100.0 %
 
                       
 
(1)   Includes 8.3% and 6.7% of product sales maintained under hubbing arrangements with certain of our customers in the three months ended September 30, 2010 and 2009, respectively and 6.6% and 7.1% in the nine months ended September 30, 2010 and 2009.
 
(2)   Includes 8.6% and 9.6% of product sales maintained under fulfillment distributor arrangements in the three months ended September 30, 2010 and 2009, respectively, and 7.4% and 8.3% in the nine months ended September 30, 2010 and 2009, respectively.
          Income from the Qualcomm Agreement is expected to be recognized in the remainder of 2010 through 2013 as follows:
                                                 
    2010   2011   2012   2013   Thereafter   Total
                    (In thousands)                
Income from Qualcomm Agreement
  $ 51,674     $ 206,695     $ 186,012     $ 86,400     $     $ 530,781  
     Inventory
          The following table presents details of our inventory:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Work in process
  $ 206,428     $ 157,148  
Finished goods
    328,427       205,280  
 
           
 
  $ 534,855     $ 362,428  
 
           

10


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Property and Equipment
          The following table presents details of our property and equipment:
                         
            September 30,     December 31,  
    Useful Life     2010     2009  
    (In years)     (In thousands)  
Leasehold improvements
    1 to 10     $ 170,569     $ 163,302  
Office furniture and equipment
    3 to 7       28,418       26,382  
Machinery and equipment
    3 to 5       292,850       235,142  
Computer software and equipment
    2 to 4       137,111       122,213  
Construction in progress
    N/A       7,418       6,666  
 
                   
 
            636,366       553,705  
Less accumulated depreciation and amortization
            (383,027 )     (324,388 )
 
                   
 
          $ 253,339     $ 229,317  
 
                   
     Goodwill
          The following table summarizes the activity related to the carrying value of our goodwill:
                                 
    Reportable Segments        
    Broadband     Mobile &     Infrastructure &        
    Communications     Wireless     Networking     Consolidated  
            (In thousands)          
Goodwill
  $ 483,029     $ 802,269     $ 1,873,623     $ 3,158,921  
Accumulated impairment losses
          (543,198 )     (1,286,109 )     (1,829,307 )
 
                       
Goodwill at January 1, 2010
  $ 483,029     $ 259,071     $ 587,514     $ 1,329,614  
Goodwill acquired during the year
          36,434       35,759       72,193  
 
                       
Goodwill at September 30, 2010
  $ 483,029     $ 295,505     $ 623,273     $ 1,401,807  
 
                         
Effects of foreign currency translation
                            8,735  
 
                             
Goodwill at September 30, 2010
                          $ 1,410,542  
 
                             
     Purchased Intangible Assets
          The following table presents details of our purchased intangible assets:
                                                 
    September 30, 2010     December 31, 2009  
            Accumulated                     Accumulated        
            Amortization &                     Amortization &        
    Gross     Impairments     Net     Gross     Impairments     Net  
    (In thousands)  
Developed technology
  $ 387,201     $ (232,491 )   $ 154,710     $ 278,297     $ (207,517 )   $ 70,780  
In-process research and development
    10,600             10,600       50,860             50,860  
Customer relationships
    123,475       (89,687 )     33,788       107,366       (79,212 )     28,154  
Customer backlog
    5,736       (5,736 )           3,736       (3,736 )      
Other
    9,551       (8,493 )     1,058       9,214       (8,081 )     1,133  
 
                                   
 
  $ 536,563     $ (336,407 )   $ 200,156     $ 449,473     $ (298,546 )   $ 150,927  
 
                                       
Effects of foreign currency translation
                    5,027                        
 
                                           
 
                  $ 205,183                     $ 150,927  
 
                                           

11


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          In the three months ended September 30, 2010 we recorded an impairment charge to developed technology of $1.8 million. In the three and nine months ended September 30, 2009 we recorded an impairment to customer relationships, completed technology and certain other assets of $7.6 million and $18.9 million, respectively, related to the acquisition of the DTV Business of AMD. In the nine months ended September 30, 2010, $50.9 million of IPR&D projects were completed and reclassified to developed technology.
          The following table presents details of the amortization of purchased intangible assets included in the cost of product revenue and other operating expense categories:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (In thousands)          
Cost of product revenue
  $ 7,415     $ 3,876     $ 23,182     $ 12,101  
Other operating expenses
    4,405       4,159       12,892       12,457  
 
                       
 
  $ 11,820     $ 8,035     $ 36,074     $ 24,558  
 
                       
          The following table presents details of the amortization of existing purchased intangible assets, including IPR&D, that is currently estimated to be expensed in the remainder of 2010 and thereafter:
                                                         
    Purchased Intangible Asset Amortization by Year  
    2010     2011     2012     2013     2014     Thereafter     Total  
                            (In thousands)                  
Cost of product revenue
  $ 7,190     $ 36,541     $ 43,284     $ 34,503     $ 21,535     $ 26,434     $ 169,487  
Other operating expenses
    7,449       6,405       3,467       3,106       3,089       12,180       35,696  
 
                                         
 
  $ 14,639     $ 42,946     $ 46,751     $ 37,609     $ 24,624     $ 38,614     $ 205,183  
 
                                         
     Accrued Liabilities
          The following table presents details of our accrued liabilities:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Accrued rebates
  $ 313,013     $ 162,212  
Accrued settlement charges
    10,327       176,707  
Accrued legal costs
    19,056       36,739  
Accrued taxes
    12,754       13,854  
Warranty reserve
    8,062       10,430  
Restructuring liabilities
          1,328  
Other
    41,048       32,024  
 
           
 
  $ 404,260     $ 433,294  
 
           

12


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Other Long-Term Liabilities
          The following table presents details of our other long-term liabilities:
                 
    September 30,     December 31,  
    2010     2009  
    (In thousands)  
Deferred rent
  $ 34,152     $ 32,931  
Accrued taxes
    22,919       24,919  
Deferred tax liabilities
    25,357       22,722  
Other long-term liabilities
    2,812       5,866  
 
           
 
  $ 85,240     $ 86,438  
 
           
     Accrued Rebate Activity
          The following table summarizes the activity related to accrued rebates:
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
    (In thousands)  
Beginning balance
  $ 162,212     $ 125,058  
Charged as a reduction of revenue
    381,304       217,581  
Reversal of unclaimed rebates
    (3,246 )     (9,171 )
Payments
    (227,257 )     (182,660 )
 
           
Ending balance
  $ 313,013     $ 150,808  
 
           
          We recorded rebates to certain customers of $145.4 million and $97.0 million and reversed accrued rebates of $0.4 million and $1.6 million in the three months ended September 30, 2010 and 2009, respectively.
     Warranty Reserve Activity
          The following table summarizes activity related to the warranty reserve:
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
    (In thousands)  
Beginning balance
  $ 10,430     $ 11,473  
Charged to costs and expenses, net
    763       2,953  
Payments
    (3,131 )     (4,438 )
 
           
Ending balance
  $ 8,062     $ 9,988  
 
           
          We recorded net reversals to costs and expenses of $4.0 million and $0.7 million in the three months ended September 30, 2010 and 2009, respectively.

13


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Computation of Net Income Per Share
          The following table presents the computation of net income per share:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands, except per share data)  
Numerator: Net income
  $ 327,129     $ 84,596     $ 815,611     $ 6,057  
 
                       
Denominator: Weighted average shares outstanding
    508,957       495,561       501,843       493,685  
Less: Unvested common shares outstanding
          (70 )     (8 )     (86 )
 
                       
Denominator for net income per share (basic)
    508,957       495,491       501,835       493,599  
Effect of dilutive securities:
                               
Stock awards
    35,294       25,952       34,737       14,960  
 
                       
Denominator for net income per share (diluted)
    544,251       521,443       536,572       508,559  
 
                       
Net income per share (basic)
  $ 0.64     $ 0.17     $ 1.63     $ 0.01  
 
                       
Net income per share (diluted)
  $ 0.60     $ 0.16     $ 1.52     $ 0.01  
 
                       
          Net income per share (diluted) does not include the effect of anti-dilutive common share equivalents resulting from outstanding equity awards. There were 30.0 million and 50.7 million anti-dilutive common share equivalents in the three months ended September 30, 2010 and 2009, respectively. There were 33.5 million and 91.8 million anti-dilutive common share equivalents in the nine months ended September 30, 2010 and 2009, respectively.
     Charitable Contribution
          In April 2009 we established the Broadcom Foundation, or the Foundation, to support science, technology, engineering and mathematics programs, as well as a broad range of community services. In June 2009 we pledged to make an unrestricted grant of $50.0 million to the Foundation upon receiving a determination letter from the Internal Revenue Service of the exemption from federal income taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. We recorded an operating expense for the contribution of $50.0 million in the nine months ended September 30, 2009.
     Supplemental Cash Flow Information
          We paid $7.6 million in the nine months ended September 30, 2010 related to capital equipment purchases that were accrued at December 31, 2009 and had billings of $7.1 million for capital equipment that were accrued but not yet paid as of September 30, 2010. These amounts have been excluded from the unaudited condensed consolidated statements of cash flows.
3. Business Combinations
          In March 2010 we acquired Teknovus, Inc., a leading supplier of Ethernet Passive Optical Network chipsets and software for $100.1 million, net of cash acquired. We also assumed $14.6 million of Teknovus debt which was subsequently repaid in the three months ended March 31, 2010. In July 2010 we acquired Innovision Research & Technology PLC, or Innovision, a near-field communication technology company for $47.9 million, net of cash acquired. We also made an additional acquisition for $2.4 million. No equity awards were assumed in these acquisitions. There were no acquisitions consummated in the nine months ended September 30, 2009.
          A portion of the cash consideration in the Teknovus and Innovision acquisitions is currently held in escrow pursuant to the terms of the acquisition agreement and is reflected in goodwill as we believe the likelihood of the escrow funds being utilized by us is remote.
          Our primary reasons for the Teknovus and Innovision acquisitions were to expand our addressable market in the Infrastructure & Networking and Mobile & Wireless markets, respectively, reduce the time required to

14


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement our existing product offerings, augment our engineering workforce, and enhance our technological capabilities.
          We allocated the purchase price of these acquisitions to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The principal factor that resulted in recognition of goodwill was that the purchase price for the acquisitions was based in part on cash flow projections assuming the integration of any acquired technology and products with our products, which is of considerably greater value than utilizing the acquired company’s technology or product on a standalone basis. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management. Intangible assets, including IPR&D, are amortized using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used or, if that pattern cannot be reliably determined, using a straight-line amortization method.
          We calculated the fair value of the tangible and intangible assets acquired to allocate the purchase prices on the respective acquisition dates. Based upon those calculations, the purchase prices for the acquisitions were allocated as follows:
         
    2010  
    Acquisitions  
    (In thousands)  
Fair Market Values
       
Cash and cash equivalents
  $ 11,038  
Accounts receivable, net
    5,576  
Inventory
    7,347  
Prepaid and other current assets
    1,252  
Property and equipment, net
    1,858  
Other assets
    70  
Goodwill
    72,193  
Purchased intangible assets
    87,090  
 
     
Total assets acquired
    186,424  
Accounts payable
    (1,927 )
Wages and related benefits
    (4,876 )
Debt
    (14,560 )
Accrued liabilities
    (2,967 )
Long-term liabilities
    (658 )
 
     
Total liabilities assumed
    (24,988 )
 
     
Purchase price allocation
  $ 161,436  
 
     
                 
    Useful     2010  
    Life     Acquisitions  
    (In years)     (In thousands)  
Purchased Intangible Assets:
               
Developed technology
    2 - 11     $ 58,044  
In-process research and development
    3 - 7       10,600  
Customer relationships
    1 - 2       16,109  
Other
    1 - 4       2,337  
 
             
 
          $ 87,090  
 
             

15


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Purchased Intangible Assets
          Developed technology represents core technology and completed technology. Core technology represents the fundamental technology that survives multiple product iterations and has passed technological feasibility. We generally use a relief-from-royalty method to value core technology, based on market royalties for similar fundamental technologies. The relief-from-royalty method estimates the cost savings that accrue to the owner of an intangible asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. The royalty rate used is based on an analysis of empirical, market-derived royalty rates for guideline intangible assets. Typically, revenue is projected over the expected remaining useful life of the completed technology. The market-derived royalty rate is then applied to estimate the royalty savings. Completed technology is specific to certain products acquired that have also passed technological feasibility. We generally use a multi-period excess earnings approach to value completed technology. The multi-period excess earnings approach calculates the value based on the risk adjusted present value of the cash flows specific to the products, allowing for a reasonable return.
          Customer relationships represent the fair value of future projected revenue that will be derived from the sale of products to existing customers of the acquired companies.
     In-Process Research and Development
          In 2010 we capitalized $10.6 million of IPR&D costs primarily related to our acquisition of Teknovus. There were no identifiable IPR&D assets related to our Innovision acquisition. Upon completion of each project, the related IPR&D assets will be amortized over their estimated useful lives. If any of the projects are abandoned, we will be required to impair the related IPR&D asset.
          The fair value of the IPR&D for our acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present values at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted average cost of capital and return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration and growth rates.
          The following table summarizes the significant assumptions underlying the valuation of IPR&D at the acquisition date:
                                                 
            Weighted                    
            Average   Average           Risk    
            Estimated   Estimated   Estimated   Adjusted    
            Percent   Time to   Cost to   Discount    
Company Acquired   Development Projects   Complete   Complete   Complete   Rate   IPR&D
                    (In years)   (In millions)           (In millions)
Teknovus, Inc.  
Ethernet Passive Optical Network (EPON) chipsets and software
    11.2 %     0.9     $ 19.3       25.9 %   $ 10.6  
          As of the acquisition date, certain ongoing development projects were in process. The assumptions consist primarily of expected completion dates for the IPR&D projects, estimated costs to complete the projects, and revenue and expense projections for the products once they have entered the market. Research and development costs to bring the products of the acquired companies to technological feasibility are not expected to have a material impact on our results of operations or financial condition. At September 30, 2010 all development projects from our Teknovus acquisition were still in process. Actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisitions.

16


 

BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Supplemental Pro Forma Data (Unaudited)
          The unaudited pro forma statement of operations data below gives effect to our Dune Networks, Teknovus and Innovision acquisitions that were completed in December 2009, March 2010 and July 2010, respectively, as if they had occurred at the beginning of 2009. The following data includes the amortization of purchased intangible assets and stock-based compensation expense. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisitions taken place at the beginning of 2009.
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
    (In thousands, except per share data)  
Pro forma net revenue
  $ 4,880,717     $ 3,192,937  
 
           
Pro forma net income (loss)
  $ 793,090     $ (41,918 )
 
           
Pro forma net income (loss) per share (basic)
  $ 1.58     $ (0.08 )
 
           
Pro forma net income (loss) per share (diluted)
  $ 1.48     $ (0.08 )
 
           
4. Cash, Cash Equivalents and Marketable Securities
          A summary of our cash, cash equivalents and short- and long-term marketable securities by major security type follows:
                                 
            Short-Term     Long-Term        
    Cash and     Marketable     Marketable        
    Cash Equivalents     Securities     Securities     Total  
            (In thousands)          
September 30, 2010
                               
Cash
  $ 84,946     $     $     $ 84,946  
Bank deposits
    506,390                   506,390  
U.S. Treasury and agency money market funds
    157,691                   157,691  
U.S. Treasury and agency obligations
    19,996       727,507       490,414       1,237,917  
Commercial paper
    340,943       375,096             716,039  
Corporate bonds
    1,513       45,536       29,862       76,911  
Institutional money market funds
    134,461                   134,461  
 
                       
 
  $ 1,245,940     $ 1,148,139     $ 520,276     $ 2,914,355  
 
                       
December 31, 2009
                               
Cash
  $ 74,044     $     $     $ 74,044  
Bank deposits
    571,959                   571,959  
U.S. Treasury and agency money market funds
    515,930                   515,930  
U.S. Treasury and agency obligations
          521,022       436,518       957,540  
Commercial paper
    79,988                   79,988  
Corporate bonds
          11,259       2,098       13,357  
Institutional money market funds
    155,172                   155,172  
 
                       
 
  $ 1,397,093     $ 532,281     $ 438,616     $ 2,367,990  
 
                       

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     The following table presents the gross unrealized gains and losses and fair values for those investments aggregated by major security type:
                                 
            Gross     Gross        
            Unrealized     Unrealized        
    Cost     Gains     Losses     Fair Value  
            (In thousands)          
September 30, 2010
                               
U.S. Treasury and agency obligations
  $ 1,235,720     $ 2,318     $ (121 )   $ 1,237,917  
Commercial paper
    716,031       10       (2 )     716,039  
Corporate bonds
    76,878       106       (73 )     76,911  
 
                       
 
  $ 2,028,629     $ 2,434     $ (196 )   $ 2,030,867  
 
                       
December 31, 2009
                               
U.S. Treasury and agency obligations
  $ 956,944     $ 724     $ (128 )   $ 957,540  
Commercial paper
    79,988                   79,988  
Corporate bonds
    13,364       5       (12 )     13,357  
 
                       
 
  $ 1,050,296     $ 729     $ (140 )   $ 1,050,885  
 
                       
     The following table shows the fair value measurements for those investments aggregated by major security type:
                                 
    Level 1     Level 2     Level 3     Fair Value  
            (In thousands)          
September 30, 2010
                               
Cash
  $ 84,946     $     $     $ 84,946  
Bank deposits
    506,390                   506,390  
U.S. Treasury and agency money market funds
    157,691                   157,691  
U.S. Treasury and agency obligations
    1,237,917                   1,237,917  
Commercial paper
          716,039             716,039  
Corporate bonds
    20,773       56,138             76,911  
Institutional money market funds
    134,461                   134,461  
 
                       
 
  $ 2,142,178     $ 772,177     $     $ 2,914,355  
 
                       
December 31, 2009
                               
Cash
  $ 74,044     $     $     $ 74,044  
Bank deposits
    571,959                   571,959  
U.S. Treasury and agency money market funds
    515,930                   515,930  
U.S. Treasury and agency obligations
    957,540                   957,540  
Commercial paper
          79,988             79,988  
Corporate bonds
    5,077       8,280             13,357  
Institutional money market funds
    155,172                   155,172  
 
                       
 
  $ 2,279,722     $ 88,268     $     $ 2,367,990  
 
                       
     There were no transfers between Level 1 and Level 2 securities during the nine months ended September 30, 2010. All of our long-term marketable securities had maturities of between one and three years in duration at September 30, 2010.
     As of September 30, 2010 we had 30 investments that were in an unrealized loss position for less than 12 months. The gross unrealized losses related to these investments were due to changes in interest rates. We have determined that the gross unrealized losses on these investments at September 30, 2010 are temporary in nature. We evaluate securities for other-than-temporary impairment on a quarterly basis. Impairment is evaluated considering numerous factors, and their relative significance varies depending on the situation. Factors considered include the

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuer, and our intent and ability to hold the investment in order to allow for an anticipated recovery in fair value.
5. Income Taxes
          We recorded tax provisions of $9.4 million and $9.9 million for the three and nine months ended September 30, 2010, respectively, and tax provisions of $6.8 million and $5.0 million for the three and nine months ended September 30, 2009, respectively. Our effective tax rates were 2.8% and 1.2% for the three and nine months ended September 30, 2010, respectively, and 7.5% and 45.4% for the three and nine months ended September 30, 2009, respectively. The difference between our effective tax rates and the 35% federal statutory rate resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate in the three and nine months ended September 30, 2010 and 2009, domestic losses recorded without income tax benefit in the three and nine months ended September 30, 2009, and tax benefits resulting primarily from the expiration of the statutes of limitations for the assessment of taxes in various foreign jurisdictions of $6.7 million for the nine months ended September 30, 2010 and $6.5 million for the nine months ended September 30, 2009. As part of our acquisition of Innovision Research & Technology plc, we recorded a tax provision of $3.4 million for the three and nine months ended September 30, 2010 for certain acquired deferred tax assets. We also recorded a tax benefit of $3.9 million in the nine months ended September 30, 2009 reflecting the utilization of a portion of our credits for increasing research activities (research and development tax credits) pursuant to a provision contained in the American Recovery and Reinvestment Tax Act of 2009, which was enacted in February 2009. Additionally, as a result of the May 27, 2009 and March 22, 2010 decisions in the U.S. Court of Appeals for the Ninth Circuit case concerning Xilinx (discussed below), we recorded a tax benefit of approximately $3 million in the nine months ended September 30, 2010 to reverse the approximately $3 million of related exposure previously recorded in the nine months ended September 30, 2009.
          We utilize the asset and liability method of accounting for income taxes. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our recent cumulative tax losses in the U.S. and certain foreign jurisdictions, and the full utilization of our loss carryback opportunities, we have concluded that a full valuation allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where we do not have cumulative tax losses, we had net deferred tax liabilities of $12.4 million and $11.2 million at September 30, 2010 and December 31, 2009, respectively.
          As previously disclosed, on May 27, 2009, the U.S. Court of Appeals for the Ninth Circuit in the case between Xilinx, Inc. and the Commissioner of Internal Revenue, overturned a 2005 U.S. Tax Court ruling regarding treatment of certain compensation expenses under a Company’s research and development cost-sharing arrangements with affiliates. The Court of Appeals held that related parties to such an arrangement must share stock-based compensation expenses, notwithstanding the fact that unrelated parties in such an arrangement would not share such costs. The case was subject to further appeal. As a result of this May 27, 2009 decision, we reduced our gross deferred tax assets for federal and state net operating loss carryforwards and capitalized research and development costs, increased in our deferred tax assets for certain tax credits, and increased our tax provision in 2009 by approximately $3 million.
          On January 13, 2010, the U.S. Court of Appeals for the Ninth Circuit withdrew its May 27, 2009 ruling in the Xilinx case and subsequently issued a new decision in favor of Xilinx on March 22, 2010, thereby affirming the August 30, 2005 decision of the U.S. Tax Court. Consequently, during the quarter ended March 31, 2010, we reversed the amounts we had previously recorded in 2009 related to the court’s May 27, 2009 decision. As a result, in the quarter ended March 31, 2010, we reduced our tax provision by approximately $3 million and adjusted certain of our gross deferred tax assets. Included in these adjustments was an increase in our federal and state net operating loss carryforwards of approximately $665 million and $455 million, respectively, an increase of federal and state capitalized research and development costs of approximately $10 million each, an increase in our deferred tax assets relating to stock-based compensation of approximately $65 million, and a decrease in certain tax credits of

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approximately $10 million. These changes in our gross deferred tax assets were fully offset by a valuation allowance adjustment, and therefore did not result in any change in our net deferred tax assets or our income tax expense for the three months ended March 31, 2010. In addition to the adjustments related to the March 22, 2010 Xilinx decision, in the three months ended March 31, 2010, we reduced our federal and state net operating losses by approximately $60 million for adjustments to our intercompany charges to foreign affiliates for the years ended 2001 to 2009. This reduction to our net operating losses is fully offset by a corresponding adjustment to the valuation allowance for deferred tax assets resulting in no net change to net deferred tax assets in our unaudited condensed consolidated balance sheet and no adjustment to our income tax expense.
          We file federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2004 through 2009 tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2003 through 2009 tax years generally remain subject to examination by tax authorities.
          Our income tax returns for the 2004, 2005 and 2006 tax years and our employment tax returns for the 2003, 2004, 2005 and 2006 tax years are currently under examination by the Internal Revenue Service. We do not expect that the results of these examinations will have a material effect on our financial condition or results of operations. In March 2010, a Notice of Proposed Adjustment, or NOPA, was received relating to the IRS examination of our 2004, 2005 and 2006 income tax returns. The NOPA primarily relates to cost-sharing methodologies of stock based compensation, as well as other cost-sharing related issues. In light of the Ninth Circuit Xilinx decision, we believe the stock based compensation matters identified in the NOPA and the settlement of the remaining proposed adjustments will not result in a material adverse financial impact on our results of operations.
          We operate under tax holidays in Singapore, which are effective through March 31, 2014. The tax holidays are conditional upon our continued compliance in meeting certain employment and investment thresholds.
6. Shareholders’ Equity
     Share Repurchase Programs
          From time to time our Board of Directors has authorized various programs to repurchase shares of our Class A common stock depending on market conditions and other factors. We repurchased approximately 5.2 million shares of our Class A common stock at a weighted average price of $29.75 per share in the three months ended March 31, 2010 under the program we announced in July 2008. This program to repurchase shares with an aggregate value of up to $1.0 billion was completed in March 2010, at which time we had repurchased 47.6 million shares of Class A common stock at a weighted average price of $21.01 per share under the program.
          In February 2010 we announced that our Board of Directors had authorized an evergreen share repurchase program intended to offset dilution associated with our stock incentive plans. We repurchased a total of 3.8 million shares of our Class A common stock at a weighted average price of $31.88 per share in the nine months ended September 30, 2010 under this program. We did not repurchase any shares of our Class A common stock in the three months ended September 30, 2010. The maximum number of shares of our Class A common stock that may be repurchased in any one year is equal to the total number of shares issued pursuant to our equity awards in the previous year and the current year. Purchases may be made in both the open market and through negotiated transactions. The share repurchase program does not have an expiration date and may be suspended at any time at the discretion of the Board of Directors. This program may also be complemented with an additional share repurchase program in the future.
          Repurchases under our share repurchase programs were and are intended to be made in open market or privately negotiated transactions in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
     Quarterly Dividend
          In January 2010 our Board of Directors adopted a dividend policy pursuant to which we intend to pay quarterly cash dividends on our common stock. Our Board of Directors declared quarterly cash dividends of $0.08 per common share payable to holders of our common stock in each of the first three quarters of 2010. In the three and nine months ended September 30, 2010 we paid $40.9 million and $120.7 million, respectively, in dividends to holders of our Class A and Class B common stock. These dividends were paid from U.S. domestic sources other than our retained earnings and are accounted for as reductions of shareholders’ equity.
     Comprehensive Income
          The components of comprehensive income, net of taxes, are as follows:
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
    (In thousands)  
Net income
  $ 815,611     $ 6,057  
Other comprehensive income (loss):
               
Unrealized gain (loss) on marketable securities
    1,649       (4,444 )
Translation adjustments
    12,177       1,089  
 
           
Total comprehensive income
  $ 829,437     $ 2,702  
 
           
7. Employee Benefit Plans
     Combined Incentive Plan Activity
          Activity under all stock option incentive plans in the nine months ended September 30, 2010 is set forth below:
                                 
    Options Outstanding  
                    Weighted     Weighted  
                    Average     Average  
            Exercise     Exercise     Grant-Date  
    Number of     Price Range     Price     Fair Value  
    Shares     per Share     per Share     per Share  
    (In thousands)    
Balance at December 31, 2009
    113,406     $ 0.01 - 81.50     $ 25.71     $ 15.71  
Options granted
    2,747       29.39 - 36.85       29.60       9.42  
Options cancelled
    (1,208 )     0.01 - 81.50       36.35       15.53  
Options exercised
    (15,588 )     0.01 - 34.94       21.08       16.73  
 
                       
Balance at September 30, 2010
    99,357     $ 0.01 - 48.63     $ 26.41     $ 15.38  
 
                       

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          Restricted stock unit activity in the nine months ended September 30, 2010 is set forth below:
                 
    Restricted Stock Units  
    Outstanding  
            Weighted  
            Average  
            Grant-Date  
    Number of     Fair Value  
    Shares     per Share  
    (In thousands)    
Balance at December 31, 2009
    28,693     $ 25.58  
Restricted stock units granted
    11,323       29.71  
Restricted stock units cancelled
    (957 )     25.85  
Restricted stock units vested
    (9,255 )     27.55  
 
           
Balance at September 30, 2010
    29,804     $ 26.53  
 
           
          In February 2010, as part of Broadcom’s regular annual equity compensation review program, our Compensation Committee granted 10.1 million shares subject to equity awards, which included 2.2 million shares under employee stock options and 7.9 million restricted stock units.
          The per share fair values of stock options and employee stock purchase rights granted in the nine months ended September 30, 2010 in connection with stock incentive plans and rights granted in connection with the employee stock purchase plan have been estimated with the following weighted average assumptions:
                 
            Employee
    Employee   Stock
    Stock   Purchase
    Options   Rights
Expected life (in years)
    4.49       0.46  
Implied Volatility
    0.39       0.39  
Risk-free interest rate
    1.99 %     0.20 %
Expected dividend yield
    1.10 %     1.00 %
Weighted average fair value
  $ 9.42     $ 7.86  
          The weighted average fair values per share of the restricted stock units granted in the nine months ended September 30, 2010 was $29.71 calculated based on the fair market value of our Class A common stock on the respective grant dates less any expected dividend yield.
     Stock-Based Compensation Expense
          The following table presents details of total stock-based compensation expense that is included in each functional line item on our unaudited condensed consolidated statements of income:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
            (In thousands)        
Cost of product revenue
  $ 5,122     $ 6,579     $ 16,850     $ 18,584  
Research and development
    80,171       90,829       252,977       266,698  
Selling, general and administrative
    27,927       31,290       88,647       89,817  

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          The amount of unearned stock-based compensation currently estimated to be expensed from 2010 through 2014 related to unvested share-based payment awards at September 30, 2010 is $798.8 million. The following table presents details of unearned stock-based compensation currently estimated to be expensed in the remainder of 2010 through 2014 related to unvested share-based payment awards at September 30, 2010:
                                                 
    2010   2011   2012   2013   2014   Total
                    (In thousands)                
Unearned stock-based compensation
  $ 108,981     $ 347,004     $ 217,404     $ 112,976     $ 12,458     $ 798,823  
          The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 1.4 years.
          If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards or assume unvested equity awards in connection with acquisitions.
8. Litigation
          Intellectual Property Proceedings. In October 2007 Wi-LAN Inc. filed complaints against us and multiple other defendants in the United States District Court for the Eastern District of Texas alleging that certain Broadcom products infringe three Wi-LAN patents relating generally to wireless LAN and DSL technology. The complaint sought a permanent injunction against us, as well as the recovery of monetary damages and attorney’s fees. In February 2009 Wi-LAN filed a supplemental complaint alleging that certain Broadcom products infringe a fourth Wi-LAN patent relating generally to Bluetooth technology. Wi-LAN’s supplemental complaint seeks a permanent injunction against us as well as the recovery of monetary damages and attorneys’ fees. We have filed answers to Wi-LAN’s complaints denying the allegations in Wi-LAN’s complaints and asserting counterclaims seeking a declaratory judgment that the asserted Wi-LAN patents are invalid, unenforceable, and not infringed. We have also filed counterclaims alleging, among other things, that Wi-LAN committed fraud and violated antitrust laws. Discovery is ongoing. Trial has been set for January 2011.
          In April 2010 Wi-LAN Inc. filed a new complaint against us and multiple other defendants in the United States District Court for the Eastern District of Texas alleging that certain Broadcom Bluetooth products infringe a fifth Wi-LAN patent. The complaint seeks a permanent injunction, damages, and attorney’s fees. In August 2010, we filed an answer denying the allegations in Wi-LAN’s complaint and asserting counterclaims that Wi-LAN’s patent is invalid, unenforceable, and not infringed. No trial date has been set.
          In September 2009 we filed a complaint in the United States District Court for the Central District of California against Emulex Corporation, or Emulex, alleging infringement of ten patents generally relating to networking technologies. In subsequent filings, we added two additional patents and dropped three patents, bringing the total to nine asserted patents. Our complaints seek injunctions against Emulex and the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. In its answers, Emulex denied liability and asserted counterclaims seeking a declaratory judgment that the asserted patents are invalid and not infringed. Discovery is currently underway, with trial set for September 2011.
          In November 2009 we filed a complaint in the United States District Court for the Eastern District of Texas against the Commonwealth Scientific and Industrial Research Organisation, or CSIRO seeking a declaratory judgment that U.S. Patent Number 5,487,069 is invalid, unenforceable and not infringed. CSIRO has not yet answered the complaint. Trial has been set for November 2011.
          In August 2010, Broadcom filed a motion to intervene (i.e., to be added as a party) in U.S. Ethernet Innovations, LLC v. Acer, Inc., Case No. 10-cv-03724-JW (N.D. Cal.). In this case, U.S. Ethernet Innovations, LLC, or USEI filed a patent infringement complaint alleging that numerous companies, including certain Broadcom customers, infringe four patents relating generally to Ethernet technology. USEI seeks monetary damages, attorney’s fees, and

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
an injunction. Defendants have filed answers denying the allegations in USEI’s complaint and asserting counterclaims for declaratory judgment that USEI’s patents are invalid, unenforceable, and not infringed. Broadcom contends that it has a license related to USEI’s patents and is seeking to intervene to assert this license as a defense. No trial date has been set.
          In December 2006 SiRF Technology, Inc., or SiRF, filed a complaint in the United States District Court for the Central District of California against Global Locate, Inc., a privately-held company that became a wholly-owned subsidiary of Broadcom in July 2007, alleging that certain Global Locate products infringe four SiRF patents relating generally to GPS technology. In January 2007 Global Locate filed an answer denying the allegations in SiRF’s complaint and asserting counterclaims. The counterclaims seek a declaratory judgment that the four SiRF patents are invalid and not infringed, assert that SiRF has infringed four Global Locate patents relating generally to GPS technology, and assert unfair competition and antitrust violations related to the filing of sham litigation. In May 2007 the court granted Global Locate’s motion to stay the case until certain U.S. International Trade Commission, or ITC, actions between Global Locate and SiRF became final. The ITC actions became final in July 2010, and the stay of the case has now been lifted. On September 27, 2010, the court denied SiRF’s motion for a partial stay of the action in view of certain pending patent reexaminations, and granted Global Locate’s motion to file a second amended counter-complaint adding claims for infringement of three additional patents and voluntarily dismissing Global Locate’s claims for unfair competition without prejudice. Trial has been set for July 2012.
          In April 2007 Global Locate filed a complaint in the ITC against SiRF and four of its customers, e-TEN Corporation, Pharos Science & Applications, Inc., MiTAC International Corporation and Mio Technology Limited, referred to collectively as the SiRF Defendants, asserting that the SiRF Defendants engaged in unfair trade practices by importing GPS devices, including integrated circuits and embedded software, incorporated in products such as personal navigation devices and GPS-enabled cellular telephones that infringe, both directly and indirectly, six Global Locate patents relating generally to GPS technology. The complaint sought an exclusion order to bar importation of the SiRF Defendants’ products into the United States and a cease and desist order to bar further sales of infringing products that have already been imported. In January 2009 the ITC issued a Final Determination finding that SiRF and the other SiRF respondents infringed six Global Locate patents and that each of the six patents was not invalid. The ITC also issued a limited exclusion order banning the importation into the United States of infringing SiRF chips and the SiRF Defendants’ products containing infringing SiRF chips and a cease and desist order prohibiting SiRF and the certain other SiRF Defendants from engaging in certain activities related to the infringing chips. In April 2010, the United States Court of Appeals for the Federal Circuit affirmed the ITC’s decision. On August 16, 2010, the ITC granted a Petition by SiRF to institute proceedings regarding a proposed modification of the exclusion order and cease and desist order, seeking a ruling regarding the applicability of the exclusion order to certain SiRF activities. The Administrative Law Judge has set a hearing date in late January 2011 for the modification proceedings. In October 2010, Broadcom filed a complaint seeking institution of enforcement proceedings relating to certain alleged violations of the ITC’s orders by the SiRF Defendants. The ITC has not yet instituted such enforcement proceedings.
          In May 2008 Broadcom filed a complaint in the United States District Court for the Central District of California against SiRF, alleging that certain SiRF GPS and multimedia products infringe four Broadcom patents relating generally to graphics and communications technology. The District Court complaint seeks preliminary and permanent injunctions against SiRF and the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. In June 2008 SiRF answered the complaint and asserted counterclaims seeking a declaratory judgment that Broadcom’s patents are invalid and not infringed. In September 2008 the court denied SiRF’s motion to stay the case. In October 2009, Broadcom amended its complaint to add CSR plc as a defendant and asserted claims alleging false advertising and unfair competition. In October 2009 SiRF answered the amended complaint denying liability and asserting counterclaims alleging false advertising and unfair competition. In December 2009 Broadcom answered SiRF’s counterclaims denying liability. In December 2009, the court granted the parties’ joint stipulation of dismissal with prejudice for all claims and counterclaims relating to one of the Broadcom patents; three Broadcom patents remain in the lawsuit. Various summary judgment motions are currently pending with the court, and trial has been set for late January 2011.
          On August 20, 2010, CSR plc filed a complaint in the United States District Court for the Central District of California against Broadcom, alleging that certain Broadcom products infringe nine patents held by CSR relating generally to GPS, wireless or other technologies. Broadcom has denied infringing CSR’s patents, and asserts

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
counterclaims for, among other things, CSR’s infringement of five asserted Broadcom patents. On October 13, 2010, CSR filed a motion seeking an order preliminarily enjoining Broadcom from, among other things, infringing four of the patents asserted by CSR in the action or selling certain Broadcom products relating to assisted GPS technology. Broadcom’s response to CSR’s motion is not yet due.
          On October 13, 2010, CSR filed a complaint in the United States District Court for the District of Delaware against Broadcom, alleging that certain Broadcom products infringe four patents relating generally to GPS, wireless or other technologies. Broadcom’s response to CSR’s complaint is not yet due.
          Other Litigation. In November 2009 Emulex filed a complaint in the Central District of California against Broadcom alleging violation of the antitrust laws, defamation, and unfair competition. The complaint seeks injunctive relief and monetary damages, including treble damages and attorneys’ fees. In January 2010, Emulex filed an amended complaint in which Emulex removed, among other things, the claim of unfair competition. In February 2010, we filed motions to dismiss the case and a motion to strike. In June 2010, the District Court granted in part and denied in part our motion to dismiss and denied our motion to strike. In July 2010, we filed a notice of appeal of the District Court’s denial of our motion to strike. No trial date has been set for this matter. We intend to defend this action vigorously.
          From March through August 2006 a number of purported Broadcom shareholders filed putative shareholder derivative actions, the Options Derivative Actions, against Broadcom, each of the then members of our Board of Directors and certain current or former officers, alleging, among other things, that the defendants improperly dated certain Broadcom employee stock option grants. Four of those cases, Murphy v. McGregor, et al. (Case No. CV06-3252 R (CWx)), Shei v. McGregor, et al. (Case No. SACV06-663 R (CWx)), Ronconi v. Dull, et al. (Case No. SACV 06-771 R (CWx)) and Jin v. Broadcom Corporation, et al. (Case No. 06CV00573) have been consolidated in the United States District Court for the Central District of California. The plaintiffs filed a consolidated amended complaint in November 2006. In addition, two putative shareholder derivative actions, Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Samueli, et al. (Case No. 06CC0124) and Servais v. Samueli, et al. (Case No. 06CC0142), were filed in the California Superior Court for the County of Orange. The Superior Court consolidated the state court derivative actions in August 2006, and the plaintiffs filed a consolidated amended complaint in September 2006. The plaintiffs in the Options Derivative Actions contend, among other things, that the defendants’ conduct violated United States and California securities laws, breached defendants’ fiduciary duties, wasted corporate assets, unjustly enriched the defendants, and caused errors in our consolidated financial statements. The plaintiffs seek, among other things, unspecified damages and disgorgement of profits from the alleged conduct, to be paid to Broadcom.
          In January 2007 the California Superior Court granted defendants’ motion to stay the state derivative action pending resolution of the prior-filed federal derivative action. In March 2007 the court in the federal derivative action denied our motion to dismiss, which motion was based on the ground that the shareholder plaintiffs lack standing to assert claims on behalf of Broadcom. Motions to dismiss filed by the individual defendants were heard, and mostly denied, in May 2007. Additionally, in May 2007 the Board of Directors established a special litigation committee, or SLC, to decide what course of action Broadcom should pursue in respect of the claims asserted in the Options Derivative Actions.
          In August 2009 Broadcom, by and through its SLC, plaintiffs and certain of the defendants executed a Stipulation and Agreement of Partial Settlement, or Partial Derivative Settlement, in the federal derivative action pertaining to past employee stock option grants. The Partial Derivative Settlement resolved all claims in the action against the defendants, other than three individuals: Dr. Henry T. Nicholas, III, our former President and Chief Executive Officer and former Co-Chairman of the Board, William J. Ruehle, our former Chief Financial Officer, and Dr. Henry Samueli, our Chief Technical Officer. In connection with the Partial Derivative Settlement, Broadcom and certain of the defendants also entered into a settlement with Broadcom’s directors and officers liability insurance carriers, or Insurance Agreement. In December 2009 the District Court entered an order granting final approval of the Partial Derivative Settlement. In January 2010 Dr. Nicholas, Mr. Ruehle, and Dr. Samueli filed notices of appeal of the order in the United States Court of Appeals for the Ninth Circuit.
          In March 2010 the SLC formally and unanimously adopted a Report of the Special Litigation Committee of the Board of Directors of Broadcom, or Report. In April 2010 the SLC directed Broadcom’s General Counsel to file a motion for summary judgment in the derivative action based on the findings and recommendations of the Report.

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
That motion was filed in April 2010 seeking dismissal of the claims against the three remaining defendants. On June 21, 2010 plaintiffs in the federal derivative action filed an opposition to Broadcom’s motion, and a cross-motion for summary judgment. The SLC was granted leave to intervene and filed a response on behalf of Broadcom. On September 13, 2010 the District Court denied Broadcom’s motion and plaintiffs’ cross-motion, and scheduled the case for trial in February 2011.
          From August through October 2006 several plaintiffs filed purported shareholder class actions in the United States District Court for the Central District of California against Broadcom and certain of our current or former officers and directors, entitled Bakshi v. Samueli, et al. (Case No. 06-5036 R (CWx)), Mills v. Samueli, et al. (Case No. SACV 06-9674 DOC R(CWx)), and Minnesota Bakers Union Pension Fund, et al. v. Broadcom Corp., et al. (Case No. SACV 06-970 CJC R (CWx)), the Stock Option Class Actions. The essence of the plaintiffs’ allegations is that we improperly backdated stock options, resulting in false or misleading disclosures concerning, among other things, our business and financial condition. Plaintiffs also allege that we failed to account for and pay taxes on stock options properly, that the individual defendants sold our common stock while in possession of material nonpublic information, and that the defendants’ conduct caused artificial inflation in our stock price and damages to the putative plaintiff class. The plaintiffs assert claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. In November 2006 the Court consolidated the Stock Option Class Actions and appointed the New Mexico State Investment Council as lead class plaintiff. In October 2007 the federal appeals court resolved a dispute regarding the appointment of lead class counsel. In March 2008 the district judge entered a revised order appointing lead class counsel. The lead plaintiff filed an amended consolidated class action complaint in April 2008, naming additional defendants including certain current officers and directors of Broadcom as well as Ernst & Young LLP, our former independent registered public accounting firm, or E&Y. In October 2008 the district judge granted defendants’ motions to dismiss with leave to amend. In October 2008 the lead plaintiff filed an amended complaint. In November 2008 defendants filed motions to dismiss. In February 2009 these motions were denied except with respect to E&Y and the former Chairman of the Audit Committee, which were granted with leave to amend, and with respect to the former Chief Executive Officer, which was granted without leave to amend. The lead plaintiff did not amend its complaint with respect to the former Chairman of the Audit Committee and the time period to do so has expired. With respect to E&Y, in March 2009 the district judge entered a final judgment for E&Y and against the lead plaintiff. The lead plaintiff has appealed the final judgment.
          In December 2009 we agreed in principle to settle the Stock Option Class Actions. The parties entered into a stipulation and agreement of settlement dated as of April 30, 2010, which provided for the claims against Broadcom and its current and former officers and directors to be dismissed with prejudice and released in exchange for a $160.5 million cash payment by Broadcom. We recorded the settlement amount as a one-time charge in 2009 and subsequent payment was made in June 2010 into a settlement fund for distribution pending final approval. On June 1, 2010 the District Court granted preliminary approval for the proposed settlement and entered an order providing for notice and a hearing in connection with the proposed settlement. On July 12, 2010 the lead plaintiff filed an unopposed motion for final approval of the proposed settlement. On August 12, 2010 the District Court entered an order granting final approval of the Stock Option Class Actions settlement. On September 10, 2010 a single purported Broadcom shareholder filed a notice of appeal of the order in the United States Court of Appeals for the Ninth Circuit. On October 18, 2010, the Ninth Circuit dismissed the shareholder’s appeal for failure to pay the filing fees.
          In April 2008 we delivered a Notice of Arbitration and Arbitration Claim to our former independent registered public accounting firm, E&Y, and certain related parties. The arbitration relates to the issues that led to the restatement of Broadcom’s financial statements for the periods from 1998 through March 31, 2006 as disclosed in an amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and an amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006, each filed with the SEC January 23, 2007. In May 2008 E&Y delivered a Notice of Defense and Counterclaim. No date for an arbitration hearing has been scheduled.
          We have indemnification agreements with each of our present and former directors and officers, under which we are generally required to indemnify each such director or officer against expenses, including attorneys’ fees, judgments, fines and settlements, arising from the Options Derivative Actions, the Stock Option Class Actions and the related SEC and U.S. Attorney’s Office investigations (subject to certain exceptions, including liabilities arising from willful misconduct, from conduct knowingly contrary to the best interests of Broadcom, or conduct that is knowingly fraudulent or deliberately dishonest or results in improper personal benefit). The potential amount of the

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
future payments we could be required to make under these indemnification obligations could be significant and could have a material impact on our results of operations. Pursuant to the Insurance Agreement, and subject to the terms described more completely therein, including relinquishing of rights to any further recovery as to the matters described above under these directors’ and officers’ liability insurance policies by Broadcom and certain of its former and current officers and directors, Broadcom received payments totaling $118.0 million from its insurance carriers. That amount includes $43.3 million in reimbursements previously received from the insurance carriers under reservations of rights, and $74.7 million paid to Broadcom upon final approval of the Partial Derivative Settlement. In addition, Broadcom paid $11.5 million to the lead federal derivative plaintiffs’ counsel for attorneys’ fees, expenses and costs of plaintiffs’ counsel in connection with the Partial Derivative Settlement and their prosecution of the derivative action. As of September 30, 2010, in connection with our securities litigation and related government investigations, we have advanced approximately $145.8 million to certain current and former officers for attorney and expert fees, which amount has been expensed. Pursuant to the Insurance Agreement, we agreed to indemnify and hold harmless the insurance carriers in connection with certain proceedings that might be brought against the carriers by non-settling parties. In October 2010 the insurance carriers notified us that they received mediation demands from certain non-settling derivative defendants and tendered those claims to Broadcom for indemnity.
          In the event that the trial court’s approval of the Partial Derivative Settlement is reversed or vacated by an appellate court or otherwise does not become final and non-appealable, Broadcom in its sole discretion has the election to either provide a release to the insurance carriers and indemnify them related to any future claims and retain the $118.0 million in accordance with the Insurance Agreement or to repay to the insurance carriers certain portions of the aggregate amount previously paid to Broadcom.
          United States Attorney’s Office Investigation and Prosecution. In June 2005 the United States Attorney’s Office for the Northern District of California commenced an investigation into the possible misuse of proprietary competitor information by certain Broadcom employees. In December 2005 one former employee was indicted for fraud and related activity in connection with computers and trade secret misappropriation. The former employee had been immediately suspended in June 2005, after just two months’ employment, when we learned about the government investigation. Following an internal investigation, his employment was terminated, nearly two months prior to the indictment. The indictment does not allege any wrongdoing by us, and we are cooperating fully with the ongoing investigation and the prosecution.
          General. We and our subsidiaries are also involved in other legal proceedings, claims and litigation arising in the ordinary course of business.
          The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. The results of legal proceedings are inherently uncertain, and material adverse outcomes are possible. The resolution of intellectual property litigation may require us to pay damages for past infringement or to obtain a license under the other party’s intellectual property rights that could require one-time license fees or ongoing royalties, which could adversely impact our product gross margins in future periods, or could prevent us from manufacturing or selling some of our products or limit or restrict the type of work that employees involved in such litigation may perform for us. From time to time we may enter into confidential discussions regarding the potential settlement of pending litigation or other proceedings; however, there can be no assurance that any such discussions will occur or will result in a settlement. The settlement of any pending litigation or other proceeding could require us to incur substantial settlement payments and costs. In addition, the settlement of any intellectual property proceeding may require us to grant a license to certain of our intellectual property rights to the other party under a cross-license agreement. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected.
9. Business Enterprise Segments
          Broadcom has three reportable segments consistent with our target markets. Our three reportable segments are: Broadband Communications (Home), Mobile & Wireless (Hand) and Infrastructure & Networking (Infrastructure).
          Our Chief Executive Officer, who is our chief operating decision maker, or CODM, reviews financial information at the operating segment level. Our Mobile & Wireless reportable segment comprises our Mobile Platforms and Wireless Connectivity businesses. Our Mobile Platforms and Wireless Connectivity businesses are reported separately to the CODM to allow greater management focus on our Mobile Platform opportunity. However

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
as the customers, economics, and competitors substantially overlap, and the product functionality is being integrated across these products in our own and competitor roadmaps, we aggregate these two businesses into one reportable segment, Mobile & Wireless.
          We also report an “All Other” category that primarily includes licensing revenue from our agreement with Verizon Wireless and income from the Qualcomm Agreement since they are principally the result of corporate efforts. “All Other” also includes operating expenses that we do not allocate to our other operating segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. Operating costs and expenses that are not allocated include stock-based compensation, amortization of purchased intangible assets, impairment of goodwill and other long-lived assets, net settlement costs, net restructuring costs, charitable contributions, employer payroll tax on certain stock option exercises, and other miscellaneous expenses related to corporate allocations that were either over or under the original projections at the beginning of the year. We include stock-based compensation and acquisition-related items in the “All Other” category as decisions regarding equity compensation are made at the corporate level and our CODM believes that acquisition accounting distorts the underlying economics of the reportable segment. Effective April 1, 2010, we reclassified the amortization of acquired inventory valuation step-up from its respective reportable segment into the “All Other” category, as these charges are the result of acquisition accounting and we believe these amounts should not be included when measuring our reportable segments’ operating performance. Prior period amounts have been reclassified to conform to the current period presentation. Our CODM does not review information regarding total assets, interest income or income taxes on an operating segment basis. The accounting policies for segment reporting are the same as for Broadcom as a whole.
          The following tables present details of our reportable segments and the “All Other” category:
                                         
    Reportable Segments        
    Broadband   Mobile &   Infrastructure &   All    
    Communications   Wireless   Networking   Other   Consolidated
                    (In thousands)                
Three Months Ended September 30, 2010
                                       
Net revenue
  $ 561,519     $ 797,395     $ 395,429     $ 51,674     $ 1,806,017  
Operating income (loss)
    117,348       164,996       140,804       (88,698 )     334,450  
 
                                       
Three Months Ended September 30, 2009
                                       
Net revenue
  $ 394,863     $ 520,614     $ 287,047     $ 51,673     $ 1,254,197  
Operating income (loss)
    50,047       79,299       86,554       (127,267 )     88,633  
                                         
    Reportable Segments        
    Broadband   Mobile &   Infrastructure &   All    
    Communications   Wireless   Networking   Other   Consolidated
            (In thousands)                
Nine Months Ended September 30, 2010
                                       
Net revenue
  $ 1,557,407     $ 1,981,742     $ 1,178,344     $ 155,271     $ 4,872,764  
Operating income (loss)
    324,561       330,178       433,053       (274,041 )     813,751  
 
                                       
Nine Months Ended September 30, 2009
                                       
Net revenue
  $ 1,075,960     $ 1,217,961     $ 715,751     $ 137,905     $ 3,147,577  
Operating income (loss)
    90,458       58,756       166,190       (318,155 )     (2,751 )

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Included in the “All Other” category:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
            (In thousands)          
Net revenue
  $ 51,674     $ 51,673     $ 155,271     $ 137,905  
 
                       
 
                               
Stock-based compensation
  $ 113,220     $ 128,698     $ 358,474     $ 375,099  
Amortization of purchased intangible assets
    11,820       8,035       36,074       24,558  
Amortization of acquired inventory valuation step-up
    264       699       6,929       7,679  
Impairment of other long-lived assets
    1,785       7,634       1,785       18,895  
Settlement costs (gains), net
                3,816       (57,256 )
Restructuring costs, net
          4,772       111       12,330  
Charitable contribution
                      50,000  
Employer payroll tax on certain stock option exercises
    2,364       1,625       6,125       3,567  
Miscellaneous corporate allocation variances
    10,919       27,477       15,998       21,188  
 
                       
Total other operating costs and expenses
  $ 140,372     $ 178,940     $ 429,312     $ 456,060  
 
                       
 
                               
Total operating loss for the “All Other” category
  $ (88,698 )   $ (127,267 )   $ (274,041 )   $ (318,155 )
 
                       
          Sales to our significant customers, including sales to their manufacturing subcontractors, as a percentage of net revenue were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Five largest customers as a group
    39.2 %     36.3 %     36.7 %     34.2 %
          Product revenue derived from all independent customers located outside the United States, excluding foreign subsidiaries or manufacturing subcontractors of customers that are headquartered in the United States even though such subsidiaries or manufacturing subcontractors are located outside of the United States, as a percentage of product revenue was as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Asia (primarily in Korea, China, Japan and Taiwan)
    36.1 %     37.5 %     38.4 %     37.2 %
Europe (primarily in the Finland, United Kingdom and France)
    17.8       10.4       15.7       12.4  
Other
    0.3       5.3       0.4       2.3  
 
                               
 
    54.2 %     53.2 %     54.5 %     51.9 %
 
                               

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BROADCOM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          Product revenue derived from shipments to international destinations, as a percentage of product revenue was as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
China
    30.9 %     28.9 %     29.5 %     29.0 %
Hong Kong
    26.4       22.9       26.2       24.7  
Other Asia (primarily Singapore and Taiwan)
    36.4       41.1       37.3       36.8  
Europe (primarily in Sweden, Hungary and Romania)
    2.4       2.1       2.4       2.9  
Other
    1.6       1.3       1.6       1.3  
 
                               
 
    97.7 %     96.3 %     97.0 %     94.7 %
 
                               
10. Subsequent Events
          On October 13, 2010 we announced that we had signed a definitive agreement to acquire Beceem Communications Inc., a privately-held company that is a provider of fourth generation (4G) wireless platform solutions. In connection with the acquisition, Broadcom expects to pay approximately $316 million, net of cash acquired, to acquire all of the outstanding shares of capital stock and other equity rights of Beceem. The purchase price will be paid in cash, except that portion attributable to unvested employee stock options which will be paid in stock options exercisable for shares of Broadcom’s Class A common stock on a fair value exchange. A portion of the cash consideration payable to the stockholders will be placed into escrow pursuant to the terms of the acquisition agreement. The boards of directors of the two companies have approved the merger. The transaction is expected to close in the quarter ending December 31, 2010 or in the quarter ending March 31, 2011 and remains subject to the satisfaction of regulatory requirements and other customary closing conditions.
          On October 26, 2010, we announced that we had signed a definitive agreement to acquire Percello Ltd., a privately-held company that develops system-on-a-chip (SoC) solutions for femtocells. In connection with the acquisition, Broadcom expects to pay approximately $86 million, net of cash acquired from Percello Ltd., to acquire all of the outstanding shares of capital stock and other rights of Percello Ltd. The purchase price will be paid in cash, except that a portion of such purchase price attributable to unvested employee stock options will be paid in Broadcom restricted stock units. Additional consideration of up to $12 million in cash will be reserved for future payment to the former holders of Percello Ltd. capital stock and other rights upon satisfaction of certain performance goals. A portion of the cash consideration payable to the stockholders will be placed into escrow to cover indemnity obligations. Excluding any purchase accounting related adjustments and fair value measurements, Broadcom expects the acquisition of Percello Ltd. to be approximately neutral to earnings per share in 2011. The boards of directors of the two companies have approved the acquisition. The transaction is expected to close in the quarter ending December 31, 2010 or in the quarter ending March 31, 2011 and remains subject to customary closing conditions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
     You should read the following discussion and analysis in conjunction with our Unaudited Condensed Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent reports on Forms 10-Q and 8-K, which discuss our business in greater detail.
     The section entitled “Risk Factors” contained in Part II, Item 1A of this Report, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to purchase, hold or sell our common stock.
     All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, 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 total net revenue, costs and expenses and product gross margin; our accounting estimates, assumptions and judgments; estimates related to the amount and/or timing of the expensing of unearned stock-based compensation expense; the demand for our products; the effect that recent economic conditions, 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 and/or design wins for a substantial portion of our revenue; our ability to adjust 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 consummate acquisitions and integrate their operations successfully; our success in pending litigation matters; availability of adequate manufacturing, assembly and test capacity; our potential needs for additional capital; inventory and accounts receivable levels; the impact of the Internal Revenue Service review of certain income and employment tax returns on our results of operations; the effect of potential changes in U.S. or foreign tax laws and regulations or the interpretation thereof; the level of accrued rebates; and income we expect to record in connection with the Qualcomm Agreement or similar arrangements in the future; and our ability to migrate to smaller process geometries. These forward-looking statements are based on our current expectations, estimates and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section entitled “Risk Factors” in Part II, 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, except as otherwise required by law.
Overview
     Broadcom Corporation (including our subsidiaries, referred to collectively in this Report as “Broadcom,” “we,” “our” and “us”) is a major technology innovator and global leader in semiconductors for wired and wireless communications. Our system-on-a-chip (SoC) and software solutions enable the delivery of voice, video, data and rich multimedia content to mobile devices, consumer electronics (CE) devices in the home and business networking products for the workplace, data centers, service providers and carriers. We provide the industry’s broadest portfolio of cutting-edge SoC solutions to manufacturers of computing and networking equipment, CE and broadband access products, and mobile devices.

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     We sell our products to leading wired and wireless communications manufacturers in each of our reportable segments: Broadband Communications (Home), Mobile & Wireless (Hand) and Infrastructure & Networking (Infrastructure). Our Mobile & Wireless reportable segment comprises our Mobile Platforms and Wireless Connectivity businesses. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into products used in multiple markets. We utilize independent foundries and third-party subcontractors to manufacture, assemble and test all of our semiconductor products.
     Our diverse product portfolio includes:
    Solutions for the Home (Broadband Communications) — enabling such products as digital cable, satellite and Internet Protocol (IP) set-top boxes and media servers; cable and digital subscriber line (DSL) modems and residential gateways; high definition televisions (HDTVs); high definition Blu-ray Disc® players; and digital video recorders (DVRs).
 
    Solutions for the Hand (Mobile & Wireless) — integrating solutions in applications for wireless and personal area networking; cellular communications; personal navigation and global positioning; processing multimedia content in smartphones; and for managing the power in mobile devices; and
 
    Solutions for Infrastructure (Infrastructure & Networking) — incorporating solutions for the business network requirements of enterprise, data center, small-to-medium-sized businesses (SMBs), and carriers and service providers, featuring high-speed controllers, switches and physical layer (PHY) devices supporting transmission and switching for local, metropolitan, wide area and storage networking and server solutions; processors for broadband network and security applications; and Voice over Internet Protocol (VoIP) solutions for gateway and telephony systems.
     Our product revenue consists principally of sales of semiconductor devices and, to a lesser extent, software licenses and royalties, development, support and maintenance agreements, data services and cancellation fees. The majority of our product sales occur through the efforts of our direct sales force. The remaining balance of our product sales occurs through distributors. Our licensing revenue and income from the Qualcomm Agreement is generated from the licensing of our intellectual property, of which the vast majority to date has been derived from agreements with two customers, Verizon Wireless and Qualcomm Incorporated. The licensing revenue from our agreement with Verizon Wireless ended in March 2009 and the income from the Qualcomm Agreement is non-recurring and will terminate in 2013. There can be no assurances that we will be able to enter into similar arrangements in the future.
     A detailed discussion of our business may be found in Part I, Item 1, “Business,” of our 2009 Annual Report on Form 10-K.
  Operating Results for the Three and Nine Months Ended September 30, 2010
     In the three months ended September 30, 2010 our net income was $327.1 million as compared to net income of $84.6 million in the three months ended September 30, 2009, a difference of $242.5 million. In the nine months ended September 30, 2010 our net income was $815.6 million as compared to net income of $6.1 million in the nine months ended September 30, 2009, a difference of $809.6 million. The increase in profitability in both periods was the direct result of broad-based increases in net revenue of 44.0% and 54.8% in the three and nine months ended September 30, 2010, respectively, as compared to the three and nine months ended September 30, 2009. In addition, our total gross margin increased 80 basis points and 240 basis points in the three and nine months ended September 30, 2010, respectively, as compared to the three and nine months ended September 30, 2009. Other 2010 highlights include the following:
    Our cash and cash equivalents and marketable securities were $2.914 billion at September 30, 2010, compared with $2.368 billion at December 31, 2009. We generated cash flow from operations of $919.3 million during the nine months ended September 30, 2010.

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    In January 2010 our Board of Directors adopted a dividend policy pursuant to which we intend to pay quarterly cash dividends to holders of our Class A and Class B common stock. We paid $40.9 million and $120.7 million in dividends in the three and nine months ended September 30, 2010, respectively.
 
    In February 2010, as part of Broadcom’s regular annual equity compensation review program, our Compensation Committee granted 10.1 million shares subject to equity awards, which included 2.2 million employee stock options and 7.9 million restricted stock units. At the date of grant, the amount of unearned stock-based compensation expense associated with these awards was $247.6 million and was estimated to be expensed from 2010 through 2014.
 
    In February 2010 we announced that our Board of Directors had authorized an evergreen share repurchase program intended to offset the dilution associated with our stock incentive plans. Under this program we repurchased 3.8 million shares of our Class A common stock at a weighted average price of $31.88 per share in the nine months ended September 30, 2010. We did not repurchase any shares of our Class A common stock in the three months ended September 30, 2010. In the three months ended March 31, 2010 we repurchased an additional 5.2 million shares of our Class A common stock which completed the share repurchase program announced in July 2008.
 
    In March 2010 we acquired Teknovus, Inc., a leading supplier of Ethernet Passive Optical Network chipsets and software for approximately $100.1 million, net of cash acquired. We also assumed $14.6 million of debt which was subsequently repaid in the three months ended March 31, 2010.
 
    In July 2010 we acquired Innovision Research & Technology PLC, or Innovision, a near-field communication technology company for $47.9 million, net of cash acquired.
  Business Enterprise Segments.
     The following tables present details of our reportable segments and the “All Other” category:
                                         
    Reportable Segments        
    Broadband   Mobile &   Infrastructure &   All    
    Communications   Wireless   Networking   Other   Consolidated
    (In thousands)
Three Months Ended September 30, 2010                        
Net revenue
  $ 561,519     $ 797,395     $ 395,429     $ 51,674     $ 1,806,017  
Operating income (loss)
    117,348       164,996       140,804       (88,698 )     334,450  
 
                                       
Three Months Ended September 30, 2009                        
Net revenue
  $ 394,863     $ 520,614     $ 287,047     $ 51,673     $ 1,254,197  
Operating income (loss)
    50,047       79,299       86,554       (127,267 )     88,633  
                                         
    Reportable Segments        
    Broadband   Mobile &   Infrastructure &   All    
    Communications   Wireless   Networking   Other   Consolidated
    (In thousands)
Nine Months Ended September 30, 2010                        
Net revenue
  $ 1,557,407     $ 1,981,742     $ 1,178,344     $ 155,271     $ 4,872,764  
Operating income (loss)
    324,561       330,178       433,053       (274,041 )     813,751  
 
                                       
Nine Months Ended September 30, 2009                        
Net revenue
  $ 1,075,960     $ 1,217,961     $ 715,751     $ 137,905     $ 3,147,577  
Operating income (loss)
    90,458       58,756       166,190       (318,155 )     (2,751 )

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Included in the “All Other” category:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
    (In thousands)  
Net revenue
  $ 51,674     $ 51,673     $ 155,271     $ 137,905  
 
                       
 
                               
Stock-based compensation
  $ 113,220     $ 128,698     $ 358,474     $ 375,099  
Amortization of purchased intangible assets
    11,820       8,035       36,074       24,558  
Amortization of acquired inventory valuation step-up
    264       699       6,929       7,679  
Impairment of other long-lived assets
    1,785       7,634       1,785       18,895  
Settlement costs (gains), net
                3,816       (57,256 )
Restructuring costs, net
          4,772       111       12,330  
Charitable contribution
                      50,000  
Employer payroll tax on certain stock option exercises
    2,364       1,625       6,125       3,567  
Miscellaneous corporate allocation variances
    10,919       27,477       15,998       21,188  
 
                       
Total other operating costs and expenses
  $ 140,372     $ 178,940     $ 429,312     $ 456,060  
 
                       
 
                               
Total operating loss for the “All Other” category
  $ (88,698 )   $ (127,267 )   $ (274,041 )   $ (318,155 )
 
                       
     For additional information about our business enterprise segments, see further discussion in Note 9 of Notes to Unaudited Condensed Consolidated Financial Statements.
  Factors That May Impact Net Income (Loss)
     Our net income (loss) has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
    volume of product sales and corresponding gross margin;
 
    required levels of research and development and other operating costs;
 
    stock-based compensation expense;
 
    licensing and income from intellectual property;
 
    deferral of revenue under multiple-element arrangements;
 
    amortization of purchased intangible assets;
 
    cash-based incentive compensation expense;
 
    litigation costs and insurance recoveries, including our directors’ and officers’ insurance settlement;
 
    settlement costs or gains, including our proposed class action settlement;
 
    income tax benefits from adjustments to tax reserves of foreign subsidiaries;
 
    the loss of interest income resulting from lower average interest rates and investment balance reductions resulting from expenditures on repurchases of our Class A common stock, dividends and acquisitions of businesses;
 
    impairment of goodwill and other long-lived assets;

34


 

    charitable contributions;
 
    other-than-temporary impairment of marketable securities and strategic investments;
 
    restructuring costs or reversals thereof; and
 
    gain (loss) on strategic investments.
Critical Accounting Policies and Estimates
     The preparation of financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to revenue recognition, rebates, allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, self-insurance, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes in any of our critical accounting policies during the nine months ended September 30, 2010.

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Results of Operations
     The following table sets forth certain Unaudited Condensed Consolidated Statements of Income data expressed as a percentage of net revenue for the periods indicated:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Net revenue:
                               
Product revenue
    96.8 %     95.3 %     96.4 %     95.0 %
Income from Qualcomm Agreement
    2.9       4.1       3.2       3.8  
Licensing revenue
    0.3       0.6       0.4       1.2  
 
                               
Total net revenue
    100.0       100.0       100.0       100.0  
Costs and expenses:
                               
Cost of product revenue
    48.3       49.1       47.8       50.2  
Research and development
    24.8       31.2       26.5       36.2  
Selling, general and administrative
    8.1       11.3       8.7       12.5  
Amortization of purchased intangible assets
    0.2       0.3       0.2       0.4  
Impairment of other long-lived assets
    0.1       0.6             0.6  
Restructuring costs, net
          0.4             0.4  
Settlement costs (gains), net
                0.1       (1.8 )
Charitable contribution
                      1.6  
 
                               
Total operating costs and expenses
    81.5       92.9       83.3       100.1  
Income (loss) from operations
    18.5       7.1       16.7       (0.1 )
Interest income, net
    0.2       0.2       0.1       0.4  
Other income (expense), net
    (0.1 )           0.1       0.1  
 
                               
Income before income taxes
    18.6       7.3       16.9       0.4  
Provision for income taxes
    0.5       0.6       0.2       0.2  
 
                               
Net income
    18.1 %     6.7 %     16.7 %     0.2 %
 
                               
     The following table presents details of product and total gross margin as a percentage of product and total revenue, respectively:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Product gross margin
    50.1 %     48.5 %     50.5 %     47.1 %
Total gross margin
    51.7       50.9       52.2       49.8  
     The following table presents details of total stock-based compensation expense as a percentage of net revenue included in each functional line item in the unaudited condensed consolidated statements of income data above:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Cost of product revenue
    0.3 %     0.5 %     0.3 %     0.6 %
Research and development
    4.4       7.2       5.2       8.5  
Selling, general and administrative
    1.5       2.5       1.8       2.9  

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  Net Revenue, Cost of Product Revenue, Product Gross Margin, and Total Gross Margin
     The following tables present net revenue, cost of product revenue, product gross margin and total gross margin:
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net     Increase     in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Product revenue
  $ 1,748,692       96.8 %   $ 1,194,745       95.3 %   $ 553,947       46.4 %
Income from Qualcomm Agreement
    51,674       2.9       51,674       4.1              
Licensing revenue
    5,651       0.3       7,778       0.6       (2,127 )     (27.3 )
 
                                     
Total net revenue
  $ 1,806,017       100.0 %   $ 1,254,197       100.0 %   $ 551,820       44.0 %
 
                                     
Cost of product revenue(1)
  $ 871,951       48.3 %   $ 615,349       49.1 %   $ 256,602       41.7 %
 
                                     
Product gross margin (2)
    50.1 %             48.5 %             1.6 %        
 
                                         
Total gross margin (2)
    51.7 %             50.9 %             0.8 %        
 
                                         
                                                 
    Nine Months Ended     Nine Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net     Increase     in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Product revenue
  $ 4,700,131       96.4 %   $ 2,989,292       95.0 %   $ 1,710,839       57.2 %
Income from Qualcomm Agreement
    155,022       3.2       118,937       3.8       36,085       30.3  
Licensing revenue
    17,611       0.4       39,348       1.2       (21,737 )     (55.2 )
 
                                     
Total net revenue
  $ 4,872,764       100.0 %   $ 3,147,577       100.0 %   $ 1,725,187       54.8 %
 
                                     
Cost of product revenue(1)
  $ 2,328,502       47.8 %   $ 1,580,300       50.2 %   $ 748,202       47.3 %
 
                                     
Product gross margin (2)
    50.5 %             47.1 %             3.4 %        
 
                                         
Total gross margin (2)
    52.2 %             49.8 %             2.4 %        
 
                                         
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     June 30, 2010             Change  
            % of Net             % of Net     Increase     in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Product revenue
  $ 1,748,692       96.8 %   $ 1,547,095       96.4 %   $ 201,597       13.0 %
Income from Qualcomm Agreement
    51,674       2.9       51,674       3.2              
Licensing revenue
    5,651       0.3       5,679       0.4       (28 )     (0.5 )
 
                                     
Total net revenue
  $ 1,806,017       100.0 %   $ 1,604,448       100.0 %   $ 201,569       12.6 %
 
                                     
Cost of product revenue(1)
  $ 871,951       48.3 %   $ 761,229       47.4 %   $ 110,722       14.5 %
 
                                     
Product gross margin (2)
    50.1 %             50.8 %             (0.7 )%        
 
                                         
Total gross margin (2)
    51.7 %             52.6 %             (0.9 )%        
 
                                         
 
(1)   Includes stock-based compensation expense resulting from stock options, stock purchase rights and restricted stock units we issued or assumed in acquisitions. For a further discussion of stock-based compensation expense, see the section entitled “Stock-Based Compensation Expense” below.
 
(2)   Due to the separate presentation of income from the Qualcomm Agreement and licensing revenue implemented in 2009, the tables include product gross margin in addition to our previously reported total gross margin.

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     Net Revenue. Our product revenue is generated principally by sales of our semiconductor devices. Our Broadband Communications products include solutions for cable modems, DSL applications, digital cable, direct broadcast satellite and IP set-top boxes, digital TVs and high definition DVD and personal video recording devices. Our Mobile & Wireless products include wireless LAN, cellular, touch controller, GPS, Bluetooth, mobile multimedia and applications processors, mobile power management and VoIP solutions. Our Infrastructure & Networking products include Ethernet transceivers, controllers, switches, broadband network and security processors and server chipsets. Our licensing revenue and income from the Qualcomm Agreement is generated from the licensing of intellectual property.
     The following table presents net revenue from each of our reportable segments and its respective contribution to net revenue:
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net             in  
    Amount     Revenue     Amount     Revenue     Increase     Amount  
    (In thousands, except percentages)  
Broadband Communications
  $ 561,519       31.1 %   $ 394,863       31.5 %   $ 166,656       42.2 %
Mobile & Wireless
    797,395       44.2       520,614       41.5       276,781       53.2  
Infrastructure & Networking
    395,429       21.8       287,047       22.9       108,382       37.8  
All other(1)
    51,674       2.9       51,673       4.1       1       0.0  
 
                                     
Total net revenue
  $ 1,806,017       100.0 %   $ 1,254,197       100.0 %   $ 551,820       44.0 %
 
                                     
 
(1)   Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009 and (ii) other revenue from certain patent agreements. See Notes 1 and 2 of Notes to Unaudited Condensed Consolidated Financial Statements.
     The increase in net revenue from our Broadband Communications reportable segment resulted primarily from an increase in demand for digital set-top boxes and broadband modems. The increase in net revenue from our Mobile & Wireless reportable segment resulted primarily from the increase in demand for our wireless combo solutions as well as the ramp of our cellular products. The increase in net revenue from our Infrastructure & Networking reportable segment resulted primarily from an increase in demand for our Ethernet switching products.
     The following table presents net revenue from each of our reportable segments and its respective contribution to net revenue:
                                                 
    Nine Months Ended     Nine Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net             in  
    Amount     Revenue     Amount     Revenue     Increase     Amount  
    (In thousands, except percentages)  
Broadband Communications
  $ 1,557,407       32.0 %   $ 1,075,960       34.2 %   $ 481,447       44.7 %
Mobile & Wireless
    1,981,742       40.7       1,217,961       38.7       763,781       62.7  
Infrastructure & Networking
    1,178,344       24.1       715,751       22.7       462,593       64.6  
All other(1)
    155,271       3.2       137,905       4.4       17,366       12.6  
 
                                     
Total net revenue
  $ 4,872,764       100.0 %   $ 3,147,577       100.0 %   $ 1,725,187       54.8 %
 
                                     
 
(1)   Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009, (ii) royalties received pursuant to a patent license agreement that was entered into with Verizon Wireless in July 2007 and (iii) other revenue from certain patent agreements, each previously reported in our Mobile & Wireless reportable segment. See Notes 1 and 2 of Notes to Unaudited Condensed Consolidated Financial Statements.

38


 

     The increase in net revenue from our Broadband Communications reportable segment resulted primarily from an increase in demand for digital set-top boxes and broadband modems. The increase in net revenue from our Mobile & Wireless reportable segment resulted primarily from the increase in demand for our wireless combo solutions as well as the ramp of our cellular products. The increase in net revenue from our Infrastructure & Networking reportable segment resulted primarily from an increase in demand for our Ethernet switching products. The increase in our “All Other” category was the result of a $36.0 million increase in income received from the Qualcomm Agreement, offset in part by a $19.0 million decrease in licensing revenue from our agreement with Verizon Wireless.
     The following table presents net revenue from each of our reportable segments and its respective contribution to net revenue:
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     June 30, 2010             Change  
            % of Net             % of Net             in  
    Amount     Revenue     Amount     Revenue     Increase     Amount  
    (In thousands, except percentages)  
Broadband Communications
  $ 561,519       31.1 %   $ 532,103       33.2 %   $ 29,416       5.5 %
Mobile & Wireless
    797,395       44.2       630,053       39.3       167,342       26.6  
Infrastructure & Networking
    395,429       21.8       390,619       24.3       4,810       1.2  
All other(1)
    51,674       2.9       51,673       3.2       1       0.0  
 
                                     
Total net revenue
  $ 1,806,017       100.0 %   $ 1,604,448       100.0 %   $ 201,569       12.6 %
 
                                     
 
(1)   Includes (i) income relating to the Qualcomm Agreement that was entered into in April 2009 and (ii) other revenue from certain patent agreements. See Notes 1 and 2 of Notes to Unaudited Condensed Consolidated Financial Statements.
     The increase in net revenue from our Broadband Communications reportable segment resulted primarily from an increase in demand for digital set-top boxes and broadband modems. The increase in net revenue from our Mobile & Wireless reportable segment resulted from the continued increase in demand for our wireless combo solutions and cellular products.
     We recorded rebates to certain customers of $145.4 million, or 8.0% of net revenue, $132.2 million, or 8.2% of net revenue, $97.0 million, or 7.7% of net revenue, in the three months ended September 30, 2010, June 30, 2010, and September 30, 2009, respectively and $381.3 million, or 7.8% of net revenue and $217.6 million, or 6.9% of net revenue in the nine months ended September 30, 2010 and 2009, respectively. The increase in rebates in 2010 was attributable to the increase in net revenue along with a change to the mix in sales to customers that participate in our rebate programs, primarily an increase in the Mobile & Wireless area. We anticipate that accrued rebates will vary in future periods based upon the level of overall sales to customers that participate in our rebate programs. We reversed accrued rebates of $0.4 million, $1.0 million and $1.6 million in the three months ended September 30, 2010, June 30, 2010 and September 30 2009, respectively, and $3.2 million and $9.2 million in the nine months ended September 30, 2010 and 2009, respectively.
     From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the seasonal variations in consumer products and changes in the overall economic environment. Additionally, since we own inventory that is physically located in a third party’s warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete products and negatively impact our cash flow.
     For these and other reasons, our total net revenue and results of operations for the three and nine months ended September 30, 2010 and prior periods may not necessarily be indicative of future net revenue and results of operations.

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  Concentration of Net Revenue
     Income from the Qualcomm Agreement is expected to be recognized in the remainder of 2010 through 2013 as follows:
                                                 
    2010   2011   2012   2013   Thereafter   Total
    (In thousands)
Income from Qualcomm Agreement
  $ 51,674     $ 206,695     $ 186,012     $ 86,400     $     $ 530,781  
     The following table presents details of our product net revenue:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Product sales made through direct sales force (1)
    77.6 %     76.8 %     78.2 %     79.0 %
Product sales made through distributors(2)
    22.4       23.2       21.8       21.0  
 
                               
 
    100.0 %     100.0 %     100.0 %     100.0 %
 
                               
 
(1)   Includes 8.3% and 6.7% of product sales maintained under hubbing arrangements with certain of our customers in the three months ended September 30, 2010 and 2009, respectively, and 6.6% and 7.1% in the nine months ended September 30, 2010 and 2009, respectively.
 
(2)   Includes 8.6% and 9.6% of product sales maintained under fulfillment distributor arrangements in the three months ended September 30, 2010 and 2009, respectively, and 7.4% and 8.3% in the nine months ended September 30, 2010 and 2009, respectively.
     Sales to our significant customers, including sales to their manufacturing subcontractors, as a percentage of net revenue were as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Five largest customers as a group
    39.2 %     36.3 %     36.7 %     34.2 %
     We expect that our largest customers will continue to account for a substantial portion of our total net revenue for the remainder of 2010 and for the foreseeable future. The identities of our largest customers and their respective contributions to our total net revenue have varied and will likely continue to vary from period to period.
     Product revenue derived from all independent customers located outside the United States, excluding foreign subsidiaries or manufacturing subcontractors of customers that are headquartered in the United States even though such subsidiaries or manufacturing subcontractors are located outside of the United States, as a percentage of product revenue was as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
Asia (primarily in Korea, China, Japan and Taiwan)
    36.1 %     37.5 %     38.4 %     37.2 %
Europe (primarily in the Finland, United Kingdom and France)
    17.8       10.4       15.7       12.4  
Other
    0.3       5.3       0.4       2.3  
 
                               
 
    54.2 %     53.2 %     54.5 %     51.9 %
 
                               

40


 

     Product revenue derived from shipments to international destinations, as a percentage of product revenue was as follows:
                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010   2009   2010   2009
China
    30.9 %     28.9 %     29.5 %     29.0 %
Hong Kong
    26.4       22.9       26.2       24.7  
Other Asia (primarily Singapore and Taiwan)
    36.4       41.1       37.3       36.8  
Europe (primarily in Sweden, Hungary and Romania)
    2.4       2.1       2.4       2.9  
Other
    1.6       1.3       1.6       1.3  
 
                               
 
    97.7 %     96.3 %     97.0 %     94.7 %
 
                               
     All of our revenue to date has been denominated in U.S. dollars.
  Factors That May Impact Net Revenue
     The demand for our products and the subsequent recognition of net revenue has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
    general economic and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, trends in the broadband communications markets in various geographic regions, 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 and distributors, to manage inventory;
 
    the timing of our distributors’ shipments to their customers or when products are taken by our customers under hubbing arrangements;
 
    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/ramp our products and technologies;
 
    the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; and
 
    the unavailability of credit and financing, which may lead certain of our customers to reduce their level of purchases or to seek credit or other accommodations from us.
     Cost of Product Revenue and Product Gross Margin. Cost of product revenue comprises the cost of our semiconductor devices, which consists of the cost of purchasing finished silicon wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services and packaging materials for semiconductor products, as well as royalties paid to vendors for use of their technology. Also included in cost of product revenue is the amortization of purchased technology, and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support, product warranty costs, provisions for excess and obsolete inventories, and stock-based compensation expense for personnel engaged in manufacturing support. Product gross margin is product revenue less cost of product revenue divided by product revenue and does not include income from the Qualcomm Agreement and licensing revenue of intellectual property. Total gross margin is total net revenue less cost of product revenue divided by total net revenue.

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     Product gross margin increased from 48.5% in the three months ended September 30, 2009 to 50.1% in the three months ended September 30, 2010 primarily as a result of cost reductions in each of our reportable segments as we continued our transition to 65 nanometer process technology. Other factors that contributed to the increase in product gross margin were: (i) fixed costs being spread over a higher revenue base and (ii) an increase in margins primarily related to the mix in our infrastructure and networking products, offset in part by a net increase in excess and obsolete inventory provisions of $15.2 million.
     Product gross margin increased from 47.1% in the nine months ended September 30, 2009 to 50.5% in the nine months ended September 30, 2010 primarily as a result of cost reductions in each of our reportable segments as we continued our transition to 65 nanometer process technology. Other factors that contributed to the increase in product gross margin were: (i) fixed costs being spread over a higher revenue base (ii) an increase in margins primarily related to the mix in our infrastructure and networking products and (iii) a net decrease in excess and obsolete inventory provisions of $11.8 million.
     Product gross margin decreased from 50.8% in the three months ended June 30, 2010 to 50.1% in the three months ended September 30, 2010 primarily as a result of a net increase in excess and obsolete inventory provisions of $20.9 million, offset in part by fixed costs being spread over a higher revenue base.
  Factors That May Impact Product Gross Margin
     Our product gross margin has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
    our product mix and volume of product sales (including sales to high volume customers);
 
    the positions of our products in their respective life cycles;
 
    introduction of products with lower margins;
 
    the effects of competition;
 
    the effects of competitive pricing programs and rebates;
 
    provisions for excess and obsolete inventories and their relationship to demand volatility;
 
    manufacturing cost efficiencies and inefficiencies;
 
    fluctuations in direct product costs such as silicon wafer costs and assembly, packaging and testing costs, and other fixed costs;
 
    our ability to create cost advantages through successful integration and convergence;
 
    our ability to advance to the next technology node faster than our competitors;
 
    licensing royalties payable by us;
 
    product warranty costs;
 
    fair value of acquired tangible and intangible assets; and
 
    reversals of unclaimed rebates and warranty reserves.
     Typically our newly introduced products have lower gross margins until we commence volume production and launch lower cost revisions of such products enabling us to benefit from economies of scale and more efficient designs. Our product and total gross margin may also be impacted by additional stock-based compensation expense

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and changes therein, as discussed below, and the amortization of purchased intangible assets related to future acquisitions.
  Research and Development Expense
     Research and development expense consists primarily of salaries and related costs of employees engaged in research, design and development activities, including stock-based compensation expense. Development and design costs consist primarily of costs related to engineering design tools, mask and prototyping costs, testing and subcontracting costs. In addition, we incur costs related to facilities and equipment expense, among other items.
     The following tables present details of research and development expense:
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net     Increase     in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Salaries and benefits
  $ 234,634       13.0 %   $ 196,036       15.6 %   $ 38,598       19.7 %
Stock-based compensation(1)
    80,171       4.4       90,829       7.2       (10,658 )     (11.7 )
Development and design costs
    76,515       4.2       54,237       4.3       22,278       41.1  
Other
    56,257       3.2       50,068       4.1       6,189       12.4  
 
                                     
Research and development
  $ 447,577       24.8 %   $ 391,170       31.2 %   $ 56,407       14.4 %
 
                                     
                                                 
    Nine Months Ended     Nine Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net     Increase     in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Salaries and benefits
  $ 681,890       14.0 %   $ 574,200       18.2 %   $ 107,690       18.8 %
Stock-based compensation(1)
    252,977       5.2       266,698       8.5       (13,721 )     (5.1 )
Development and design costs
    195,859       4.0       148,185       4.7       47,674       32.2  
Other
    159,337       3.3       149,581       4.8       9,756       6.5  
 
                                     
Research and development
  $ 1,290,063       26.5 %   $ 1,138,664       36.2 %   $ 151,399       13.3 %
 
                                     
 
(1)   Includes stock-based compensation expense resulting from stock options, stock purchase rights and restricted stock units we issued or assumed in acquisitions. For a further discussion of stock-based compensation expense, see the section entitled “Stock-Based Compensation Expense” below.

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     The increase in salaries and benefits was primarily attributable to an increase in headcount of approximately 930 personnel (predominantly in the Infrastructure & Networking reportable segment as a result of our acquisitions of Dune Networks and Teknovus, as well as increases in our Mobile & Wireless reportable segment as a result of our Innovision acquisition), to approximately 6,340 at September 30, 2010, which represents a 17.2% increase from our September 30, 2009 levels. Salary increases were also attributable to increased incentive compensation. Development and design costs increased due to increases in mask, prototyping, testing and engineering design tool costs stemming from our continued transition of products to 65 and 40 nanometer process technologies. Development and design costs vary from period to period depending on the timing, development and tape-out of various products.
     We expect research and development costs to increase as a result of growth in, and the diversification of, the markets we serve, new product opportunities, the number of design wins that go into production, changes in our compensation policies, and any expansion into new markets and technologies.
     We remain committed to significant research and development efforts to extend our technology leadership in the wired and wireless communications markets in which we operate. The majority of our new products are now designed in 65 nanometer and 40 nanometer CMOS processes, and we are preparing for the 28 nanometer process. We currently hold more than 4,500 U.S. and more than 1,900 foreign patents and more than 7,800 additional U.S. and foreign pending patent applications. We maintain an active program of filing for and acquiring additional U.S. and foreign patents in wired and wireless communications and other fields.
  Selling, General and Administrative Expense
     Selling, general and administrative expense consists primarily of personnel-related expenses, including stock-based compensation expense, legal and other professional fees, facilities expenses and communications expenses.
     The following tables present details of selling, general and administrative expense:
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net     Increase     in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Salaries and benefits
  $ 61,214       3.4 %   $ 53,180       4.2 %   $ 8,034       15.1 %
Stock-based compensation(1)
    27,927       1.5       31,290       2.5       (3,363 )     (10.7 )
Legal and accounting fees
    32,237       1.8       42,728       3.4       (10,491 )     (24.6 )
Other
    24,471       1.4       15,282       1.2       9,189       60.1  
 
                                     
Selling, general and administrative
  $ 145,849       8.1 %   $ 142,480       11.3 %   $ 3,369       2.4 %
 
                                     
                                                 
    Nine Months Ended     Nine Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net     Increase     in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Salaries and benefits
  $ 175,556       3.6 %   $ 144,335       4.6 %   $ 31,221       21.6 %
Stock-based compensation(1)
    88,647       1.8       89,817       2.9       (1,170 )     (1.3 )
Legal and accounting fees
    90,337       1.9       116,854       3.7       (26,517 )     (22.7 )
Other
    67,304       1.4       43,932       1.3       23,372       53.2  
 
                                     
Selling, general and administrative
  $ 421,844       8.7 %   $ 394,938       12.5 %   $ 26,906       6.8 %
 
                                     
 
(1)   Includes stock-based compensation expense resulting from stock options, stock purchase rights and restricted stock units we issued or assumed in acquisitions. For a further discussion of stock-based compensation expense, see the section entitled “Stock-Based Compensation Expense” below.

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     The increase in salaries and benefits was primarily attributable to an increase in headcount of approximately 220 personnel which represents an 17.1% increase from our September 30, 2009 levels, as well as higher incentive compensation. The decrease in legal and accounting fees related to a decrease in legal fees associated with litigation related to our stock options matter. Legal fees consist primarily of attorneys’ fees and expenses related to our outstanding intellectual property and prior years’ stock option backdating securities litigation, patent prosecution and filings and various other transactions. Legal fees fluctuate from period to period due to the nature, scope, timing and costs of the matters in litigation. See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for further information. The increase in the Other line item in the above tables is primarily attributable to an increase in facilities and travel expenses.
  Stock-Based Compensation Expense
     The following tables present details of total stock-based compensation expense that is included in each functional line item in our unaudited condensed consolidated statements of income:
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net             in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Cost of product revenue
  $ 5,122       0.3 %   $ 6,579       0.5 %   $ (1,457 )     (22.1 )%
Research and development
    80,171       4.4       90,829       7.2       (10,658 )     (11.7 )
Selling, general and administrative
    27,927       1.5       31,290       2.5       (3,363 )     (10.7 )
 
                                     
 
  $ 113,220       6.2 %   $ 128,698       10.2 %   $ (15,478 )     (12.0 )%
 
                                     
                                                 
    Nine Months Ended     Nine Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net             in  
    Amount     Revenue     Amount     Revenue     (Decrease)     Amount  
    (In thousands, except percentages)  
Cost of product revenue
  $ 16,850       0.3 %   $ 18,584       0.6 %   $ (1,734 )     (9.3 )%
Research and development
    252,977       5.2       266,698       8.5       (13,721 )     (5.1 )
Selling, general and administrative
    88,647       1.8       89,817       2.9       (1,170 )     (1.3 )
 
                                     
 
  $ 358,474       7.3 %   $ 375,099       12.0 %   $ (16,625 )     (4.4 )%
 
                                     
     We recognize stock-based compensation expense related to share-based awards, resulting from stock options, stock purchase rights and restricted stock units we issued or assumed in acquisitions over their respective service periods. Unearned stock-based compensation is principally amortized ratably over the service periods of the underlying stock options and restricted stock units, generally 48 months and 16 quarters, respectively. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees or assume unvested equity awards in connection with acquisitions.
     It is our long-term objective that total stock-based compensation approximates 5% of total net revenue.

45


 

     The following table presents details of unearned stock-based compensation currently estimated to be expensed in the remainder of 2010 through 2014 related to unvested share-based payment awards at September 30, 2010:
                                                 
    2010   2011   2012   2013   2014   Total
    (In thousands)
Unearned stock-based compensation
  $ 108,981     $ 347,004     $ 217,404     $ 112,976     $ 12,458     $ 798,823  
     See Note 7 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of activity related to share-based awards.
  Amortization of Purchased Intangible Assets
     The following tables present details of the amortization of purchased intangible assets included in the cost of product revenue and other operating expense categories:
                                                 
    Three Months Ended     Three Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net             in  
    Amount     Revenue     Amount     Revenue     Increase     Amount  
    (In thousands, except percentages)  
Cost of product revenue
  $ 7,415       0.4 %   $ 3,876       0.3 %   $ 3,539       91.3 %
Other operating expenses
    4,405       0.2       4,159       0.3       246       5.9  
 
                                     
 
  $ 11,820       0.6 %   $ 8,035       0.6 %   $ 3,785       47.1 %
 
                                     
                                                 
    Nine Months Ended     Nine Months Ended             %  
    September 30, 2010     September 30, 2009             Change  
            % of Net             % of Net             in  
    Amount     Revenue     Amount     Revenue     Increase     Amount  
    (In thousands, except percentages)  
Cost of product revenue
  $ 23,182       0.5 %   $ 12,101       0.4 %   $ 11,081       91.6 %
Other operating expenses
    12,892       0.2       12,457       0.4       435       3.5  
 
                                     
 
  $ 36,074       0.7 %   $ 24,558       0.8 %   $ 11,516       46.9 %
 
                                     
     The following table presents details of the amortization of existing purchased intangible assets, including IPR&D that is currently estimated to be expensed in the remainder of 2010 and thereafter at September 30, 2010. If we acquire additional purchased intangible assets in the future, our cost of product revenue or operating expenses will be increased by the amortization of those assets.
                                                         
    Purchased Intangible Asset Amortization by Year  
    2010     2011     2012     2013     2014     Thereafter     Total  
    (In thousands)  
Cost of product revenue
  $ 7,190     $ 36,541     $ 43,284     $ 34,503     $ 21,535     $ 26,434     $ 169,487  
Other operating expenses
    7,449       6,405       3,467       3,106       3,089       12,180       35,696  
 
                                         
 
  $ 14,639     $ 42,946     $ 46,751     $ 37,609     $ 24,624     $ 38,614     $ 205,183  
 
                                         
  Impairment of Long-Lived Assets
     In the three months ended September 30, 2010 we recorded an impairment charge to developed technology of $1.8 million. In the three and nine months ended September 30, 2009 we recorded an impairment to customer relationships, completed technology and certain other assets of $7.6 million and $18.9 million, respectively, related to the acquisition of the DTV Business of AMD.

46


 

  Restructuring Costs (Reversals)
     In light of the deterioration in worldwide economic conditions, in January 2009 we implemented a restructuring plan that included a reduction in our worldwide headcount of 200 people, which represented 3% of our global workforce. In the three months ended September 30, 2009 we implemented a plan to reduce our headcount by an additional 120 people related to our DTV business. We did not record any restructuring costs in the nine months ended September 30, 2010.
     We recorded $4.8 million and $12.3 million in net restructuring costs in the three and nine months ended September 30, 2009, respectively, related to the plans, primarily for severance and other charges associated with our reduction in workforce across multiple locations and functions and, to a lesser extent, the closure of one of our facilities.
  Settlement Costs (Gains)
     We did not record any settlement costs in the three months ended September 30, 2010 or 2009. We recorded settlement charges of $3.8 million in the nine months ended September 30, 2010. In the nine months ended September 30, 2009, we recorded settlement gains of $65.3 million related to the Qualcomm Agreement, $6.9 million in settlement costs for an estimated settlement associated with certain employment tax items and additional settlement costs of $1.2 million.
  Charitable Contribution
     In April 2009 we established the Broadcom Foundation, or the Foundation, to support science, technology, engineering and mathematics programs, as well as a broad range of community services. In June 2009 we pledged to make an unrestricted grant of $50.0 million to the Foundation upon receiving a determination letter from the Internal Revenue Service of the exemption from federal income taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. We recorded an operating expense for the contribution of $50.0 million in the nine months ended September 30, 2009.
  Interest and Other Income (Expense), Net
     The following tables present interest and other income, net:
                                                 
    Three Months Ended   Three Months Ended           %
    September 30, 2010   September 30, 2009           Change
            % of Net           % of Net   Increase   in
    Amount   Revenue   Amount   Revenue   (Decrease)   Amount
    (In thousands, except percentages)
Interest income, net
  $ 3,180       0.2 %   $ 2,978       0.2 %   $ 202       6.8 %
Other income (expense), net
    (1,113 )     (0.1 )     (178 )           (935 )     525.3  
                                                 
    Nine Months Ended   Nine Months Ended           %
    September 30, 2010   September 30, 2009           Change
            % of Net           % of Net   Increase   in
    Amount   Revenue   Amount   Revenue   (Decrease)   Amount
    (In thousands, except percentages)
Interest income, net
  $ 8,042       0.1 %   $ 11,362       0.4 %   $ (3,320 )     (29.2 )%
Other income (expense), net
    3,679       0.1       2,487       0.1       1,192       47.9  
     Interest income, net, reflects interest earned on cash and cash equivalents and marketable securities balances. Other income, net, primarily includes gains and losses on foreign currency transactions. The increase in interest income, net, for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009, was the result of the increase in our cash and marketable securities balances, offset in part by the overall decrease in market interest rates . Our cash and marketable securities balances increased from $2.377 billion at September 30, 2009 to $2.914 billion at September 30, 2010, primarily due to net cash provided by operating

47


 

activities. The average interest rates in the three months ended September 30, 2010 and 2009 were 0.47% and 0.51%, respectively.
     The decrease in interest income, net, for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009 was the result of the current interest rate environment as the Federal Funds Rate was approximately 0.25% at September 30, 2010 and the shortened investment duration of our cash and marketable securities as compared to the same period a year ago. The average interest rates in the nine months ended September 30, 2010 and 2009 were 0.42% and 0.71%, respectively.
  Provision for Income Taxes
     We recorded tax provisions of $9.4 million and $9.9 million for the three and nine months ended September 30, 2010, respectively, and tax provisions of $6.8 million and $5.0 million for the three and nine months ended September 30, 2009, respectively. Our effective tax rates were 2.8% and 1.2% for the three and nine months ended September 30, 2010, respectively, and 7.5% and 45.4% for the three and nine months ended September 30, 2009, respectively. The difference between our effective tax rates and the 35% federal statutory rate resulted primarily from foreign earnings taxed at rates lower than the federal statutory rate in the three and nine months ended September 30, 2010 and 2009, domestic losses recorded without income tax benefit in the three and nine months ended September 30, 2009, and tax benefits resulting primarily from the expiration of the statutes of limitations for the assessment of taxes in various foreign jurisdictions of $6.7 million for the nine months ended September 30, 2010 and $6.5 million for the nine months ended September 30, 2009. As part of our acquisition of Innovision Research & Technology plc, we recorded a tax provision of $3.4 million for the three and nine months ended September 30, 2010 for certain acquired deferred tax assets. We also recorded a tax benefit of $3.9 million in the nine months ended September 30, 2009 reflecting the utilization of a portion of our credits for increasing research activities (research and development tax credits) pursuant to a provision contained in the American Recovery and Reinvestment Tax Act of 2009, which was enacted in February 2009. Additionally, as a result of the May 27, 2009 and March 22, 2010 decisions in the U.S. Court of Appeals for the Ninth Circuit case concerning Xilinx (discussed below), we recorded a tax benefit of approximately $3 million in the nine months ended September 30, 2010 to reverse the approximately $3 million of related exposure previously recorded in the nine months ended September 30, 2009.
     We utilize the asset and liability method of accounting for income taxes. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. Forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our recent cumulative tax losses in the U.S. and certain foreign jurisdictions, and the full utilization of our loss carryback opportunities, we have concluded that a full valuation allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where we do not have cumulative tax losses, we had net deferred tax liabilities of $12.4 million and $11.2 million at September 30, 2010 and December 31, 2009, respectively.
     As previously disclosed, on May 27, 2009, the U.S. Court of Appeals for the Ninth Circuit in the case between Xilinx, Inc. and the Commissioner of Internal Revenue, overturned a 2005 U.S. Tax Court ruling regarding treatment of certain compensation expenses under a Company’s research and development cost-sharing arrangements with affiliates. The Court of Appeals held that related parties to such an arrangement must share stock-based compensation expenses, notwithstanding the fact that unrelated parties in such an arrangement would not share such costs. The case was subject to further appeal. As a result of this May 27, 2009 decision, we reduced our gross deferred tax assets for federal and state net operating loss carryforwards and capitalized research and development costs, increased in our deferred tax assets for certain tax credits, and increased our tax provision in 2009 by approximately $3 million.
     On January 13, 2010, the U.S. Court of Appeals for the Ninth Circuit withdrew its May 27, 2009 ruling in the Xilinx case and subsequently issued a new decision in favor of Xilinx on March 22, 2010, thereby affirming the August 30, 2005 decision of the U.S. Tax Court. Consequently, during the quarter ended March 31, 2010, we reversed the amounts we had previously recorded in 2009 related to the court’s May 27, 2009 decision. As a result, in the quarter ended March 31, 2010, we reduced our tax provision by approximately $3 million and adjusted certain

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of our gross deferred tax assets. Included in these adjustments was an increase in our federal and state net operating loss carryforwards of approximately $665 million and $455 million, respectively, an increase of federal and state capitalized research and development costs of approximately $10 million each, an increase in our deferred tax assets relating to stock-based compensation of approximately $65 million, and a decrease in certain tax credits of approximately $10 million. These changes in our gross deferred tax assets were fully offset by a valuation allowance adjustment, and therefore did not result in any change in our net deferred tax assets or our income tax expense for the three months ended March 31, 2010. In addition to the adjustments related to the March 22, 2010 Xilinx decision, in the three months ended March 31, 2010, we reduced our federal and state net operating losses by approximately $60 million for adjustments to our intercompany charges to foreign affiliates for the years ended 2001 to 2009. This reduction to our net operating losses is fully offset by a corresponding adjustment to the valuation allowance for deferred tax assets resulting in no net change to net deferred tax assets in our unaudited condensed consolidated balance sheet and no adjustment to our income tax expense.
     We file federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2004 through 2009 tax years generally remain subject to examination by federal and most state tax authorities. In foreign jurisdictions, the 2003 through 2009 tax years generally remain subject to examination by tax authorities.
     Our income tax returns for the 2004, 2005 and 2006 tax years and our employment tax returns for the 2003, 2004, 2005 and 2006 tax years are currently under examination by the Internal Revenue Service. We do not expect that the results of these examinations will have a material effect on our financial condition or results of operations. In March 2010, a Notice of Proposed Adjustment, or NOPA, was received relating to the IRS examination of our 2004, 2005 and 2006 income tax returns. The NOPA primarily relates to cost-sharing methodologies of stock based compensation, as well as other cost-sharing related issues. In light of the Ninth Circuit Xilinx decision, we believe the stock based compensation matters identified in the NOPA and the settlement of the remaining proposed adjustments will not result in a material adverse financial impact on our results of operations.
     We operate under tax holidays in Singapore, which are effective through March 31, 2014. The tax holidays are conditional upon our continued compliance in meeting certain employment and investment thresholds.
Recent Accounting Pronouncements
     See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a description of our recent accounting pronouncements.
Subsequent Events
     See Note 10 of Notes to Unaudited Condensed Consolidated Financial Statements for a description of our recent entry into definitive agreements to acquire Beceem Communications Inc. and Percello Ltd.
Liquidity and Capital Resources
     Working Capital and Cash and Marketable Securities. The following table presents working capital, and cash and cash equivalents and marketable securities:
                         
    September 30,     December 31,     Increase  
    2010     2009     (Decrease)  
    (In thousands)  
Working capital
  $ 2,608,342     $ 1,765,982     $ 842,360  
 
                 
Cash and cash equivalents(1)
  $ 1,245,940     $ 1,397,093     $ (151,153 )
Short-term marketable securities(1)
    1,148,139       532,281       615,858  
Long-term marketable securities
    520,276       438,616       81,660  
 
                 
 
  $ 2,914,355     $ 2,367,990     $ 546,365  
 
                 
 
(1)   Included in working capital.

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     See discussion of market risk that follows in Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  Cash Provided and Used in the Nine Months Ended September 30, 2010 and 2009
     Cash and cash equivalents increased to $1.246 billion at September 30, 2010 from $1.397 billion at December 31, 2009 as a result of cash provided by operating activities, and the proceeds from the issuance of our Class A common stock, offset by net purchases of marketable securities, the acquisition of Teknovus and Innovision, repurchases of our Class A common stock and our quarterly dividend payments.
                 
    Nine Months Ended  
    September 30,  
    2010     2009  
    (In thousands)  
Net cash provided by operating activities
  $ 919,321     $ 654,965  
Net cash used in investing activities
    (934,704 )     (370,527 )
Net cash used in financing activities
    (135,770 )     (129,862 )
 
           
Increase (decrease) in cash and cash equivalents
  $ (151,153 )   $ 154,576  
Cash and cash equivalents at beginning of period
    1,397,093       1,190,645  
 
           
Cash and cash equivalents at end of period
  $ 1,245,940     $ 1,345,221  
 
           
  Operating Activities
     In the nine months ended September 30, 2010 our operating activities provided $919.3 million in cash. This was primarily the result of net income of $815.6 million and net non-cash operating expenses of $454.0 million, offset in part by net cash used by changes in operating assets and liabilities of $350.3 million including our $160.5 million payment of previously accrued securities litigation settlement costs. In the nine months ended September 30, 2009 our operating activities provided $655.0 million in cash. This was primarily the result of $467.5 million in net non-cash operating expenses, $181.4 million in net cash provided by changes in operating assets and liabilities (including the effects of the proceeds received from the Qualcomm Agreement) and net income of $6.1 million.
     Changes in assets and liabilities at September 30, 2010 compared to December 31, 2009 included the following:
    Days sales outstanding increased from 35 days to 40 days driven primarily by a variation in revenue linearity as a larger percentage of our sales occurred in the last month of the quarter ended September 30, 2010 as compared to the last month of the quarter ended December 31, 2009.
 
    Inventory days on hand increased from 52 days to 56 days due to our decision to increase inventory on hand to meet the anticipated growth in the demand for our products primarily in our Mobile & Wireless reportable segment.
 
    Accounts payable days outstanding decreased from 63 to 59 days resulting primarily from the timing of inventory purchases and vendor payments.
     We typically bill customers on an open account basis subject to our standard net thirty day payment terms. If, in the longer term, our revenue increases, it is likely that our accounts receivable balance will also increase. Our accounts receivable could also increase if customers delay their payments or if we grant extended payment terms to customers, both of which are more likely to occur during challenging economic times when our customers may face issues gaining access to sufficient credit on a timely basis.
     In the future, our inventory levels will continue to be determined by the level of purchase orders we receive and the stage at which our products are in their respective product life cycles, our ability, and the ability of our customers, to manage inventory under hubbing arrangements, and competitive situations in the marketplace. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels.

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Investing Activities
     Investing activities used $934.7 million in cash in the nine months ended September 30, 2010, which was primarily the result of $694.3 million in net purchases of marketable securities, $150.4 million in net cash paid primarily for the acquisitions of Teknovus and Innovision and $82.0 million of capital equipment purchases, mostly to support our research and development efforts. Investing activities used $370.5 million in cash in the nine months ended September 30, 2009, which was primarily the result of net purchases of marketable securities of $320.6 million and $48.8 million of capital equipment purchases.
Financing Activities
     Our financing activities used $135.8 million in cash in the nine months ended September 30, 2010, which was primarily the result of $275.5 million in repurchases of shares of our Class A common stock, dividends paid of $120.7 million, repayment of debt assumed in our Teknovus acquisition of $14.6 million and $96.7 million in minimum tax withholding paid on behalf of employees for shares issued pursuant to restricted stock units, offset in part by $371.7 million in proceeds received from issuances of common stock upon exercise of stock options and pursuant to our employee stock purchase plan. Our financing activities used $129.9 million in cash in the nine months ended September 30, 2009, which was primarily the result of $206.5 million in repurchases of shares of our Class A common stock and $60.6 million in minimum tax withholding paid on behalf of employees for shares issued pursuant to restricted stock units, offset in part by $137.2 million in proceeds received from issuances of common stock upon exercise of stock options and pursuant to our employee stock purchase plan.
     The timing and number of stock option exercises and employee stock purchases and the amount of cash proceeds we receive through those exercises and purchases are not within our control, and in the future we may not generate as much cash from the exercise of stock options as we have in the past. Moreover, it is now our practice to issue a combination of restricted stock units and stock options only to certain employees and, in most cases to issue solely restricted stock units. Unlike the exercise of stock options, the issuance of shares upon vesting of restricted stock units does not result in any cash proceeds to Broadcom and requires the use of cash, as we currently allow employees to elect to have a portion of the shares issued upon vesting of restricted stock units withheld to satisfy minimum statutory withholding taxes, which we then pay in cash to the appropriate tax authorities on each participating employee’s behalf.
Prospective Capital Needs
     We believe that our existing cash, cash equivalents and marketable securities, together with cash generated from operations and from the purchase of common stock through our employee stock option and purchase plans, will be sufficient to cover our working capital needs, capital expenditures, investment requirements, commitments, repurchases of our Class A common stock and quarterly dividends for at least the next 12 months. However, it is possible that we may need to raise additional funds to finance our activities beyond the next 12 months or to consummate acquisitions of other businesses, assets, products or technologies. If needed, we may be able to raise such funds by selling equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. We could also reduce certain expenditures, such as repurchases of our Class A common stock.
     In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. We intend to actively explore the bank lending and bond markets in the fourth quarter ending December 31, 2010 and will be opportunistic about borrowing should we be able to obtain the right terms. However, we may not be able to obtain such funds on a timely basis on acceptable terms, if at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of our Class A common stock.
     Although we believe that we have sufficient capital to fund our activities for at least the next 12 months, our future capital requirements may vary materially from those now planned. We anticipate that the amount of capital we will need in the future will depend on many factors, including:
    general economic and specific conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry, trends in the broadband communications markets in various

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      geographic regions, including seasonality in sales of consumer products into which our products are incorporated;
    acquisitions of other businesses, assets, products or technologies;
 
    the unavailability of credit and financing, which may lead certain of our customers to reduce their levels of purchases or to seek credit or other accommodations from us;
 
    litigation expenses, settlements and judgments;
 
    the overall levels of sales of our semiconductor products, licensing revenue, income from the Qualcomm Agreement and product gross margins;
 
    our business, product, capital expenditure and research and development plans, and product and technology roadmaps;
 
    the market acceptance of our products;
 
    repurchases of our Class A common stock;
 
    payment of cash dividends;
 
    required levels of research and development and other operating costs;
 
    volume price discounts and customer rebates;
 
    intellectual property disputes, customer indemnification claims and other types of litigation risks;
 
    the levels of inventory and accounts receivable that we maintain;
 
    licensing royalties payable by us;
 
    changes in our compensation policies;
 
    the issuance of restricted stock units and the related cash payments we make for withholding taxes due from employees during 2010 and future years;
 
    capital improvements for new and existing facilities;
 
    technological advances;
 
    our competitors’ responses to our products and our anticipation of and responses to their products;
 
    our relationships with suppliers and customers;
 
    the availability and cost of sufficient foundry, assembly and test capacity and packaging materials; and
 
    the level of exercises of stock options and stock purchases under our employee stock purchase plan.
     In addition, we may require additional capital to accommodate planned future long-term growth, hiring, infrastructure and facility needs.
Off-Balance Sheet Arrangements
     At September 30, 2010 we had no material off-balance sheet arrangements, other than our operating leases.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
     The Company manages its total portfolio to encompass a diversified pool of investment-grade securities to preserve principal and maintain liquidity. Investments in both fixed rate and floating rate instruments carry a degree

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of interest rate risk. Fixed rate securities may have their market value adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded debt investments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. However, because any debt securities we hold are classified as available-for-sale, no gains or losses are realized in the income statement due to changes in interest rates unless such securities are sold prior to maturity or unless declines in value are determined to be other-than-temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of shareholders’ equity, net of tax.
     In a declining interest rate environment, as short term investments mature, reinvestment occurs at less favorable market rates. Given the short term nature of certain investments, the current interest rate environment may continue to negatively impact our investment income.
     To assess the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming a 100 basis point parallel shift in the yield curve. Based on investment positions as of September 30, 2010, a 100 basis point increase in interest rates across all maturities would result in an $8.5 million incremental decline in the fair market value of the portfolio. As of December 31, 2009, a similar 100 basis point shift in the yield curve would have resulted in an $8.8 million incremental decline in the fair market value of the portfolio. Such losses would only be realized if we sold the investments prior to maturity.
     Actual future gains and losses associated with our investments may differ from the sensitivity analyses performed as of September 30, 2010 due to the inherent limitations associated with predicting the changes in the timing and level of interest rates and our actual exposures and positions.
     Our cash, cash equivalent and marketable securities at September 30, 2010 consisted of $1.600 billion held domestically, with the remaining balance of $1.314 billion held by foreign subsidiaries. There may be tax effects upon repatriation of that cash to the United States.
Item 4. Controls and Procedures
     We are committed to maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures and implementing controls and procedures based on the application of management’s judgment.
     Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2010, the end of the period covered by this Report.
     There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Internal Control
     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered

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relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to management override, error or improper acts may occur and not be detected. Any resulting misstatement or loss may have an adverse and material effect on our business, financial condition and results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
     The information set forth under Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see “Risk Factors” immediately below.
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 Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent reports on Forms 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 may be adversely impacted by worldwide economic uncertainties and specific conditions in the markets we address.
     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 characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. An increasing number of our products are being incorporated into consumer electronic products, which are subject to significant seasonality and fluctuations in demand. Economic volatility can cause extreme difficulties for our customers and vendors to accurately forecast and plan future business activities. This unpredictability could cause our customers to reduce spending on our products and services, which would delay and lengthen sales cycles. Furthermore, during challenging economic times our customers and vendors may face issues gaining timely access to sufficient credit, which could impact their ability to make timely payments to us. As a result, we may experience growth patterns that are different than the end demand for products, particularly during periods of high volatility.
     We cannot predict the timing, strength or duration of any economic slowdown or the impact it will have on our customers, our vendors or us. The combination of our lengthy sales cycle coupled with challenging macroeconomic conditions could have a compound impact on our business. The impact of market volatility is not limited to revenue but may also affect our product gross margins and other financial metrics. Any downturn 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.
Our quarterly operating results may fluctuate significantly.

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     Our quarterly net revenue and operating results have fluctuated significantly in the past and are likely to continue to vary from quarter to quarter. Variability in the nature of our operating results may be attributed to the factors identified throughout this “Risk Factors” section, including:
    changes in economic conditions in the markets we address, including the continuing volatility in the technology sector and semiconductor industry;
 
    seasonality in sales of consumer products in which our products are incorporated;
 
    our dependence on a few significant customers and/or design wins for a substantial portion of our revenue;
 
    timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;
 
    changes in customer product needs and market acceptance of our products;
 
    the impact of the Internal Revenue Service review of certain of our income and employment tax returns; and
 
    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.
     Many of the factors impacting our operating results are not within our control.
Our stock price is highly volatile.
     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. From January 1, 2008 through September 30, 2010 our Class A common stock has traded at prices as low as $12.98 and as high as $38.47 per share. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control.
     In addition, the market prices of securities of Internet-related, semiconductor and other technology companies have been and remain 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. 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. 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 we currently are, the subject of securities class action litigation.
     Due to the nature of our compensation programs, most of our executive officers sell shares of our common stock each quarter or otherwise periodically, often pursuant to trading plans established under Rule 10b5-1 promulgated under the Exchange Act. As a result, sales of shares by our executive officers may not be indicative of their respective opinions of Broadcom’s performance at the time of sale or of our potential future performance. Nonetheless, the market price of our stock may be affected by sales of shares by our executive officers.
We face intense competition.
     The semiconductor industry and the wired and wireless communications markets are intensely competitive. We expect competition to continue to increase as new markets develop, as industry standards become well known and as other competitors enter our business. 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 presences 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

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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. We also face competition from newly established competitors, suppliers of products, and customers who choose to develop their own semiconductor solutions.
     Existing or new competitors may 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 depend on a few significant customers for a substantial portion of our revenue.
     We derive a substantial portion of our revenue from sales to a relatively small number of customers. Sales to our five largest customers represented 36.7% and 34.2% of our total net revenue in the nine months ended September 30, 2010 and 2009, respectively. We expect that our largest customers will continue to account for a substantial portion of our total net revenue for the foreseeable future. The loss of any significant customer could materially and adversely affect our financial condition and results of operations.
     A significant portion of our revenue in any period may also depend on a single product design win with a large customer. As a result, the loss of any such key design win or any significant delay in the ramp of volume production of the customer’s products into which our product is designed could materially and adversely affect our financial condition and results of operations. We may not be able to maintain sales to certain of our key customers or continue to secure key design wins for a variety of reasons, including:
    agreements with our customers typically do not require them to purchase a minimum quantity of our products; and
 
    our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty.
     In addition, the majority of our licensing revenues and related income to date has been derived from agreements with two customers, Verizon Wireless and Qualcomm. Our patent license agreements with these two customers are expected to result in licensing revenue and related income of approximately $1.056 billion over a seven year period. From July 2007 through September 2010, we recorded $525.7 million in licensing revenue and related income derived from Verizon Wireless and Qualcomm. The licensing revenue from our agreement with Verizon Wireless has ended and the income from the Qualcomm Agreement is non-recurring and will terminate in 2013. There can be no assurances that we will be able to enter into similar arrangements in the future, or that we will be able to successfully collect the remaining payments due to us under the Qualcomm Agreement in the event of a default by Qualcomm.
     The loss of a key customer or design win, a reduction in sales to any key customer, decrease in licensing revenue, significant delay in our customers’ product development plans, or our inability to attract new significant customers or secure new key design wins could seriously impact our revenue and materially and adversely affect our results of operations.
We may fail to adjust our operations in response to changes in demand.
     Through internal growth and acquisitions, we significantly modified the scope of our operations and workforce in recent years. Our operations are characterized by a high percentage of costs that are fixed or difficult to reduce in the short term, such as research and development expenses and our highly skilled workforce. During some periods, our growth has placed a significant strain on our management personnel, systems and resources. To respond to periods of increased demand, we will be required to expand, train, manage and motivate our workforce. Alternatively, in response to the economic downturn in the markets in the semiconductor industry and communications market, we have been required to implement restructuring actions and a number of other cost

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saving measures. All of these endeavors require substantial management effort. If we are unable to effectively manage our expanding operations, we may be unable to adjust 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.
We face risks associated with our acquisition strategy.
     A key element of our business strategy involves expansion through the acquisitions of businesses, assets, products or technologies. The expansion of our business through acquisitions allows us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. We may not be able to identify or consummate future acquisitions or realize the desired benefit from these acquisitions.
     We face several challenges in the integration of acquired businesses that could disrupt our ongoing business and distract our management team, including:
    delays in the timing and successful integration of an acquired company’s technologies;
 
    the loss of key personnel;
 
    lower gross margins and other financial challenges; and
 
    becoming subject to intellectual property or other litigation.
     Acquisitions can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense, write up of acquired inventory to fair value, and the recording and later amortization of amounts related to certain purchased intangible assets. In addition, we may record goodwill and other purchased intangible assets in connection with an acquisition and incur impairment charges in the future. If our actual results, or the plans and estimates used in future impairment analyses, are less favorable than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.
We may be required to defend against alleged infringement of intellectual property rights.
     Companies in the semiconductor industry and the wired and wireless communications markets aggressively protect and pursue their intellectual property rights. From time to time, we receive notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Additionally, we receive notices that challenge the validity of our patents. Intellectual property litigation can be expensive, time consuming and distracting to management. An adverse determination in any of these types of disputes could prevent us from manufacturing or selling some of our products or could prevent us from enforcing our intellectual property rights.
     We may also be required to indemnify some customers and strategic partners under our agreements 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 or litigation against us are not valid or successfully asserted, these claims could result in significant costs and diversion of the attention of management and other key employees to defend.
     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. Any of these claims or litigation may materially and adversely affect our business, financial condition and results of operations.

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We may not be able to protect or enforce our intellectual property rights.
     Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. It is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies and processes. Any of our existing or future patents may be challenged, invalidated or circumvented. We engage 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. If our intellectual property rights do not adequately protect our technology, our competitors may be able to offer products similar to ours.
     Our software may be derived from “open source” software, which is generally made available to the public by its authors and/or other third parties. Open source software is often made available under licenses, which impose certain obligations in the event we 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 on different terms than those customarily used to protect our intellectual property. With respect to our proprietary software, we generally license such software under terms that prohibit combining it with open source software. Despite these restrictions, parties may combine our 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 enter into confidentiality agreements with our employees, consultants and strategic partners. We also 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. 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.
     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. Identifying unauthorized use of our products and technologies is difficult and time consuming. The initiation of litigation may adversely affect our relationships and agreements with certain customers that have a stake in the outcome of the litigation proceedings. Litigation is very expensive and may 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.
Our business is subject to potential tax liabilities.
     We are subject to income taxes in the United States and various foreign jurisdictions. The amount of income taxes we pay is subject to our interpretation and application of tax laws in jurisdictions in which we file. Changes in current or future laws or regulations, or the imposition of new or changed tax laws or regulations or new related interpretations by taxing authorities in the U.S. or foreign jurisdictions, could adversely affect our results of operations. We are subject to examinations and tax audits. There can be no assurance that the outcomes from these audits will not have an adverse effect on our net operating loss and research and development tax credit carryforwards, our financial position, or our operating results.
     In certain foreign jurisdictions, we operate under tax holidays and favorable tax incentives. For instance, in Singapore we operate under tax holidays that reduce taxes on substantially all of our operating income in that jurisdiction. Such tax holidays and incentives often require us to meet specified employment and investment criteria in such jurisdictions. In a period of tight manufacturing capacity, our ability to meet Singaporean content in our products may be more limited, which may have adverse tax consequences. More generally, if any of our tax holidays or incentives are terminated or if we fail to the meet the criteria to continue to enjoy such holidays or incentives, our results of operations may be materially and adversely affected.
We are involved in litigation.
     From time to time, we may become a party in various legal proceedings. For example, we are engaged in a civil litigation related to allegations that certain of our current and former directors and officers improperly dated stock

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option grants. Please refer to Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report for details regarding our pending litigation. Litigation is inherently unpredictable and there can be no assurance that any lawsuit to which we are a party will be resolved in our favor. Any claim that is successfully decided against us may cause us to pay substantial damages, including punitive damages, and other related fees. Regardless of whether lawsuits are resolved in our favor, any litigation will be expensive, time consuming and could divert the attention of our management.
We manufacture and sell complex products and may be unable to successfully develop and introduce new products.
     We have experienced hardware and software defects and bugs associated with the introduction of our highly complex products. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products. These problems could interrupt or delay sales and shipment of our products to customers. To alleviate these problems, we may have to divert our resources from other development efforts. In addition, these problems could result in claims against us by our customers or others, including possible claims for consequential damages and/or lost profits.
     We expect that a high percentage of our future sales will come from sales of new products. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. The markets for some of these products are new to us and may be immature and/or unpredictable. These markets may not develop into profitable opportunities and we have invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. As a result, it is difficult to anticipate our future revenue streams from, or the sustainability of, our new products.
     Our industry is dynamic and we are required to devote significant resources to research and development to remain competitive. The development of new silicon devices is highly complex, and we have experienced delays in completing the development, production and introduction of our new products. We may choose to discontinue one or more products or product development programs to dedicate more resources to other products. The discontinuation of an existing or planned product may adversely affect our relationship with our customers.
     Our ability to successfully develop and deliver new products will depend on various factors, including our ability to:
    effectively identify and capitalize upon opportunities in new markets;
 
    timely complete and introduce new integrated products;
 
    transition our semiconductor products to increasingly smaller line width geometries;
 
    license any desired third party technology or intellectual property rights;
 
    obtain sufficient foundry capacity and packaging materials; and
 
    qualify and obtain industry interoperability certification of our products.
     If we are not able to develop and introduce new products in a cost effective and timely manner, we will be unable to attract new customers or to retain our existing customers which would materially and adversely affect our results of operations.
We are subject to order and shipment uncertainties.
     It is difficult to accurately predict demand for our semiconductor products. We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally cancel, change or defer purchase orders on short notice without incurring a significant penalty. Our ability to accurately forecast customer demand is further impaired by the delays inherent in our lengthy sales cycle. We operate in a dynamic industry and use significant resources to develop new products for existing and new markets. After we have developed a product, there is no guarantee that our customers will integrate our product into their equipment or devices and, ultimately,

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bring those products to market. In these situations, we may never produce and deliver any significant number of our products, even after incurring substantial development expenses. When a customer elects to integrate our product, it is typically six to 24 months before volume production of their equipment or devices commences. After volume production begins, we cannot be assured that the equipment or devices incorporating our product will gain market acceptance.
     Our product demand forecasts are based on multiple assumptions, each of which may introduce error into our estimates. In the event we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, we could 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 could forego revenue opportunities and potentially lose market share and damage our customer relationships. In addition, a percentage of our inventory is maintained under hubbing arrangements whereby products are delivered to a customer or third party warehouse based upon the customer’s projected needs. Under these arrangements, we do not recognize product revenue until the customer reports that it has removed our product from the warehouse to incorporate into its end products. Our ability to effectively manage inventory levels may be impaired under our hubbing arrangements, which could increase expenses associated with excess and obsolete product and negatively impact our cash flow.
We are increasingly exposed to risks associated with our international operations.
     We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers located outside the United States. In addition, 54.5% and 51.9% of our product revenue in the nine months ended September 30, 2010 and 2009, respectively, was derived from product sales to 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 in Asia, represented 97.0% and 94.7% of our product revenue in the nine months ended September 30, 2010 and 2009, respectively. 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. 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;
 
    continuation of overseas conflicts and the risk of terrorist attacks and resulting heightened security;
 
    the imposition of governmental controls and restrictions and unexpected changes in regulatory requirements;
 
    nationalization of business and blocking of cash flows;
 
    changes in taxation and tariffs; and
 
    difficulties in staffing and managing international operations.
     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.
We depend on third-party subcontractors to fabricate, assemble and test our products.
     We do not own or operate fabrication, assembly or test facilities. We rely on third-party subcontractors to manufacture, assemble and test substantially all of our semiconductor devices. Accordingly, we cannot directly control our product delivery schedules and quality assurance. This lack of control could result in product shortages or quality assurance problems. These issues could delay shipments of our products or increase our assembly or testing costs.

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     We do not have long-term agreements with any of our manufacturing, assembly or test subcontractors and typically procure services from these suppliers on a per order basis. In the event our third-party foundry subcontractors experience a disruption of manufacturing, assembly or testing capacity, we may not be able to obtain alternative manufacturing, assembly and testing services in a timely manner, or at all. Furthermore, our foundries must have new manufacturing processes qualified if there is a disruption in an existing process, which could be time-consuming. We could experience significant delays in product shipments if we are required to find alternative manufactures, assemblers or testers for our products. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products.
     Because we rely on outside foundries, we face several significant risks in addition to those discussed above, including: