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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 June 30, 2006
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 Corporation

(Exact Name of Registrant as Specified in Its Charter)


California (State or Other Jurisdiction of Incorporation or Organization)		33-0480482 (I.R.S. Employer Identification No.)

16215 Alton Parkway
Irvine, California 92618-3616
(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 o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


	þ	Large accelerated filer o Accelerated filer o Non-accelerated filer

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 December 31, 2006 the registrant had 473.5 million shares of Class A common stock, $0.0001 par value, and 74.8 million shares of Class B common stock, $0.0001 par value, outstanding.

BROADCOM CORPORATION

QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006

TABLE OF CONTENTS


		Page

	Explanatory Note		1

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		4
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005		4
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005		5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005		6
	Notes to Unaudited Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		52
Item 4.	Controls and Procedures		53

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		56
Item 1A.	Risk Factors		56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		74
Item 3.	Defaults upon Senior Securities		75
Item 4.	Submission of Matters to a Vote of Security Holders		75
Item 5.	Other Information		77
Item 6.	Exhibits		78
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31
EXHIBIT 32

Broadcom^®, the pulse logo and SystemI/O^tm 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.

CAUTIONARY STATEMENT

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 net revenue, costs and expenses and gross margin; our accounting estimates, assumptions and judgments; the impact of the January 2007 restatement of our financial statements and new accounting rules related to the expensing of stock options on our reported results; our success in pending litigation; the demand for our products; the effect that seasonality and volume fluctuations in the demand for our customers’ consumer-oriented products will have on our quarterly operating results; our dependence on a few key customers for a substantial portion of our revenue; our ability to scale our operations in response to changes in demand for existing products and services or the demand for new products requested by our customers; the competitive nature of and anticipated growth in our markets; our ability to migrate to smaller process geometries; manufacturing, assembly and test capacity; our ability to consummate acquisitions and integrate their operations successfully; our potential needs for additional capital; inventory and accounts receivable levels; and the level of accrued rebates. These forward-looking statements are based on our current expectations, estimates and projections about our industry and business, management’s beliefs, and certain assumptions made by us, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” contained 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 for any reason, except as otherwise required by law.

Forward-looking statements are not the only statements you should regard with caution. The preparation of our restated consolidated financial statements for the three months ended March 31, 2006 and prior periods required us to make judgments with respect to the methodologies we selected to calculate the adjustments contained in the restated financial statements as well as estimates and assumptions regarding the application of those methodologies. These judgments, estimates and assumptions, which are based on factors that we believe to be reasonable under the circumstances, affected the amounts of additional deferred compensation and additional stock-based compensation expense that we recorded in 2005 and the six months ended June 30, 2006. The application of alternative methodologies, estimates and assumptions could have resulted in materially different amounts.

EXPLANATORY NOTE

We recently completed a voluntary review of our equity award practices. The voluntary review, which commenced in May 2006 and covered all grants of options to purchase shares of our Class A or Class B common stock, referred to in this Quarterly Report on Form 10-Q, or this Report, as stock options or options, and other equity awards made since our initial public offering in April 1998, was directed by the Audit Committee of our Board of Directors. The voluntary review consisted of two components: (1) an equity award review, so-referenced in this Report, to determine whether we used appropriate measurement dates for option grants and other equity awards made under our extensive employee equity award programs, which was conducted with the assistance of outside legal counsel Irell & Manella LLP and forensic accountants FTI Consulting Inc., and (2) an investigation of the conduct and performance of Broadcom’s officers, employees and directors who were involved in the stock option granting process, referred to in this Report as the conduct review, which was conducted with the assistance of independent legal counsel Kaye Scholer LLP and forensic accountants LECG, LLC.

expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being amortized over the service period relating to each option, typically four years, with approximately 95% of the expense being recorded in years prior to 2004.

As a consequence of these adjustments, our audited consolidated financial statements and related disclosures for the three years ended December 31, 2005 and our consolidated statements of operations and consolidated balance sheet data for the five years ended December 31, 2005 have been restated. In addition, the unaudited quarterly unaudited financial information and financial statements for interim periods of 2005 and 2004 and unaudited condensed consolidated financial statements for the three months ended March 31, 2006 have been restated. We have also restated the stock-based compensation expense footnote information calculated under Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, or SFAS 123, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, or SFAS 148, under the disclosure-only alternatives of those pronouncements for the years 2003 through 2005 and for interim periods of 2005 and 2004. This restated financial and footnote information is included in our amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006 filed with the Securities and Exchange Commission, or SEC, today.

The adjustments did not affect Broadcom’s previously-reported revenue, cash, cash equivalents or marketable securities balances in any of the restated periods.

The amounts of the adjustments we recorded for the years 1998 through 2005 were calculated pursuant to APB 25. Effective January 1, 2006 we adopted SFAS No. 123 (revised 2004), Share-Based Payment, or SFAS 123R, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their respective grant date fair values. As a result, the $14.3 million of additional stock-based compensation expense that we recorded in connection with our equity award review in the three months ended March 31, 2006 is calculated pursuant to SFAS 123R.

The follow table summarizes additional stock-based compensation expense and related tax adjustments resulting from the review of our equity award practices on a quarterly basis for 2005 and the three months ended March 31, 2006:


	Three Months Ended
	March 31,			June 30,		September 30,		December 31,		March 31,
	2005			2005		2005		2005		2006(1)
	(In thousands)

Additional stock-based compensation expense	$	12,845		$	11,599	$	10,362	$	7,205	$	14,295
Other tax adjustments		223			441		1,084		881		2,893

Additional operating expenses		13,068			12,040		11,446		8,086		17,188
Income tax expense (benefit)		(8,255	)		8,255		—		—		—

Net adjustments	$	4,813		$	20,295	$	11,446	$	8,086	$	17,188


(1)		These amounts are not included in the total additional stock-based compensation expense and related tax adjustments recorded for the years 1998 through 2005 discussed above because they are calculated in accordance with SFAS 123R, which we adopted effective January 1, 2006.

on previously-reported stock-based compensation expense on a quarterly basis for 2005 and the three months ended March 31, 2006:


	Stock-Based Compensation Expense
	As Reported		Adjustments		As Restated
	(In thousands)

Three Months Ended March 31, 2005	$	11,294	$	4,590	$	15,884
Three Months Ended June 30, 2005		14,548		19,854		34,402
Three Months Ended September 30, 2005		16,584		10,362		26,946
Three Months Ended December 31, 2005		17,578		7,205		24,783

Year Ended December 31, 2005	$	60,004	$	42,011	$	102,015

Three Months Ended March 31, 2006	$	93,691	$	14,295	$	107,986

This Quarterly Report on Form 10-Q should be read in conjunction with our amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006 filed with the SEC today. Information regarding the effect of the restatement on our financial position and results of operations is provided in Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Report.

Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K previously filed by Broadcom, the related opinions of our independent registered public accounting firm, and all earnings press releases and similar communications issued by us, for all periods ended on or before March 31, 2006 should not be relied upon and are superseded in their entirety by the information in the amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and the amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006 filed with the SEC today.

Share and per share information presented in this Report has been adjusted to reflect all splits and dividends of our common stock subsequent to April 16, 1998, including the three-for-two stock split effected February 21, 2006 through the payment of a stock dividend.

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2006			2005
				(Restated)
	(In thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	1,838,372		$	1,437,276
Short-term marketable securities		366,894			295,402
Accounts receivable, net		408,301			307,356
Inventory		278,036			194,571
Prepaid expenses and other current assets		90,242			101,271

Total current assets		2,981,845			2,335,876
Property and equipment, net		110,691			96,438
Long-term marketable securities		171,961			142,843
Goodwill		1,186,286			1,149,602
Purchased intangible assets, net		34,019			7,332
Other assets		15,916			20,108

Total assets	$	4,500,718		$	3,752,199


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	321,011		$	289,069
Wages and related benefits		73,852			74,709
Deferred revenue		1,520			2,053
Accrued liabilities		257,628			233,663

Total current liabilities		654,011			599,494
Commitments and contingencies
Long-term liabilities		7,952			12,138
Shareholders’ equity:
Common stock		55			52
Additional paid-in capital		11,752,767			11,474,724
Notes receivable from employees		(2,317	)		(4,743	)
Deferred compensation		—			(194,331	)
Accumulated deficit		(7,912,459	)		(8,136,243	)
Accumulated other comprehensive income		709			1,108

Total shareholders’ equity		3,838,755			3,140,567

Total liabilities and shareholders’ equity	$	4,500,718		$	3,752,199

See accompanying notes.

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006		2005			2006		2005
			(Restated)					(Restated)
	(In thousands, except per share data)

Net revenue	$	941,131	$	604,861		$	1,841,778	$	1,155,206
Cost of revenue		457,374		284,092			891,583		550,911

Gross profit		483,757		320,769			950,195		604,295
Operating expense:
Research and development		280,024		161,991			531,718		316,575
Selling, general and administrative		121,982		64,899			234,881		126,947
Amortization of purchased intangible assets		605		1,040			1,688		1,952
In-process research and development		—		—			5,200		6,652
Settlement costs		—		110,000			—		110,000

Income (loss) from operations		81,146		(17,161	)		176,708		42,169
Interest income, net		28,194		10,678			51,932		18,636
Other income, net		1,448		679			3,219		777

Income (loss) before income taxes		110,788		(5,804	)		231,859		61,582
Provision (benefit) for income taxes		4,702		(570	)		8,075		2,447

Net income (loss)	$	106,086	$	(5,234	)	$	223,784	$	59,135

Net income (loss) per share (basic)	$	.19	$	(.01	)	$	.41	$	.12

Net income(loss) per share (diluted)	$	.18	$	(.01	)	$	.37	$	.11

Weighted average shares (basic)		547,790		502,353			543,379		499,779

Weighted average shares (diluted)		594,546		502,353			597,875		536,858

The following table presents details of total stock-based compensation expense included in each functional line item in the unaudited condensed consolidated statements of operations above:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006(1)		2005		2006(1)		2005
			(Restated)				(Restated)
	(In thousands)

Cost of revenue	$	7,105	$	1,007	$	13,391	$	2,066
Research and development		86,420		17,872		156,425		33,409
Selling, general and administrative		38,940		7,268		70,635		14,811

	$	132,465	$	26,147	$	240,451	$	50,286

The amounts included in the three and six months ended June 30, 2006 reflect the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), effective January 1, 2006. Had Broadcom applied the provisions of SFAS 123R in prior periods, it would have reported a net loss of $128.8 million or a $0.26 net loss per share (basic and diluted) in the three months ended June 30, 2005 and a net loss of $214.4 million or a $0.43 net loss per share (basic and diluted) in the six months ended June 30, 2005. See Notes 1 and 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

All historical share information has been adjusted to reflect the three-for-two stock split effected February 21, 2006 through the payment of a stock dividend of one additional share of Class A or Class B common stock, as applicable, for every two shares of such class held on the record date of February 6, 2006.

See accompanying notes.

BROADCOM CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2006			2005
				(Restated)
	(In thousands)

Operating activities
Net income	$	223,784		$	59,135
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,325			27,778
Stock-based compensation expense:
Stock options and other awards		181,248			36,727
Restricted stock units issued by the Company		59,203			13,559
Acquisition-related items:
Amortization of purchased intangible assets		7,413			7,486
In-process research and development		5,200			6,652
Gain on strategic investments		(700	)		—
Changes in operating assets and liabilities:
Accounts receivable		(100,901	)		(37,848	)
Inventory		(82,840	)		(4,728	)
Prepaid expenses and other assets		17,747			(10,622	)
Accounts payable		27,715			40,119
Accrued settlement liabilities		(2,000	)		99,852
Other accrued liabilities		17,798			(7,919	)

Net cash provided by operating activities		376,992			230,191

Investing activities
Net purchases of property and equipment		(37,229	)		(13,430	)
Net cash paid for acquisitions		(67,921	)		(24,028	)
Net proceeds from sales (purchases) of strategic investments		137			(105	)
Purchases of marketable securities		(372,033	)		(334,880	)
Proceeds from maturities of marketable securities		271,423			218,404

Net cash used in investing activities		(205,623	)		(154,039	)

Financing activities
Net proceeds from issuance of common stock		477,690			99,422
Repurchases of Class A common stock		(246,102	)		(18,240	)
Repayment of notes receivable by employees		2,426			124
Excess tax benefits from stock-based compensation		338			—
Payments on assumed debt and other obligations		(4,625	)		(2,482	)

Net cash provided by financing activities		229,727			78,824

Increase in cash and cash equivalents		401,096			154,976
Cash and cash equivalents at beginning of period		1,437,276			858,592

Cash and cash equivalents at end of period	$	1,838,372		$	1,013,568

See accompanying notes.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006


1.	Summary of Significant Accounting Policies

The Company

Broadcom Corporation is a global leader in semiconductors for wired and wireless communications. The Company’s products enable the delivery of voice, video, data and multimedia to and throughout the home, the office and the mobile environment. The Company provides the industry’s broadest portfolio of state-of-the-art system-on-a-chip and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. Its diverse product portfolio includes solutions for digital cable, satellite and Internet Protocol (IP) set-top boxes and media servers; high definition television (HDTV); high definition DVD players and personal video recording (PVR) devices; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; System I/O^tm server solutions; broadband network and security processors; wireless and personal area networking; cellular communications; mobile multimedia and applications processors; mobile power management; and Voice over Internet Protocol (VoIP) gateway and telephony systems.

Basis of Presentation

The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“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 the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2005, included in the Company’s amended Annual Report on Form 10-K/A filed January 23, 2007 with the SEC.

The condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company’s consolidated financial position at June 30, 2006 and December 31, 2005, and the consolidated results of its operations for the three and six months ended June 30, 2006 and 2005, and the consolidated cash flows for the six months ended June 30, 2006 and 2005. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for future quarters or the full year.

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, tax contingencies, restructuring costs, litigation and other loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The preparation of the Company’s restated consolidated financial statements required management to make judgments with respect to the methodologies it selected to calculate the adjustments to the Company’s unaudited condensed consolidated financial statements and estimates and assumptions regarding the application of those methodologies. These judgments, estimates and assumptions affected the amounts of additional

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

deferred compensation (recorded prior to 2006) and additional stock-based compensation expense that the Company recorded in 2005 and the six months ended June 30, 2006, and the application of alternative methodologies, estimates and assumptions could have resulted in materially different amounts.

Revenue Recognition

The Company’s net revenue is generated principally by sales of its semiconductor products. The Company derives the remaining balance of its net revenue predominantly from software licenses, development agreements, support and maintenance agreements and cancellation fees. In addition, the majority of the Company’s sales occur through the efforts of its direct sales force. The remaining balance of its sales occurs through distributors.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Sales of semiconductor products		98.5	%		98.5	%		99.0	%		98.5	%
Other		1.5			1.5			1.0			1.5

		100.0	%		100.0	%		100.0	%		100.0	%


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Sales made through direct sales force		83.0	%		84.8	%		82.6	%		85.3	%
Sales made through distributors		17.0			15.2			17.4			14.7

		100.0	%		100.0	%		100.0	%		100.0	%

In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”) and SAB No. 104, Revenue Recognition (“SAB 104”), the Company recognizes product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) 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, the Company does not recognize revenue until all customer acceptance requirements have been met, when applicable. A portion of the Company’s sales are made through distributors under agreements allowing for pricing credits and/or rights of return. Product revenue on sales made through these distributors is not recognized until the distributors ship the product to their customers, at which time the terms of the sale become fixed and determinable. The Company records reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time.

In arrangements that include a combination of hardware and software products that are also sold separately, where software is more than incidental and essential to the functionality of the product being sold, the Company follows the guidance in Emerging Issues Task Force (“EITF”) Issue No. 03-05, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software, accounts for the entire arrangement as a sale of software and software-related items, and follows the revenue recognition criteria in Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), and related interpretations.

Revenue under development agreements is recognized when applicable contractual milestones have been met, including deliverables, and in any case, does not exceed the amount that would be recognized using the

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

percentage-of-completion method in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Revenue from software licenses and maintenance agreements is recognized in accordance with the provisions of SOP 97-2 as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Revenue from cancellation fees is recognized when cash is received from the customer.

Inventory

Inventory consists of work in process and finished goods and is stated at the lower of cost (first-in, first-out) or market. The Company establishes inventory reserves for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. Shipping and handling costs are classified as a component of cost of revenue in the consolidated statements of operations.

Rebates

The Company accounts for rebates in accordance with Financial Accounting Standards Board (“FASB”) EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), and, accordingly, records reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms included in the Company’s various rebate agreements.

Warranty

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

Stock-Based Compensation

The Company 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. The Company also has an employee stock purchase plan for all eligible employees. Effective January 1, 2006 the Company adopted SFAS 123R, which requires all share-based payments to employees, including grants of employee stock options, restricted stock units and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition. SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under previous literature. This requirement may reduce future net operating cash flows and increase net financing cash flows. In March 2005 the SEC issued SAB No. 107, Share-Based Payment (“SAB 107”), which provides guidance regarding the interaction of SFAS 123R and certain SEC rules and regulations. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

The Company adopted SFAS 123R using the modified-prospective method of recognition of compensation expense related to share-based payments. The Company’s unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2006 reflect the impact of adopting SFAS 123R. In accordance with the modified prospective transition method, the Company’s unaudited condensed consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award 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 and the expected volatility of the Company’s stock price. Although the Black-Scholes model meets the requirements of SFAS 123R and SAB 107, the fair values generated by the model may not be indicative of the actual fair values of the Company’s awards, as it does not consider other factors important to those share-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

On November 10, 2005 the FASB issued Staff Position No. SFAS 123R-3, Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards (“SFAS 123R-3”). The Company has elected to adopt the alternative transition method provided in SFAS 123R-3 for calculating the tax effects of stock-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee stock-based compensation expense, and to determine the subsequent impact on the APIC Pool and unaudited condensed consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that were outstanding at the Company’s adoption of SFAS 123R. In addition, in accordance with SFAS 123R, SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), and EITF Topic D-32, Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations, the Company has elected to recognize excess income tax benefits from stock option exercises in additional paid-in capital only if an incremental income tax benefit would be realized after considering all other tax attributes presently available to the Company.

Prior to the adoption of SFAS 123R, the Company accounted for share-based payment awards to employees in accordance with APB 25 and related interpretations, and had adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. In accordance with APB 25, stock-based compensation expense was not recorded in connection with share-based payment awards granted with exercise prices equal to or greater than the fair market value of the Company’s Class A common stock on the date of grant, unless certain modifications were subsequently made. The Company recorded deferred compensation in connection with stock options granted, as well as stock options assumed in acquisitions, with exercise prices less than the fair market value of the Class A common stock on the date of grant or assumption in the case of acquisitions. The amount of such deferred compensation per share was equal to the excess of the fair market value over the exercise price on such date. The Company recorded deferred compensation in connection with restricted stock units equal to the fair market value of the Class A common stock on the date of grant. Recorded deferred compensation was recognized as stock-based compensation expense ratably over the applicable vesting periods, which are generally deemed to be the applicable service periods. In accordance with the provisions of SFAS 123R, as of January 1, 2006, all deferred compensation previously recorded has been eliminated with a corresponding reduction in additional paid-in capital.

Net Income Per Share

Net income per share (basic) is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Net income per share (diluted) is calculated by adjusting outstanding shares, assuming any dilutive effects of options and restricted stock units calculated using the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company’s Class A common stock results in a greater dilutive effect from outstanding options and restricted stock units. Additionally, the exercise of employee stock options and the vesting of restricted stock units results in a greater dilutive effect on net income per share.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Business Enterprise Segments

The Company operates in one reportable operating segment, wired and wireless broadband communications. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Although the Company had four operating segments at June 30, 2006, under the aggregation criteria set forth in SFAS 131 the Company operates in only one reportable operating segment, wired and wireless broadband communications.

Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas:


	•	the nature of products and services;

	•	the nature of the production processes;

	•	the type or class of customer for their products and services; and

	•	the methods used to distribute their products or provide their services.

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


	•	the sale of integrated circuits is the only material source of revenue for each of its four operating segments;

	•	the integrated circuits sold by each of its operating segments use the same standard CMOS manufacturing processes;

	•	the integrated circuits marketed by each of its operating segments are sold to one type of customer: manufacturers of wired and wireless communications equipment, which incorporate the Company’s integrated circuits into their electronic products; and

	•	all of its integrated circuits are sold through a centralized sales force and common wholesale distributors.

All of the Company’s operating segments share similar economic characteristics as they have a similar long term business model, operate at similar gross margins, and have similar research and development expenses and similar selling, general and administrative expenses. The causes for variation among each of the operating segments are the same and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. The number and composition of employees and the amounts and types of tools and materials required are similar for each operating segment. Finally, even though the Company periodically reorganizes its operating segments based upon changes in customers, end markets or products, acquisitions, long-term growth strategies, and the experience and bandwidth of the senior executives in charge, the common financial goals for each operating segment remain constant.

Because the Company meets each of the criteria set forth in SFAS 131 and its four operating segments as of June 30, 2006 share similar economic characteristics, the Company aggregates its results of operations into one reportable operating segment.

Reclassifications

Certain amounts in the 2005 unaudited condensed consolidated financial statements have been reclassified to conform with the current period presentation.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


2.	Restatement of Unaudited Condensed Consolidated Financial Statements

Broadcom Corporation recently completed a voluntary review of the Company’s equity award practices. The voluntary review, which commenced in May 2006 and covered all grants of options to purchase shares of the Company’s Class A or Class B common stock (“stock options” or “options”) and other equity awards made since the Company’s initial public offering in April 1998, was directed by the Audit Committee of the Board of Directors. The voluntary review consisted of two components: (1) an equity award review to determine whether the Company used appropriate measurement dates for option grants and other equity awards made under its extensive employee equity award programs, which was conducted with the assistance of outside legal counsel Irell & Manella LLP and forensic accountants FTI Consulting Inc., and (2) an investigation of the conduct and performance of Broadcom’s officers, employees and directors who were involved in the stock option granting process, which was conducted with the assistance of independent legal counsel Kaye Scholer LLP and forensic accountants LECG, LLC.

Based on the results of the equity award review, the Audit Committee concluded that, pursuant to APB 25 and related interpretations, the accounting measurement dates for most of the stock options granted between June 1998 and May 2003, covering options to purchase 232.9 million shares of the Company’s Class A or Class B common stock, differed from the measurement dates previously used for such awards. As a result, revised measurement dates were applied to the affected option grants and the Company recorded a total of $2.259 billion in additional stock-based compensation expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being recorded over the service period relating to each option, typically four years, with approximately 95% of the expense being recorded in years prior to 2004.

As a consequence of these adjustments, the Company’s audited consolidated financial statements and related disclosures for the three years ended December 31, 2005, the unaudited quarterly financial information for interim periods of 2005 and 2004, and unaudited condensed consolidated financial statements for the three months ended March 31, 2006 have been restated. The Company has also restated the stock-based compensation expense footnote information calculated under SFAS 123 and SFAS 148 under the disclosure-only alternatives of those pronouncements for the years 2003 through 2005 and for the quarterly periods of 2005 and 2004. This restated financial and footnote information is included in the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006 filed with the SEC today. The adjustments did not affect the Company’s previously-reported cash, cash equivalents or marketable securities balances in any of the restated periods.

Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K previously filed by Broadcom, the related opinions of the Company’s independent registered public accounting firm, and all earnings press releases and similar communications issued by Broadcom, for all periods ended on or before March 31, 2006 should not be relied upon and are superseded in their entirety by the information in the amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and the amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006 filed with the SEC today.

The amounts of the adjustments the Company recorded for the years 1998 through 2005 were calculated pursuant to APB 25. The Company adopted SFAS 123R effective January 1, 2006, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their respective grant date fair values. As a result, the $14.3 million of additional stock-based compensation expense that the Company’s recorded in connection with its equity award review in the three months ended March 31, 2006 is calculated pursuant to SFAS 123R.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes additional stock-based compensation expense and related tax adjustments resulting from the review of the Company’s equity award practices on a quarterly basis for 2005 and the three months ended March 31, 2006:


	Three Months Ended
	March 31,			June 30,		September 30,		December 31,		March 31,
	2005			2005		2005		2005		2006(1)
	(In thousands)

Additional stock-based compensation expense	$	12,845		$	11,599	$	10,362	$	7,205	$	14,295
Other tax adjustments		223			441		1,084		881		2,893

Additional operating expenses		13,068			12,040		11,446		8,086		17,188
Income tax expense (benefit)		(8,255	)		8,255		—		—		—

Net adjustments	$	4,813		$	20,295	$	11,446	$	8,086	$	17,188


(1)		These amounts are not included in the total additional stock-based compensation expense and related tax adjustments recorded for the years 1998 through 2005 discussed above because they are calculated in accordance with SFAS 123R, which the Company adopted effective January 1, 2006.

The following table summarizes the impact of the additional stock-based compensation expense and related income tax adjustments (but not “other tax adjustments”) resulting from the review of the Company’s equity award practices on previously reported stock-based compensation expense on a quarterly basis for 2005 and the three months ended March 31, 2006:


	Stock-Based Compensation Expense
	As Reported		Adjustments		As Restated
	(In thousands)

Three months ended March 31, 2005	$	11,294	$	4,590	$	15,884
Three months ended June 30, 2005		14,548		19,854		34,402
Three months ended September 30, 2005		16,584		10,362		26,946
Three months ended December 31, 2005		17,578		7,205		24,783

Year ended December 31, 2005	$	60,004	$	42,011	$	102,015

Three months ended March 31, 2006	$	93,691	$	14,295	$	107,986

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Impact of the Additional Stock-Based Compensation Expense-Related Adjustments on the Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Statements of Operations

The following tables present the impact of the additional stock-based compensation expense-related adjustments on the Company’s previously-reported unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2005:


	Three Months Ended									Six Months Ended
	June 30, 2005									June 30, 2005
	As Reported			Adjustments			As Restated			As Reported		Adjustments			As Restated
	(In thousands, except per share data)

Net revenue	$	604,861		$	—		$	604,861		$	1,155,206	$	—		$	1,155,206
Cost of revenue		283,455			637			284,092			549,571		1,340			550,911

Gross profit		321,406			(637	)		320,769			605,635		(1,340	)		604,295
Operating expense:
Research and development		153,634			8,357			161,991			299,504		17,071			316,575
Selling, general and administrative		61,853			3,046			64,899			120,250		6,697			126,947
Amortization of purchased intangible assets		1,040			—			1,040			1,952		—			1,952
Settlement costs		110,000			—			110,000			110,000		—			110,000
In-process research and development		—			—			—			6,652		—			6,652

Income (loss) from operations		(5,121	)		(12,040	)		(17,161	)		67,277		(25,108	)		42,169
Interest income, net		10,678			—			10,678			18,636		—			18,636
Other income, net		679			—			679			777		—			777

Income (loss) before income taxes		6,236			(12,040	)		(5,804	)		86,690		(25,108	)		61,582
Provision (benefit) for income taxes		(8,825	)		8,255			(570	)		2,447		—			2,447

Net income (loss)	$	15,061		$	(20,295	)	$	(5,234	)	$	84,243	$	(25,108	)	$	59,135

Net income (loss) per share (basic)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.17	$	(0.05	)	$	0.12

Net income (loss) per share (diluted)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.16	$	(0.05	)	$	0.11

Weighted average shares (basic)		502,353			—			502,353			499,779		—			499,779

Weighted average shares (diluted)		544,796			(42,443	)		502,353			540,967		(4,109	)		536,858

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents details of the total stock-based compensation expense that is included in each functional line item in the unaudited condensed consolidated statements of operations above:


	Three Months Ended						Six Months Ended
	June 30, 2005						June 30, 2005
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
	(In thousands)

Cost of revenue	$	394	$	613	$	1,007	$	762	$	1,304	$	2,066
Research and development		9,915		7,957		17,872		16,940		16,469		33,409
Selling, general and administrative		4,239		3,029		7,268		8,140		6,671		14,811

	$	14,548	$	11,599	$	26,147	$	25,842	$	24,444	$	50,286

Consolidated Balance Sheet

The net impact of the additional stock-based compensation expense-related adjustments on the Company’s previously-reported consolidated balance sheet as of December 31, 2005 was an increase in wages and related benefits and a decrease in total shareholders’ equity for related tax adjustments of $4.9 million as of December 31, 2005.

Stock-Based Compensation in Accordance with SFAS 123

In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below is a pro forma illustration of the effect on net income (loss) and net income (loss) per share information for the three and six months ended June 30, 2005, computed as if the Company had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines provided by APB 25. In addition, the table below presents the impact of the additional stock-based compensation expense-related adjustments on the Company’s previously-reported pro forma illustrations for the stated periods:


	Three Months Ended									Six Months Ended
	June 30, 2005									June 30, 2005
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated
	(In thousands, except per share data)

Net income (loss)	$	15,061		$	(20,295	)	$	(5,234	)	$	84,243		$	(25,108	)	$	59,135
Add: Stock-based compensation expense included in net income (loss)		14,548			19,854			34,402			25,842			24,444			50,286
Deduct: Stock-based compensation expense determined under the fair value method		(108,565	)		(49,368	)		(157,933	)		(250,569	)		(73,287	)		(323,856	)

Net loss — pro forma	$	(78,956	)	$	(49,809	)	$	(128,765	)	$	(140,484	)	$	(73,951	)	$	(214,435	)

Net income (loss) per share (basic)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.17		$	(0.05	)	$	0.12

Net income (loss) per share (diluted)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.16		$	(0.05	)	$	0.11

Net loss per share (basic and diluted) — pro forma	$	(0.16	)	$	(0.10	)	$	(0.26	)	$	(0.28	)	$	(0.15	)	$	(0.43	)

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


3.	Supplemental Financial Information

Inventory

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


	June 30,		December 31,
	2006		2005
	(In thousands)

Work in process	$	121,259	$	86,445
Finished goods		156,777		108,126

	$	278,036	$	194,571

Purchased Intangible Assets

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


	June 30, 2006							December 31, 2005
			Accumulated							Accumulated
	Gross		Amortization			Net		Gross		Amortization			Net
	(In thousands)

Completed technology	$	186,799	$	(156,400	)	$	30,399	$	156,099	$	(150,676	)	$	5,423
Customer relationships		49,266		(46,466	)		2,800		46,266		(45,228	)		1,038
Customer backlog		3,316		(3,316	)		—		3,316		(3,316	)		—
Other		7,614		(6,794	)		820		7,214		(6,343	)		871

	$	246,995	$	(212,976	)	$	34,019	$	212,895	$	(205,563	)	$	7,332

At June 30, 2006 the unamortized balance of purchased intangible assets that will be amortized to future cost of revenue and other operating expenses was $30.4 million and $3.6 million, respectively. This expense will be amortized ratably through 2011. If the Company acquires additional purchased intangible assets in the future, its cost of revenue or other operating expenses will be increased by the amortization of those assets.

The following table presents details of the amortization of purchased intangible assets by expense category:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(In thousands)

Cost of revenue	$	2,744	$	3,244	$	5,725	$	5,534
Operating expense		605		1,040		1,688		1,952

	$	3,349	$	4,284	$	7,413	$	7,486

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accrued Liabilities

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


	June 30,		December 31,
	2006		2005
	(In thousands)

Accrued rebates	$	110,938	$	99,645
Accrued taxes		70,761		68,318
Warranty reserve		18,272		14,131
Restructuring liabilities		7,335		8,083
Accrued settlement liabilities		2,048		2,047
Other		48,274		41,439

	$	257,628	$	233,663

Long-Term Liabilities

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


	June 30,		December 31,
	2006		2005
	(In thousands)

Restructuring liabilities	$	5,952	$	8,138
Accrued settlement liabilities		2,000		4,000

	$	7,952	$	12,138

Accrued Rebate Activity

The following table summarizes the activity related to accrued rebates during the six months ended June 30, 2006 and 2005:


	Six Months Ended
	June 30,
	2006			2005
	(In thousands)

Beginning balance	$	99,645		$	93,222
Charged as a reduction to revenue		111,123			105,199
Payments		(99,830	)		(109,731	)

Ending balance	$	110,938		$	88,690

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Warranty Reserve Activity

The following table summarizes the activity related to warranty reserves during the six months ended June 30, 2006 and 2005:


	Six Months Ended
	June 30,
	2006			2005
	(In thousands)

Beginning balance	$	14,131		$	19,185
Charged to costs and expenses		4,592			—
Acquired through acquisition		878			55
Payments		(1,329	)		(1,728	)

Ending balance	$	18,272		$	17,512

Restructuring Activity

The following table summarizes the activity related to the Company’s current and long-term restructuring liabilities during the six months ended June 30, 2006:


	Six Months Ended
	June 30, 2006
	(In thousands)

Beginning balance	$	16,221
Cash payments(1)		(2,934	)

Ending balance	$	13,287


(1)		These cash payments relate to net lease payments on excess facilities and non-cancelable lease costs. The consolidation of excess facilities costs will be paid over the respective lease terms through 2010.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Computation of Net Income (Loss) Per Share

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
				(Restated)						(Restated)
	(In thousands, except per share data)

Numerator: Net income (loss)	$	106,086		$	(5,234	)	$	223,784		$	59,135

Denominator: Weighted average shares outstanding		547,969			502,994			543,588			500,483
Less: Unvested common shares outstanding		(179	)		(641	)		(209	)		(704	)

Denominator for net income (loss) per share (basic)		547,790			502,353			543,379			499,779
Effect of dilutive securities:
Unvested common shares outstanding		73			—			154			680
Stock options, restricted stock units and certain other equity compensation instruments		46,683			—			54,342			36,399

Denominator for net income per share (diluted)		594,546			502,353			597,875			536,858

Net income (loss) per share (basic)	$	.19		$	(.01	)	$	.41		$	.12

Net income (loss) per share (diluted)	$	.18		$	(.01	)	$	.37		$	.11

At June 30, 2006 common share equivalents were calculated based on (i) stock options to purchase 129.7 million shares of Class A or Class B common stock outstanding with a weighted average exercise price of $22.17 per share and (ii) 13.5 million restricted stock units that entitle the holder to receive a like number of freely transferable shares of Class A common stock as the awards vest.


4.	Business Combinations

In March 2006 the Company completed the acquisition of Sandburst Corporation, a fabless semiconductor company specializing in the design and development of packet switching and routing systems-on-a-chip (“SoCs”) that are deployed in enterprise core and metropolitan Ethernet networks. In connection with this acquisition, the Company paid $72.0 million in cash. In addition, the Company assumed unvested stock options to purchase 0.1 million shares that had a fair value of $4.4 million in accordance with SFAS 123R. The Company recorded a one-time charge of $5.2 million for purchased in-process research and development (“IPR&D”) expense. The amount allocated to IPR&D in the three months ended March 31, 2006 was determined through established valuation techniques used in the high technology industry and was expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed. The Company also assumed $7.6 million in net liabilities and recorded $40.2 million in goodwill, $30.7 million of completed technology and $3.4 million in other purchased intangible assets in connection with this acquisition.

The Company’s primary reasons for the Sandburst acquisition were to enter into the design and development of packet switching and routing SoCs that are deployed in enterprise core and metropolitan Ethernet networks, reduce the time required to develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement the Company’s existing network switch product offerings, augment its engineering workforce, and enhance its technological capabilities. Certain of the cash consideration in the above acquisition is currently held in escrow pursuant to the terms of the acquisition agreement.

The unaudited condensed consolidated financial statements for the six months ended June 30, 2006 include the results of operations of Sandburst commencing as of the acquisition date. No supplemental pro forma

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

information is presented for the acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.


5.	Income Taxes

The Company recorded tax provisions of $4.7 million and $8.1 million for the three and six months ended June 30, 2006, respectively, and a tax benefit of $0.6 million and a tax provision of $2.4 million for the three and six months ended June 30, 2005, respectively. The effective tax rates for the Company were 4.2% and 3.5% for the three and six months ended June 30, 2006, respectively, and 9.8% and 4.0% for the three and six months ended June 30, 2005, respectively.

The difference between the Company’s effective tax rates and the 35% federal statutory rate resulted primarily from domestic losses recorded without income tax benefit, foreign earnings taxed at rates lower than the federal statutory rate and certain foreign tax benefits recorded for the three and six months ended June 30, 2006 and June 30, 2005. During the three months ended June 30, 2005 the Company’s Singapore operations were granted certain additional tax incentives, which reduced the Company’s tax provision for the three months ended June 30, 2005 by approximately $4.6 million.

The Company utilizes the liability method of accounting for income taxes as set forth in SFAS 109. The Company records net deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. SFAS 109 further states that 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 the Company’s recent cumulative losses in the U.S. and certain foreign jurisdictions, and the full utilization of its loss carryback opportunities, the Company has concluded that a full valuation allowance should be recorded in such jurisdictions. In certain other foreign jurisdictions where the Company does not have cumulative losses, the Company recorded net deferred tax assets of $1.3 million and $1.4 million at June 30, 2006 and December 31, 2005, respectively, in accordance with SFAS 109.


6.	Shareholders’ Equity

Common Stock

In June 2006 the Company filed Second Amended and Restated Articles of Incorporation (the “Restated Articles”) with the California Secretary of State. The Restated Articles (i) increased the aggregate number of shares of Class A common stock that the Company is authorized to issue from 800,000,000 shares to 2,500,000,000 shares, (ii) clarified that the Company is only authorized to issue 6,432,161 shares of preferred stock and (iii) eliminated all statements referring to the rights, preferences, privileges and restrictions of Series A, Series B, Series C, Series D and Series E preferred stock, all outstanding shares of which automatically converted into shares of Class B common stock upon consummation of its initial public offering.

Share Repurchase Program

In February 2005 the Company’s Board of Directors authorized a program to repurchase shares of the Company’s Class A common stock. The Board approved the repurchase of shares having an aggregate value of up to $250 million from time to time over a period of one year, depending on market conditions. In January 2006 the Board approved an amendment to the share repurchase program extending the program through January 26, 2007 and authorizing the repurchase of additional shares of the Company’s Class A common stock having a total market value of up to $500 million from time to time during the period beginning January 26, 2006 and ending January 26, 2007. From the time the program was first implemented through June 30, 2006, the Company repurchased 11.8 million shares at a weighted average price of $33.94 per share. At June 30, 2006, $256.2 million

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

remained available to repurchase shares under the authorized program, as amended. On July 24, 2006 the Company’s Board of Directors decided to suspend purchasing of shares of Class A common stock under the share repurchase program.

Stock Split

The Company effected a three-for-two stock split of its Class A and Class B common stock on February 21, 2006 through the payment of a stock dividend of one additional share of Class A or Class B common stock, as applicable, for every two shares of such class held on the record date of February 6, 2006. All historical share numbers and per share amounts contained in these notes and in the unaudited condensed consolidated financial statements have been retroactively restated to reflect this change in the Company’s capital structure.

Comprehensive Income

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


	Six Months Ended
	June 30,
	2006			2005
				(Restated)
	(In thousands)

Net income	$	106,086		$	59,135
Other comprehensive income (loss):
Reclassification adjustment for net realized loss included in net income		—			1
Translation adjustments		(399	)		(34	)

Total comprehensive income	$	105,687		$	59,102

Accumulated other comprehensive income reflected on the unaudited condensed consolidated balance sheets at June 30, 2006 and December 31, 2005 represents accumulated translation adjustments.


7.	Employee Benefit Plans

Stock Incentive Plans

The Board of Directors or the plan administrator determines eligibility, vesting schedules and exercise prices for options granted under the plans. Options granted generally have a term of 10 years, and in the case of newly-hired employees generally vest and become exercisable at the rate of 25% after one year of service and ratably on a monthly basis over a period of 36 months thereafter; subsequent option grants to existing employees generally vest and become exercisable ratably on a monthly basis over a period of 48 months measured from the date of grant. Certain options that have been granted under the Company’s 1998 Plan or that were assumed by the Company in connection with certain of its acquisitions provide that the vesting of the options granted thereunder will accelerate in whole or in part upon the occurrence of certain specified events.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In addition, the Company grants restricted stock units as part of its regular annual employee equity compensation review program as well as to new hires and non-employee members of the Board of Directors. Restricted stock units are share awards that entitle the holder to receive freely tradable shares of the Company’s Class A common stock upon vesting. Generally, restricted stock units vest ratably on a quarterly basis over 16 quarters from the date of grant.

Combined Incentive Plan Information

Option activity under the Company’s stock incentive plans in the six months ended June 30, 2006 is set forth below:


	Options Outstanding
						Weighted
						Average		Weighted
						Exercise		Average
	Number of			Price Range		Price		Fair Value
	Shares			per Share		per Share		per Share
								(Restated)
	(In thousands)

Balance at December 31, 2005		142,108		$	.01 - $81.50	$	19.00	$	18.57
Options granted under the 1998 Plan		16,786			29.33 - 48.63		41.09		12.49
Options assumed in acquisition		107			5.26 - 40.49		7.66		41.31
Options cancelled		(1,717	)		.01 - 46.58		24.02		11.65
Options exercised		(27,539	)		.01 - 38.17		17.21		19.49

Balance at June 30, 2006		129,745			.01 - 81.50		22.17		17.68

At June 30, 2006, outstanding options to purchase 70.3 million shares were exercisable with an average per share exercise price of $18.00. The weighted average remaining contractual life of options outstanding and of options exercisable as of June 30, 2006 were 7.1 years and 6.1 years, respectively.

The total pretax intrinsic value of options exercised during the three and six months ended June 30, 2006 was $112.3 million and $678.5 million, respectively. This intrinsic value represents the difference between the fair market value of the Company’s Class A common stock on the date of exercise and the exercise price of each option. Based on the closing price of the Company’s Class A common stock of $30.33 on June 30, 2006, the total pretax intrinsic value of all outstanding options was $1.242 billion. The total pretax intrinsic value of exercisable options was $875.1 million.

Restricted stock unit activity under the 1998 Plan in the six months ended June 30, 2006 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, 2005		7,090		$	23.48
Restricted stock units granted under the 1998 Plan		8,208			41.64
Restricted stock units cancelled		(253	)		28.90
Restricted stock units vested		(1,575	)		28.90

Balance at June 30, 2006		13,470			33.81

The total pretax intrinsic value of restricted stock units vested during the three and six months ended June 30, 2006 was $42.8 million and $66.9 million, respectively. Based on the closing price of the Company’s Class A

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

common stock of $30.33 on June 30, 2006, the total pretax intrinsic value of all outstanding restricted stock units was $408.5 million.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan for all eligible employees. Under the plan, employees may purchase shares of the Company’s Class A common stock at six-month intervals at 85% of fair market value (calculated in the manner provided in the plan). Employees purchase such stock using payroll deductions, which may not exceed 15% of their total cash compensation. The plan imposes certain limitations upon an employee’s right to acquire Class A common stock, including the following: (i) no employee may purchase more than 9,000 shares of Class A common stock on any one purchase date and (ii) no employee may be granted rights to purchase more than $25,000 worth of Class A common stock for each calendar year in which such rights are at any time outstanding. The Company issued 1.6 million shares under this plan in the three months ended June 30, 2006. At June 30, 2006, 7.4 million shares were available for future issuance under this plan.

Stock-Based Compensation Expense

The following table presents details of total stock-based compensation expense by functional line item:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006(1)		2005		2006(1)		2005
			(Restated)				(Restated)
	(In thousands)

Cost of revenue	$	7,105	$	1,007	$	13,391	$	2,066
Research and development		86,420		17,872		156,425		33,409
Selling, general and administrative		38,940		7,268		70,635		14,811

	$	132,465	$	26,147	$	240,451	$	50,286


(1)		The amounts included in the three and six months ended June 30, 2006 reflect the adoption of SFAS 123R. In accordance with the modified prospective transition method, the Company’s unaudited condensed consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

The weighted average fair values per share of stock options granted in connection with the Company’s stock incentive plans have been estimated utilizing the following assumptions:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Expected life (in years)		3.20			3.06			3.17			3.23
Volatility		0.35			0.39			0.35			0.41
Risk-free interest rate		4.99	%		4.01	%		4.93	%		3.96	%
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%

The weighted average fair values per share of the restricted stock units awarded in the six months ended June 30, 2006 and 2005 were $41.64 and $21.37, respectively, calculated based on the fair market value of the Company’s Class A common stock on the respective grant dates.

The adoption of SFAS 123R will continue to have a significant adverse impact on the Company’s reported results of operations, although it should not have a material impact on its overall financial position. The amount of unearned stock-based compensation currently estimated to be expensed in the period 2006 through 2011 related to unvested share-based payment awards at June 30, 2006 is $1.054 billion. Of this amount, $218.1 million, $390.7 million, $257.8 million, $159.3 million and $27.9 million are currently estimated to be recorded in the

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

remainder of 2006, in 2007, 2008, 2009 and thereafter, respectively. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 1.6 years. Approximately 97% of the total unearned stock-based compensation at June 30, 2006 will be expensed by the end of 2009. If there are any modifications or cancellations of the underlying unvested securities, the Company 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 the Company grants additional equity awards to employees or assumes unvested equity awards in connection with acquisitions.

The Company granted employee stock options to purchase 12.4 million shares of its common stock and 6.2 million restricted stock units in the second quarter of 2006 as part of the Company’s regular annual equity compensation review program. The Company will recognize up to $415.4 million of stock-based compensation expense, net of forfeitures, related to those awards. This unearned stock-based compensation is being amortized ratably over the service periods of the underlying stock options and restricted stock units, generally 48 months and 16 quarters, respectively.

In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below is a pro forma illustration of the effect on net income (loss) and net income (loss) per share computed as if the Company had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines provided by APB 25 in the three and six months ended June 30, 2005:


	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
	(Restated)			(Restated)
	(In thousands, except per share data)

Net income (loss) — as reported	$	(5,234	)	$	59,135
Add: Stock-based compensation expense included in net income (loss) — as reported		34,402			50,286
Deduct: Stock-based compensation expense determined under the fair value method		(157,933	)		(323,856	)

Net loss — pro forma	$	(128,765	)	$	(214,435	)

Net income (loss) per share (basic) — as reported	$	(0.01	)	$	0.12

Net income (loss) per share (diluted) — as reported	$	(0.01	)	$	0.11

Net loss per share (basic and diluted) — pro forma	$	(0.26	)	$	(0.43	)


8.	Litigation

The following describes the material legal proceedings, examinations and other matters in which the Company and its subsidiaries are involved that: (1) were pending as of December 31, 2005; (2) were terminated during the period from December 31, 2005 through January 19, 2007; or (3) are pending as of January 19, 2007. Thus, the description of a matter may include developments that occurred since December 31, 2005, as well as those that occurred during 2005. The matters include legal proceedings relating to the restatement of our consolidated financial statements, such as class action securities lawsuits, shareholder derivative actions and governmental proceedings.

Intellectual Property Proceedings. In May 2005 the Company filed a complaint in the U.S. International Trade Commission (“ITC”) asserting that Qualcomm Incorporated (“Qualcomm”) engaged in unfair trade practices by importing integrated circuits and other products that infringe, both directly and indirectly, five of the Company’s patents relating generally to wired and wireless communications. The complaint seeks an exclusion order to bar importation of those Qualcomm products into the United States and a cease and desist order to bar further sales of infringing Qualcomm products that have already been imported. In June 2005 the ITC instituted

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

an investigation of Qualcomm based upon the allegations made in the Company’s complaint. The investigation was later limited to asserted infringement of three Broadcom patents. At Qualcomm’s request, the U.S. Patent and Trademark Office (“USPTO”) is reexamining one of the patents. In December 2006 the full Commission upheld the ITC administrative law judge’s October 2006 Initial Determination finding all three patents valid and one infringed. The Commission is currently considering the appropriate remedies for Qualcomm’s infringement. A decision is expected in March 2007.

In May 2005 the Company filed two complaints against Qualcomm in the United States District Court for the Central District of California. The first complaint asserts that Qualcomm has infringed, both directly and indirectly, the same five patents asserted by Broadcom in the ITC complaint. The District Court complaint seeks preliminary and permanent injunctions against Qualcomm and the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. In July 2005 Qualcomm answered the complaint and asserted counterclaims seeking a declaratory judgment that the Company’s patents are invalid and not infringed. In December 2005 the court transferred the causes of action relating to two of the patents to the United States District Court for the Southern District of California. Pursuant to statute, the court has stayed the remainder of this action pending the outcome of the ITC action.

The second District Court complaint asserts that Qualcomm has infringed, both directly and indirectly, five other Broadcom patents relating generally to wired and wireless communications and multimedia processing technologies. The complaint seeks preliminary and permanent injunctions against Qualcomm and the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. In July 2005 Qualcomm answered the second complaint and asserted counterclaims seeking a declaratory judgment that the Company’s patents are invalid and not infringed. In November 2006 Broadcom withdrew one of the patents from the case. In December 2006 the court granted a motion to stay proceedings on a second patent pending the outcome of a USPTO reexamination of that patent initiated at Qualcomm’s request. Trial has been set for May 2007.

In July 2005 Qualcomm filed a complaint against the Company in the United States District Court for the Southern District of California alleging that certain Broadcom products infringe, both directly and indirectly, seven Qualcomm patents relating generally to the transmission, reception and processing of communication signals, including radio signals and/or signals for wireless telephony. The complaint seeks a preliminary and permanent injunction against Broadcom as well as the recovery of monetary damages and attorneys’ fees. Qualcomm has subsequently withdrawn two patents from the case. The Company filed an answer in September 2005 denying the allegations in Qualcomm’s complaint and asserting counterclaims. The counterclaims seek a declaratory judgment that the seven Qualcomm patents are invalid and not infringed, and assert that Qualcomm has infringed, both directly and indirectly, six Broadcom patents relating generally to wired and wireless communications. The counterclaims seek preliminary and permanent injunctions against Qualcomm and the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. The Company has subsequently withdrawn two patents from the case. In January 2006 Qualcomm amended its complaint to seek treble damages for willful infringement. Discovery has been completed, and the court has scheduled a series of five trials in this case over the period March through August 2007.

In August 2005 Qualcomm filed a second complaint against the Company in the United States District Court for the Southern District of California alleging that Broadcom breached a contract relating to Bluetooth development and seeking a declaration that two of the Company’s patents relating to Bluetooth technology are invalid and not infringed. In March 2006 Qualcomm filed an amended complaint providing further details concerning the same causes of action. The Company filed an answer in April 2006 denying the allegations in the complaint and asserting counterclaims. The counterclaims assert that Qualcomm has infringed, both directly and indirectly, the same two Broadcom patents, and also allege breach of the Bluetooth contract by Qualcomm. Broadcom is seeking preliminary and permanent injunctions against Qualcomm and the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. Discovery has been completed, and trial has been set for March 2007.

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In October 2005 Qualcomm filed a third complaint against the Company in the United States District Court for the Southern District of California alleging that certain Broadcom products infringe, both directly and indirectly, two Qualcomm patents relating generally to the processing of digital video signals. The complaint seeks preliminary and permanent injunctions against the Company as well as the recovery of monetary damages and attorneys’ fees. The Company filed an answer in December 2005 denying the allegations in Qualcomm’s complaint and asserting counterclaims seeking a declaratory judgment that the two Qualcomm patents are invalid and not infringed. Discovery in the action has been completed, and trial is currently in progress.

In March 2006 Qualcomm filed a fourth complaint against Broadcom in the United States District Court for the Southern District of California alleging that the Company had misappropriated certain Qualcomm trade secrets and that certain Broadcom products infringe, both directly and indirectly, a patent related generally to orthogonal frequency division multiplexing technology. The complaint seeks preliminary and permanent injunctions against the Company as well as the recovery of monetary damages, including double damages, and attorneys’ fees. The Company filed an answer in May 2006 denying the allegations in Qualcomm’s complaint and asserting counterclaims. The counterclaims seek a declaratory judgment that the Qualcomm patent is invalid and not infringed, and assert that Qualcomm has infringed, both directly and indirectly, two Broadcom patents relating generally to video technology. The counterclaims seek preliminary and permanent injunctions against Qualcomm and the recovery of monetary damages, including treble damages for willful infringement, and attorneys’ fees. In June 2006 Qualcomm filed a motion for preliminary injunction against Broadcom. In October 2006 the court entered a stipulated order for preliminary injunction prohibiting Broadcom from using certain documents pending trial on the merits of the case. The Company amended its answer to add a counterclaim asserting that Qualcomm has misappropriated certain Broadcom trade secrets, and Qualcomm amended its complaint to add three individual Broadcom employees as defendants and include additional allegations of trade secret misappropriation. Discovery is ongoing, and trial has been set for October 2007.

Antitrust Proceedings. In July 2005 the Company filed a complaint against Qualcomm in the United States District Court for the District of New Jersey asserting that Qualcomm’s licensing and other practices related to cellular technology and products violate federal and state antitrust laws. The complaint also asserts causes of action based on breach of contract, promissory estoppel, fraud, and tortious interference with prospective economic advantage. In September 2005 the Company filed an amended complaint in the action also challenging Qualcomm’s proposed acquisition of Flarion Technologies, Inc. under the antitrust laws and asserting violations of various state unfair competition and unfair business practices laws. In August 2006 the court granted Qualcomm’s motion to dismiss the complaint. In September 2006 Broadcom filed a notice of appeal to the United States Court of Appeals for the Third Circuit, where briefing is under way. No appellate hearing date has been set.

In October 2005 the Company and five other leading mobile wireless technology companies filed complaints with the European Commission requesting that the Commission investigate Qualcomm’s anticompetitive conduct related to the licensing of its patents and the sale of its chipsets for mobile wireless devices and systems. The Commission has commenced a preliminary investigation, and is determining whether to institute a formal investigation, of Qualcomm.

In June 2006 Broadcom and another leading mobile wireless technology company filed complaints with the Korean Fair Trade Commission requesting that the Commission investigate Qualcomm’s anticompetitive conduct related to the licensing of its patents and the sale of its chipsets for mobile wireless devices and systems. The Commission has instituted a formal investigation of Qualcomm.

Securities Litigation. In 2001 the Company and three of its current and former executive officers were served with a number of shareholder class action complaints alleging violations of the Securities Exchange Act of 1934, as amended. The essence of the allegations was that the defendants intentionally failed to disclose and properly account for the financial impact of performance-based warrants assumed in connection with five acquisitions consummated in 2000 and 2001, which plaintiffs alleged had the effect of materially overstating the Company’s reported and future financial performance. The lawsuits were consolidated into a single action before the United

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

States District Court for the Central District of California entitled In re Broadcom Corp. Securities Litigation (the “Class Action”). The court issued an order certifying a class of all persons or entities who purchased or otherwise acquired publicly traded securities of the Company, or bought or sold options on the Company’s stock, between July 31, 2000 and February 26, 2001, with certain exceptions.

By a Stipulation of Settlement (the “Stipulation”) dated as of June 24, 2005, the parties agreed to settle the Class Action. Pursuant to the Stipulation, the Class Action has been dismissed with prejudice in exchange for an aggregate payment of $150.0 million (the “Settlement Fund”), which will be distributed to class members after the payment of the costs of administering the settlement and fees and costs awarded to plaintiffs’ counsel by the court. The Company’s insurance carriers paid $40.0 million of the Settlement Fund, and the balance was paid by the Company. As part of the settlement, the Company and the other Defendants continue to deny any liability or wrongdoing with respect to the claims raised in the Class Action. In September 2005 the court granted final approval of the Stipulation and entered final judgment and an order of dismissal thereon and made effective full releases by all class members of all claims relating to the matters asserted in the Class Action. In October 2005 two objectors to the settlement filed notices of appeal before the Ninth Circuit Court of Appeals from, among other things, the order granting final approval of the settlement and the final judgment and order of dismissal. In December 2005 one of the objectors decided to voluntarily dismiss its appeal, and the parties filed a stipulation with the Ninth Circuit Court of Appeals dismissing that appeal. The second objector also decided to voluntarily dismiss its appeal, and the parties filed a stipulation in January 2006 dismissing the final appeal. The settlement, final judgment and order of dismissal are now final and no longer subject to appeal.

In February 2002 an additional complaint, entitled Arenson, et al. v. Broadcom Corp., et al., was filed by 47 persons and entities in the Superior Court of the State of California for the County of Orange, against the Company and three of its current and former executive officers. The separate case, which asserted causes of action substantially identical to those asserted in the Class Action, was removed to the United States District Court for the Central District of California and consolidated with the Class Action for purposes of discovery. The Stipulation of Settlement in the Class Action provided to the Arenson plaintiffs the option of joining the class in the Class Action in exchange for dismissal of their claims in the separate case. In September 2005 each of the Arenson plaintiffs exercised that option. Accordingly, the Arenson plaintiffs are now bound by the terms of the Class Action settlement and the judgment in the Class Action. In October 2005 the parties filed a stipulation dismissing the Arenson action with prejudice.

In March 2006 a purported class action lawsuit was filed in the Superior Court of California, County of Orange, by a plaintiff who claims to be a shareholder of Broadcom. The lawsuit, entitled Jin v. Broadcom Corporation, et al. (Case No. 06 CC00057), named as defendants Broadcom, each of the members of our Board of Directors, certain Broadcom officers, and Henry T. Nicholas III, our co-founder. In May 2006 the plaintiff amended her complaint and added two plaintiffs, both purportedly Broadcom shareholders. The principal claims asserted in the amended complaint were that (a) disclosures in our March 27, 2006 proxy statement concerning the Second Amended and Restated Articles of Incorporation (the “Second Amended Articles”), which, among other things, increased the number of authorized shares of Broadcom’s Class A common stock, are incorrect and/or misleading; (b) Broadcom’s recent stock split, the recent amendment to our share repurchase program, and recent and proposed changes in the compensation of our non-employee directors constitute breaches of the defendants’ fiduciary duties; and (c) the defendants improperly dated Broadcom’s stock option grants to enhance defendants’ own profits on the exercise of such options. In June 2006 defendants removed the action to the United States District Court for the Central District of California (where it was assigned Case No. 06CV00573). The plaintiffs sought, and received, leave to file a further amended complaint that asserts only derivative claims on behalf of the Company. This case has now been consolidated with the other federal derivative lawsuits described below.

From May 2006 through August 2006, a number of purported Broadcom shareholders brought five putative shareholder derivative actions (the “Options Derivative Actions”) against Broadcom, our entire Board of Directors, certain current or former officers, and Henry T. Nicholas III, our co-founder, alleging that the defendants

BROADCOM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

improperly dated certain Broadcom employee stock option grants. Three 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)), and Ronconi v. Dull, et al. (Case No. SACV 06-771 R (CWx)) were filed in the United States District Court for the Central District of California. The District Court consolidated those actions and the Jin action described above by orders in August and October 2006, and the plaintiffs filed a consolidated amended complaint in November 2006. The remaining 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 financial statements. The plaintiffs seek, among other things, unspecified damages and disgorgement of profits from the alleged conduct, to be paid to Broadcom.

In November 2006 the defendants moved to dismiss the federal derivative action on the ground that the shareholder plaintiffs lack standing to assert claims on behalf of Broadcom. That motion is scheduled to be heard in February 2007. If the court does not grant the motion to dismiss, the individual defendants’ responses to the complaint will be due three weeks after resolution of the motion to dismiss. In January 2007 the Superior Court granted defendants’ motion to stay the state derivative action pending resolution of the prior-filed federal derivative action. The Company intends to vigorously defend each of the Options Derivative Actions.

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 its 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 “Options Class Actions”). The essence of the plaintiffs’ allegations is that Broadcom improperly backdated stock options, resulting in false or misleading disclosures concerning, among other things, Broadcom’s business and financial condition. Plaintiffs also allege that Broadcom failed to account for and pay taxes on stock options properly, that the individual defendants sold Broadcom stock while in possession of material nonpublic information, and that the defendants’ conduct caused the artificial inflation of Broadcom’s stock price and damages to the putative plaintiff class. The plaintiffs assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. In November 2006, the Court consolidated the Options Class Actions, appointed the New Mexico State Investment Council as lead class plaintiff, ordered the lead class plaintiff to file a consolidated complaint within 60 days after a restatement of the Company’s financial statements, and extended the deadline for the defendants to respond to the complaint to 60 days after the filing of the consolidated complaint. The Company intends to defend the consolidated action vigorously.

The Company has entered into indemnification agreements with each of its present and former directors and officers. Under these agreements, Broadcom is required to indemnify each such director or officer against expenses, including attorney’s fees, judgments, fines and settlements, paid by such individual in connection with the Class Action, the Arenson lawsuit, the Options Derivative Actions and Options Class Actions (other than indemnified liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest).

SEC Inquiry and United States Attorney’s Office Information Request. In June 2006 the Company received an informal request for information from the staff of the Los Angeles regional office of the Securities and Exchange Commission regarding its option granting practices. In December 2006 the SEC issued a formal order of investigation and a subpoena for the production of documents. The Company is cooperating with the SEC, but does not know when the inquiry and investigation will be resolved or what, if any, actions the SEC may require it to take as part of that resolution. Broadcom has also been informally contacted by the U.S. Attorney’s Office for the Central District of California and has been asked to produce on a voluntary basis documents, many of which

it previously provided to the SEC. The Company is cooperating with this request. Any action by the SEC, the U.S. Attorney’s Office or other governmental agency could result in civil or criminal sanctions against the Company and/or certain of its current or former officers, directors and/or employees.

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 the Company 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 Broadcom, which is cooperating fully with the ongoing investigation and the prosecution.

General. The Company and its 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 any future intellectual property litigation may require the Company to pay damages for past infringement or one-time license fees or running royalties, which could adversely impact gross profit and gross margins in future periods, or could prevent Broadcom from manufacturing or selling some of its products or limit or restrict the type of work that employees involved in such litigation may perform for Broadcom. From time to time the Company 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 Broadcom to incur substantial settlement payments and costs. In addition, the settlement of any intellectual property proceeding may require the Company to obtain a license under the other party’s intellectual property rights that could require one-time license fees and/or royalty payments in the future and/or to grant a license to certain of the Company’s intellectual property rights to the other party under a cross-license agreement. If any of those events were to occur, Broadcom’s business, financial condition and results of operations could be materially and adversely affected.


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 amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and subsequent reports on Forms 10-Q/A, 10-Q and 8-K, which discuss our business in greater detail.

Financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K previously filed by Broadcom, the related opinions of our independent registered public accounting firm, and all earnings press releases and similar communications issued by us, for all periods ended on or before March 31, 2006 should not be relied upon and are superseded in their entirety by the information in the amended Annual Report on Form 10-K/A for the year ended December 31, 2005, the amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006 and this Report.

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

Purpose of Certain Restated Information Contained in this Quarterly Report on Form 10-Q

We recently completed a voluntary review of our equity award practices. The voluntary review, which commenced in May 2006 and covered all grants of options and other equity awards made since our initial public offering in April 1998, was directed by the Audit Committee of our Board of Directors. The voluntary review consisted of two components: (1) an equity award review to determine whether we used appropriate measurement dates for option grants and other equity awards made under our extensive employee equity award programs, which was conducted with the assistance of outside legal counsel Irell & Manella LLP and forensic accountants FTI Consulting Inc., and (2) an investigation of the conduct and performance of Broadcom’s officers, employees and directors who were involved in the stock option granting process, which was conducted with the assistance of independent legal counsel Kaye Scholer LLP and forensic accountants LECG, LLC.

Based on the results of the equity award review, the Audit Committee concluded that, pursuant to Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations, the accounting measurement dates for most of the stock options granted between June 1998 and May 2003, covering options to purchase 232.9 million shares of our Class A or Class B common stock, differed from the measurement dates previously used for such awards. As a result, revised measurement dates were applied to the affected option grants and Broadcom has recorded a total of $2.259 billion in additional stock-based compensation expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being recorded over the service period relating to each option, typically four years, with approximately 95% of the expense being recorded in years prior to 2004.

As a consequence of these adjustments, our audited consolidated financial statements and related disclosures for the three years ended December 31, 2005 and our consolidated statements of operations and consolidated balance sheet data for the five years ended December 31, 2005 have been restated. In addition, the unaudited quarterly unaudited financial information and financial statements for interim periods of 2005 and 2004 and unaudited condensed consolidated financial statements for the three months ended March 31, 2006 have been restated. We have also restated the stock-based compensation expense footnote information calculated under SFAS 123 and SFAS 148 under the disclosure-only alternatives of those pronouncements for the years 2003 through 2005 and for the interim periods of 2005 and 2004. This restated financial and footnote information is included in our amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006 filed with the SEC today. The adjustments did not affect Broadcom’s previously-reported cash, cash equivalents or marketable securities balances in any of the restated periods.

The amounts of the adjustments we recorded for the years 1998 through 2005 were calculated pursuant to APB 25. Effective January 1, 2006 we adopted SFAS 123R, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their respective grant date fair values. As a result, the $14.3 million of additional stock-based compensation expense that we recorded in connection with our equity award review in the three months ended March 31, 2006 is calculated pursuant to SFAS 123R.

The following table summarizes additional stock-based compensation expense and related tax adjustments resulting from the review of our equity award practices on a quarterly basis for 2005 and the three months ended March 31, 2006:


	Three Months Ended
	March 31,			June 30,		September 30,		December 31,		March 31,
	2005			2005		2005		2005		2006(1)
	(In thousands)

Additional stock-based compensation expense	$	12,845		$	11,599	$	10,362	$	7,205	$	14,295
Other tax adjustments		223			441		1,084		881		2,893

Additional operating expenses		13,068			12,040		11,446		8,086		17,188
Income tax expense (benefit)		(8,255	)		8,255		—		—		—

Net adjustments	$	4,813		$	20,295	$	11,446	$	8,086	$	17,188


(1)		These amounts are not included in the total additional stock-based compensation expense and related tax adjustments recorded for the years 1998 through 2005 discussed above because they are calculated in accordance with SFAS 123R, which we adopted effective January 1, 2006.

The following table summarizes the impact of the additional stock-based compensation expense and related income tax adjustments (but not “other tax adjustments”) resulting from the review of our equity award practices on previously reported stock-based compensation expense on a quarterly basis for 2005 and the three months ended March 31, 2006:


	Stock-Based Compensation Expense
	As Reported		Adjustments		As Restated
	(In thousands)

Three months ended March 31, 2005	$	11,294	$	4,590	$	15,884
Three months ended June 30, 2005		14,548		19,854		34,402
Three months ended September 30, 2005		16,584		10,362		26,946
Three months ended December 31, 2005		17,578		7,205		24,783

Year ended December 31, 2005	$	60,004	$	42,011	$	102,015

Three months ended March 31, 2006	$	93,691	$	14,295	$	107,986

Impact of the Additional Stock-Based Compensation Expense-Related Adjustments on the Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Statements of Operations

The following tables present the impact of the additional stock-based compensation expense-related adjustments on our previously-reported unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2005:


	Three Months Ended									Six Months Ended
	June 30, 2005									June 30, 2005
	As Reported			Adjustments			As Restated			As Reported		Adjustments			As Restated
	(In thousands, except per share data)

Net revenue	$	604,861		$	—		$	604,861		$	1,155,206	$	—		$	1,155,206
Cost of revenue		283,455			637			284,092			549,571		1,340			550,911

Gross profit		321,406			(637	)		320,769			605,635		(1,340	)		604,295
Operating expense:
Research and development		153,634			8,357			161,991			299,504		17,071			316,575
Selling, general and administrative		61,853			3,046			64,899			120,250		6,697			126,947
Amortization of purchased intangible assets		1,040			—			1,040			1,952		—			1,952
Settlement costs		110,000			—			110,000			110,000		—			110,000
In-process research and development		—			—			—			6,652		—			6,652

Income (loss) from operations		(5,121	)		(12,040	)		(17,161	)		67,277		(25,108	)		42,169
Interest income, net		10,678			—			10,678			18,636		—			18,636
Other income, net		679			—			679			777		—			777

Income (loss) before income taxes		6,236			(12,040	)		(5,804	)		86,690		(25,108	)		61,582
Provision (benefit) for income taxes		(8,825	)		8,255			(570	)		2,447		—			2,447

Net income (loss)	$	15,061		$	(20,295	)	$	(5,234	)	$	84,243	$	(25,108	)	$	59,135

Net income (loss) per share (basic)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.17	$	(0.05	)	$	0.12

Net income (loss) per share (diluted)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.16	$	(0.05	)	$	0.11

Weighted average shares (basic)		502,353			—			502,353			499,779		—			499,779

Weighted average shares (diluted)		544,796			(42,443	)		502,353			540,967		(4,109	)		536,858

The following table presents details of the total stock-based compensation expense that is included in each functional line item in the consolidated statements of operations above:


	Three Months Ended						Six Months Ended
	June 30, 2005						June 30, 2005
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
	(In thousands)

Cost of revenue	$	394	$	613	$	1,007	$	762	$	1,304	$	2,066
Research and development		9,915		7,957		17,872		16,940		16,469		33,409
Selling, general and administrative		4,239		3,029		7,268		8,140		6,671		14,811

	$	14,548	$	11,599	$	26,147	$	25,842	$	24,444	$	50,286

Consolidated Balance Sheet

The net impact of the additional stock-based compensation expense-related adjustments on our previously-reported unaudited condensed consolidated balance sheet was an increase in wages and related benefits and a decrease in total shareholders’ equity for related tax adjustments of $4.9 million at December 31, 2005.

Stock-Based Compensation in Accordance with SFAS 123

In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below is a pro forma illustration of the effect on net income (loss) and net income (loss) per share information for the three and six months ended June 30, 2005, computed as if the Company had valued stock-based awards to employees using the Black-Scholes option pricing model instead of applying the guidelines provided by APB 25. In addition, the tables below present the impact of the additional stock-based compensation expense-related adjustments on the Company’s previously-reported pro forma illustrations for the stated periods:


	Three Months Ended									Six Months Ended
	June 30, 2005									June 30, 2005
	As Reported			Adjustments			As Restated			As Reported			Adjustments			As Restated
	(In thousands, except per share data)

Net income (loss)	$	15,061		$	(20,295	)	$	(5,234	)	$	84,243		$	(25,108	)	$	59,135
Add: Stock-based compensation expense included in net income (loss)		14,548			19,854			34,402			25,842			24,444			50,286
Deduct: Stock-based compensation expense determined under the fair value method		(108,565	)		(49,368	)		(157,933	)		(250,569	)		(73,287	)		(323,856	)

Net loss — pro forma	$	(78,956	)	$	(49,809	)	$	(128,765	)	$	(140,484	)	$	(73,951	)	$	(214,435	)

Net income (loss) per share (basic)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.17		$	(0.05	)	$	0.12

Net income (loss) per share (diluted)	$	0.03		$	(0.04	)	$	(0.01	)	$	0.16		$	(0.05	)	$	0.11

Net loss per share (basic and diluted) — pro forma	$	(0.16	)	$	(0.10	)	$	(0.26	)	$	(0.28	)	$	(0.15	)	$	(0.43	)

Overview

Broadcom Corporation is a global leader in semiconductors for wired and wireless communications. Our products enable the delivery of voice, video, data and multimedia to and throughout the home, the office and the mobile environment. Broadcom provides the industry’s broadest portfolio of state-of-the-art system-on-a-chip and software solutions to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. Our diverse product portfolio includes solutions for digital cable, satellite and Internet Protocol (IP) set-top boxes and media servers; high definition television (HDTV); high definition DVD players and personal video recording (PVR) devices; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; SystemI/O server solutions; broadband network and security processors; wireless and personal area networking; cellular communications; mobile multimedia and applications processors; mobile power management; and Voice over Internet Protocol (VoIP) gateway and telephony systems.

Net Revenue. We sell our products to leading manufacturers of wired and wireless communications equipment in each of our target markets. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into equipment used in multiple markets. We utilize independent foundries to manufacture all of our semiconductor products.

Our net revenue is generated principally by sales of our semiconductor products. We derive the remaining balance of our net revenue predominantly from software licenses, development agreements, support and

maintenance agreements and cancellation fees. In addition, the majority of our sales occur through the efforts of our direct sales force. The remaining balance of our sales occur through distributors.

The following table presents details of our net revenue:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Sales of semiconductor products		98.5	%		98.5	%		99.0	%		98.5	%
Other		1.5			1.5			1.0			1.5

		100.0	%		100.0	%		100.0	%		100.0	%


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Sales made through direct sales force		83.0	%		84.8	%		82.6	%		85.3	%
Sales made through distributors		17.0			15.2			17.4			14.7

		100.0	%		100.0	%		100.0	%		100.0	%

The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:


	•	general economic and market conditions in the semiconductor industry and wired and wireless communications markets;

	•	our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a cost effective and timely manner;

	•	the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory;

	•	seasonality in the demand for consumer wired and wireless communication products into which our solutions are incorporated;

	•	the rate at which our present and future customers and end-users adopt our products and technologies in our target markets; and

	•	the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products.

For these and other reasons, our net revenue and results of operations in the three months ended June 30, 2006 and prior periods may not be indicative of future net revenue and results of operations.

From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect that these fluctuations will continue and that they may be exaggerated by the increasing volume of Broadcom solutions that are incorporated into consumer products, sales of which are typically subject to greater seasonality and greater volume fluctuations than non-consumer OEM products.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Five largest customers as a group		45.4	%		46.5	%		45.9	%		50.5	%

We expect that our largest customers will continue to account for a substantial portion of our net revenue in 2006 and for the foreseeable future. The identities of our largest customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period.

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Asia (primarily in Taiwan, Korea, China and Japan)		18.9	%		16.0	%		19.4	%		16.6	%
Europe (primarily in France and the United Kingdom)		10.2			8.1			9.8			7.4
Other		0.3			0.5			0.4			0.2

		29.4	%		24.6	%		29.6	%		24.2	%

Net revenue derived from shipments to international destinations, as a percentage of total net revenue was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Asia (primarily in Taiwan, Korea, and China)		79.1	%		72.9	%		78.5	%		70.6	%
Europe (primarily in France and the United Kingdom)		4.2			4.0			3.6			4.3
Other		4.0			6.2			5.3			6.8

		87.3	%		83.1	%		87.4	%		81.7	%

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

Gross Margin. Our gross margin, or gross profit as a percentage 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:


	•	our product mix and volume of product sales;

	•	stock-based compensation expense;

	•	the position of our products in their respective life cycles;

	•	the effects of competition;

	•	the effects of competitive pricing programs;

	•	manufacturing cost efficiencies and inefficiencies;

	•	fluctuations in direct product costs such as wafer pricing and assembly, packaging and testing costs, and overhead costs;

	•	provisions for excess or obsolete inventories;

	•	product warranty costs;

	•	amortization of purchased intangible assets; and

	•	licensing and royalty arrangements.

Net Income (Loss). Our net income (loss) has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:


	•	stock-based compensation expense;


	•	settlement costs;

	•	amortization of purchased intangible assets;

	•	in-process research and development, or IPR&D;

	•	impairment of goodwill and other intangible assets;

	•	income tax benefits from adjustments to tax reserves of foreign subsidiaries;

	•	gain (loss) on strategic investments; and

	•	restructuring costs or reversals thereof.

In the three months ended June 30, 2006 our net income was $106.1 million as compared to a net loss of $5.2 million in the three months ended June 30, 2005, a difference of $111.3 million. This improvement in profitability was the direct result of a 55.6% increase in net revenue. These improvements were partially offset by an increase in provisions for warranty costs of $2.3 million and an increase in stock-based compensation of $106.3 million.

In the six months ended June 30, 2006 our net income was $223.8 million as compared to $59.1 million in the six months ended June 30, 2005, a difference of $164.6 million. This improvement in profitability was the direct result of a 59.4% increase in net revenue and a 6.7 percentage point reduction in operating expenses as a percentage of net revenue. These improvements were partially offset by an increase in provisions for excess and obsolete inventory and warranty costs of $10.6 million and an increase in stock-based compensation of $190.2 million.

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

Acquisition Strategy. An element of our business strategy involves the acquisition of businesses, assets, products or technologies that allow us to reduce the time required to develop new technologies and products and bring them to market, incorporate enhanced functionality into and complement our existing product offerings, augment our engineering workforce, and/or enhance our technological capabilities. We plan to continue to evaluate strategic opportunities as they arise, including acquisitions and other business combination transactions, strategic relationships, capital infusions and the purchase or sale of assets. See Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements for information related to the acquisition made during the six months ended June 30, 2006.

Business Enterprise Segments. We operate in one reportable operating segment, wired and wireless broadband communications. Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards, or SFAS, No. 131, Disclosures about Segments of an Enterprise and Related Information, or SFAS 131, establishes standards for the way public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. Although we had four operating segments at June 30, 2006, under the aggregation criteria set forth in SFAS 131 we operate in only one reportable operating segment, wired and wireless broadband communications.


	•	the nature of products and services;

	•	the nature of the production processes;

	•	the type or class of customer for their products and services; and

	•	the methods used to distribute their products or provide their services.

We meet each of the aggregation criteria for the following reasons:


	•	the sale of integrated circuits is the only material source of revenue for each of our four operating segments;

	•	the integrated circuits sold by each of our operating segments use the same standard CMOS manufacturing processes;

	•	the integrated circuits marketed by each of our operating segments are sold to one type of customer: manufacturers of wired and wireless communications equipment, which incorporate our integrated circuits into their electronic products; and

	•	all of our integrated circuits are sold through a centralized sales force and common wholesale distributors.

All of our operating segments share similar economic characteristics as they have a similar long term business model, operate at similar gross margins, and have similar research and development expenses and similar selling, general and administrative expenses. The causes for variation among each of our operating segments are the same and include factors such as (i) life cycle and price and cost fluctuations, (ii) number of competitors, (iii) product differentiation and (iv) size of market opportunity. Additionally, each operating segment is subject to the overall cyclical nature of the semiconductor industry. The number and composition of employees and the amounts and types of tools and materials required are similar for each operating segment. Finally, even though we periodically reorganize our operating segments based upon changes in customers, end markets or products, acquisitions, long-term growth strategies, and the experience and bandwidth of the senior executives in charge, the common financial goals for each operating segment remain constant.

Because we meet each of the criteria set forth in SFAS 131 and our four operating segments as of June 30, 2006 share similar economic characteristics, we aggregate our results of operations into one reportable operating segment.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, warranty reserves, inventory reserves, stock-based compensation expense, goodwill and purchased intangible asset valuations, strategic investments, deferred income tax asset valuation allowances, restructuring costs, litigation and other loss contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of 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.

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


	•	Net Revenue. We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) our price to


		the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met at the time of product shipment. However, we do not recognize revenue until all customer acceptance requirements have been met, when applicable. A portion of our sales are made through distributors under agreements allowing for pricing credits and/or rights of return. Product revenue on sales made through these distributors is not recognized until the distributors ship the product to their customers, at which time the terms of the sale become fixed and determinable. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess the collectibility of our accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.


	•	Sales Returns and Allowance for Doubtful Accounts. We record reductions to revenue for estimated product returns and pricing adjustments, such as competitive pricing programs and rebates, in the same period that the related revenue is recorded. The amount of these reductions is based on historical sales returns, analysis of credit memo data, specific criteria included in rebate agreements, and other factors known at the time. Additional reductions to revenue would result if actual product returns or pricing adjustments exceed our estimates. We also maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of any of our customers were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances could be required.

	•	Inventory and Warranty Reserves. We establish inventory reserves for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory reserves could be required. Our products typically carry a one to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation has been and may in the future be affected by product failure rates, product recalls, repair or field replacement costs and additional development costs incurred in correcting any product failure, as well as possible claims for consequential costs. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required. In that event, our gross profit and gross margins would be reduced.

	•	Stock-Based Compensation Expense for 2006 and Thereafter. Effective January 1, 2006 we adopted SFAS 123R, which requires all share-based payments to employees, including grants of employee stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each share-based payment award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payment awards. The Black-Scholes model meets the requirements of SFAS 123R; however, the fair values generated by the model may not be indicative of the actual fair values of our awards as it does not consider certain factors important to our awards, such as continued employment, periodic vesting requirements and limited transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We use the implied volatility for traded options on our stock as the expected volatility assumption required in the Black-Scholes model. Our selection of the implied volatility approach is based on the availability of data regarding actively traded options on our stock as we believe that implied volatility is more representative than historical volatility. The expected life of the awards is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our history and expectation of dividend payouts. The fair value


		of our restricted stock units is based on the fair market value of our Class A common stock on the date of grant. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in our financial statements in 2006 and thereafter is based on awards that are ultimately expected to vest. We evaluate the assumptions used to value our awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, 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 we assume unvested equity awards in connection with acquisitions. Had we adopted SFAS 123R in prior periods, the magnitude of the impact of that standard on our results of operations would have approximated the impact of SFAS 123 assuming the application of the Black-Scholes option pricing model as described in the disclosure of pro forma net income (loss) and pro forma net income (loss) per share in Notes 1 and 7 of our Notes to Unaudited Condensed Consolidated Financial Statements. See “Critical Accounting Policies and Estimates Applied to the Restatement of Broadcom’s Consolidated Financial Statements” for additional discussion of the estimates and assumptions used to calculated the adjustments to our consolidated financial statements for stock option grants awarded between June 1998 and May 2003.


	•	Goodwill and Purchased Intangible Assets. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. The amounts and useful lives assigned to intangible assets acquired, other than goodwill, impact the amount and timing of future amortization, and the amount assigned to in-process research and development is expensed immediately. The value of our intangible assets, including goodwill, could be impacted by future adverse changes such as: (i) any future declines in our operating results, (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock, (iii) another significant slowdown in the worldwide economy or the semiconductor industry or (iv) any failure to meet the performance projections included in our forecasts of future operating results. We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis in the fourth quarter or more frequently if we believe indicators of impairment exist. In the process of our annual impairment review, we primarily use the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies to determine the fair value of our intangible assets. Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

	•	Deferred Taxes and Tax Contingencies. We utilize the liability method of accounting for income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. 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 cumulative 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 against our net deferred tax assets is appropriate in such jurisdictions. In certain other foreign jurisdictions where we do not have cumulative losses, we record valuation allowances to reduce our net deferred tax assets to the amount we believe is more likely than not to be realized. In the future, if we realize a deferred tax asset that currently carries a valuation allowance, we may record a reduction to income tax expense in the period of such realization. We record estimated income tax liabilities to the extent they are probable and can be reasonably estimated. As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws


		and regulations in various taxing jurisdictions. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities.


	•	Litigation and Settlement Costs. From time to time, we are involved in disputes, litigation and other legal proceedings. We prosecute and defend these matters aggressively. However, there are many uncertainties associated with any litigation, and we cannot assure you that these actions or other third party claims against us will be resolved without costly litigation and/or substantial settlement charges. In addition the resolution of any future intellectual property litigation may require us to pay damages for past infringement or one-time license fees or ongoing royalties, which could adversely impact gross profit and 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 Broadcom. If any of those events were to occur, our business, financial condition and results of operations could be materially and adversely affected. We record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. However the actual liability in any such litigation may be materially different from our estimates, which could result in the need to record additional costs.

	•	Critical Accounting Policies and Estimates Applied to the Restatement of Broadcom’s Consolidated Financial Statements. The preparation of our restated consolidated financial statements required us to make estimates and assumptions that affected the amount of the recorded additional deferred compensation and stock-based compensation expense. We used three methodologies to calculate the adjustments to our consolidated financial statements for stock option grants awarded between June 1998 and May 2003.

Equity Edge^® Entry Date

In many instances, the new measurement date applied to an affected option grant was the date the grant was entered into our Equity Edge software system, which we used to monitor and administer our equity award programs from 1998 through 2006. This methodology was used for: (1) option grants to employees other than Section 16 Officers for which we were unable to locate contemporaneous documentation confirming that an Equity Award Committee meeting occurred on the indicated grant date; (2) those broad-based option grants for which we had not completed allocations of options to individual employees by the time the grant date was selected by the Equity Award or Compensation Committee; and (3) those option grants for which the grant date was selected after the date indicated on the unanimous written consent documenting the approval of those options. When an option grant was entered into Equity Edge, the entry date was recorded by the system. Also, once option grants were entered into Equity Edge, individual grant information was generally transmitted to an online brokerage website on which employees were able to view their specific option grants. We believe in most cases, the Equity Edge entry date represents the best approximation of the date on which the measurement date criteria of APB 25 were met. Therefore, in each of the three circumstances described above, we usually determined that the date on which an option grant was entered into the Equity Edge system represented the best approximation of the appropriate measurement date under APB 25.

We considered three alternate revised measurement dates or values for these option grants:


	•	First, we considered alternate measurement dates based on the date seven days prior to the date of each grant’s entry into Equity Edge. This alternative was based on evidence obtained during our equity award review that indicated that most grants were entered into Equity Edge a number of


		days after the date on which the measurement date criteria of APB 25 had been met. Had we used the dates seven days prior to the dates of entry into Equity Edge, rather than the later Equity Edge entry dates, our total gross additional deferred compensation adjustment of $2.672 billion would have been reduced by $24.2 million.


	•	Second, we considered measurement dates based on the date fourteen days prior to the date of each grant’s entry into Equity Edge. Again, this alternative was based on evidence obtained during our equity award review which indicated that most grants were entered into Equity Edge a number of days after the date on which the measurement date criteria of APB 25 had been met. Had we used the dates fourteen days prior to the dates of entry into Equity Edge rather than the later Equity Edge entry dates, our total gross additional deferred compensation adjustment of $2.672 billion would have been reduced by $116.7 million.

	•	Third, we considered an alternate measurement approach based on the average closing stock price during the period between the date indicated on the unanimous written consent documenting each option grant approval and the date of each grant’s entry into Equity Edge. Had we used the average closing stock prices as the basis for measurement rather than measurement on the dates of entry into Equity Edge, our total gross additional deferred compensation adjustment of $2.672 billion would have been reduced by $409.5 million.

With respect to option grants for which we were unable to locate contemporaneous documentation confirming that an Equity Award Committee meeting had occurred on the indicated grant date, we also considered using the indicated grant date as the measurement date under APB 25. Although this approach would have resulted in a substantially lower deferred compensation adjustment as compared to the methodology we used, we were not able to conclude that the indicated grant date represented the best approximation of the date the terms of the option were determined with finality. We also considered whether variable accounting should apply to such option grants. Generally, variable accounting applies when a particular grant’s exercise price, the number of shares, or both, are unknown until after the date of grant. Variable accounting could also be applicable if the option grant were subject to some modification of terms. In our particular circumstances, the exercise prices and number of shares underlying the affected option grants were known and not subject to any change, and therefore we determined that variable accounting is not appropriate for these awards.

Date of Execution of Unanimous Written Consents

For option grants to executive officers, as defined in Section 16 of the Securities Exchange Act of 1934, as amended, or Section 16 Officers, for which we were unable to locate contemporaneous documentation confirming that a Compensation Committee meeting occurred on the indicated grant date, the new measurement date applied to the affected option grant was the date that the unanimous written consent ratifying the option grant was likely signed, rather than the “as of” date specified on the consent. The date that each unanimous written consent ratifying the option grant was likely signed was determined based either on interview evidence indicating that a unanimous written consent was signed on a particular Board of Directors meeting date, or a facsimile header indicating the date on which a unanimous written consent was signed and returned to Broadcom.

With respect to these option grants we also considered using the indicated grant date or the date of entry into the Equity Edge system as the measurement date under APB 25. Had we used the indicated grant date, our total gross additional deferred compensation adjustment of $2.672 billion would have been reduced by $73.7 million. Had we used the dates of entry into the Equity Edge system in these instances rather than the dates that the unanimous written consents ratifying these Section 16 Officer option grants were likely signed, our additional deferred compensation adjustment would have been reduced by $5.6 million.

Date of Notification to Employee-Recipients

In those instances in which option grants were awarded but we did not notify the employees of such option grants for an extended period, the additional deferred compensation was calculated based on our best approximation of the date on which notification of the option grant to the affected employee occurred and the fair market value of the shares at the time of notification. For 78% of these option grants, we located copies of written grant notifications, which were signed and dated by the employee-recipient, or signed by the employee-recipient and dated by the Shareholder Services or Human Resources Department when received. While we believe that notification is not an explicit criterion required by APB 25 to establish a measurement date, in these instances we determined that the date of notification to those employees represented the best approximation of the date on which the measurement date criteria could have been met with finality, and that the date recorded on the written notification represented the best approximation of the appropriate measurement date under APB 25. For each of the remaining 22% of the affected option grants for which we were unable to locate documentation of written option grant notification (representing fewer than 0.6% of the total number of grants made from June 1998 through May 2003), we identified an approximate range of dates during which employee notification likely occurred. The ranges were determined based on periodic option grant reports that were prepared using the Equity Edge system. We concluded that the average closing stock price during each date range represented the best approximation of the intrinsic value of each option grant for which we were unable to locate documentation of written option grant notification.

The above conclusion is based on a test in which we measured three alternate values for the 78% of grants for which we were able to ascertain actual notification dates: (1) the average closing stock price during the notification date range; (2) the highest closing stock price during the notification date range; and (3) the lowest closing stock price during the notification date range for each grant. The average price produced the result that most closely approximated the amount of additional stock-based compensation expense resulting from the actual notice dates:


	Gross Additional Stock-Based		Difference from
Method	Compensation Expense		Actual Notice	% Difference

Actual Notice	$	403.7 million

Average Price	$	386.4 million	$(17.3) million		(4.3	)%
Highest Price	$	597.6 million	$193.9 million		48.0	%
Lowest Price	$	179.6 million	$(224.1) million		(55.5	)%

Had we used the dates of entry into the Equity Edge system in these instances, rather than the later notification dates, our total gross additional deferred compensation adjustment would have been reduced by $251.1 million.

Results of Operations for the Three and Six Months Ended June 30, 2006 Compared to the Three and Six Months Ended June 30, 2005

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


	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2006			2005			2006			2005
				(Restated)						(Restated)

Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue(1)		48.6			47.0			48.4			47.7

Gross profit		51.4			53.0			51.6			52.3
Operating expense:
Research and development(1)		29.7			26.8			28.9			27.4
Selling, general and administrative(1)		13.0			10.7			12.7			11.0
Amortization of purchased intangible assets		0.1			0.1			0.1			0.2
In-process research and development		—			—			0.3			0.5
Restructuring costs (reversal)		—			—			—			—
Settlement costs		—			18.2			—			9.5

Income (loss) from operations		8.6			(2.8	)		9.6			3.7
Interest income, net		3.0			1.7			2.8			1.5
Other income, net		0.2			0.1			0.2			0.1

Income (loss) before income taxes		11.8			(1.0	)		12.6			5.3
Provision (benefit) for income taxes		0.5			(0.1	)		0.4			0.2

Net income (loss)		11.3	%		(0.9	)%		12.2	%		5.1	%


(1)		The percentages included in the three and six months ended June 30, 2006 reflect the adoption of SFAS 123R. In accordance with the modified prospective transition method, our unaudited condensed consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Notes 1 and 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

Net Revenue, Cost of Revenue and Gross Profit

The following tables present net revenue, cost of revenue and gross profit for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
						(Restated)
	(In thousands, except percentages)

Net revenue	$	941,131		100.0	%	$	604,861		100.0	%	$	336,270		55.6	%
Cost of revenue(1)		457,374		48.6			284,092		47.0			173,282		61.0

Gross profit	$	483,757		51.4	%	$	320,769		53.0	%	$	162,988		50.8


	Six Months Ended					Six Months Ended
	June 30, 2006					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
						(Restated)
	(In thousands, except percentages)

Net revenue	$	1,841,778		100.0	%	$	1,155,206		100.0	%	$	686,572		59.4	%
Cost of revenue(1)		891,583		48.4			550,911		47.7			340,672		61.8

Gross profit	$	950,195		51.6	%	$	604,295		52.3	%	$	345,900		57.2


(1)		The amounts included in the three and six months ended June 30, 2006 reflect the adoption of SFAS 123R. In accordance with the modified prospective transition method, our unaudited condensed consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Notes 1 and 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

Net Revenue. Our revenue is generated principally by sales of our semiconductor products. Net revenue is revenue less reductions for rebates and provisions for returns and allowances.

The following table presents net revenue from each of our major target markets and their respective contributions to the increase in net revenue in the three months ended June 30, 2006 as compared to the three months ended June 30, 2005:


	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(In thousands, except percentages)

Enterprise networking	$	305,213		32.5	%	$	253,153		41.9	%	$	52,060		20.6	%
Broadband communications		357,103		37.9			225,735		37.3			131,368		58.2
Mobile and wireless		278,815		29.6			125,973		20.8			152,842		121.3

Net revenue	$	941,131		100.0	%	$	604,861		100.0	%	$	336,270		55.6

Our enterprise networking products include Ethernet transceivers, controllers, switches, broadband network and security processors, server chipsets and storage products. Our broadband communications products include solutions for cable modems, DSL applications, digital cable, direct broadcast satellite and IP set-top boxes, digital TVs and HD DVD and personal video recording devices. Our mobile and wireless products include wireless LAN, cellular, Bluetooth, mobile multimedia and VoIP solutions.

The increase in net revenue from our enterprise networking target market resulted primarily from an increase in net revenue attributable to our enterprise Ethernet, network switching and controller products. The increase in net revenue from our broadband communications target market resulted from increases in cable modems, DSL applications and direct broadcast satellite. The increase in net revenue from our mobile and wireless target market resulted primarily from strength in our Bluetooth, mobile multimedia, cellular and wireless LAN product offerings.

The following table presents net revenue from each of our major target markets and their respective contributions to net revenue in the six months ended June 30, 2006 as compared to the six months ended June 30, 2005:


	Six Months Ended					Six Months Ended
	June 30, 2006					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(In thousands, except percentages)

Enterprise networking	$	610,803		33.1	%	$	487,106		42.2	%	$	123,697		25.4	%
Broadband communications		688,255		37.4			432,943		37.5			255,312		59.0
Mobile and wireless		542,720		29.5			235,157		20.3			307,563		130.8

Net revenue	$	1,841,778		100.0	%	$	1,155,206		100.0	%	$	686,572		59.4

The increase in net revenue from our enterprise networking target market resulted primarily from an increase in net revenue attributable to our enterprise Ethernet, network switching and controller products. The increase in net revenue in our broadband communications target market resulted from increases in cable modems, DSL applications and direct broadcast satellite. In our mobile and wireless target market, we experienced strong growth in our Bluetooth, mobile multimedia and wireless LAN offerings.

The following table presents net revenue from each of our major target markets and their respective contributions to net revenue in the three months ended June 30, 2006 as compared to the three months ended March 31, 2006:


	Three Months Ended					Three Months Ended
	June 30, 2006					March 31, 2006
			% of Net					% of Net			Increase			%
	Amount		Revenue			Amount		Revenue			(Decrease)			Change
	(In thousands, except percentages)

Enterprise networking	$	305,213		32.5	%	$	305,590		33.9	%	$	(377	)		(0.1	)%
Broadband communications		357,103		37.9			331,152		36.8			25,951			7.8
Mobile and wireless		278,815		29.6			263,905		29.3			14,910			5.6

Net revenue	$	941,131		100.0	%	$	900,647		100.0	%	$	40,484			4.5

Although our enterprise networking target market was flat, we experienced strong growth in our controller and PHY products offset by a decrease in our switching products. The increase in net revenue in our broadband communications target market resulted primarily from an increase in net revenue from our solutions for DSL applications, cable set-top boxes and cable modems, partially offset by a decrease in our direct broadcast satellite revenue. In our mobile and wireless target market, we experienced strong growth in our wireless LAN offerings, partially offset by a decline in our mobile multimedia and Bluetooth business.

We recorded rebates to certain customers in the amounts of $56.8 million and $53.1 million in the three months ended June 30, 2006 and 2005, respectively, and $111.1 million and $105.2 million in the six months ended June 30, 2006 and 2005, respectively. We account for rebates in accordance with FASB Emerging Issues Task Force, or EITF, Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), and, accordingly, record reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms included in our various rebate agreements. We anticipate that accrued rebates will vary in future periods based on the level of overall sales to customers that participate in our rebate programs and as specific rebate programs contractually end and unclaimed rebates are no longer subject to payment. However, we do not expect rebates to impact our gross margin as our prices to these customers and corresponding revenue and margins are already net of such rebates. Historically, reversals of rebate accruals have not been material.

Cost of Revenue and Gross Profit. Cost of revenue includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with our purchase of assembly, test and quality assurance services and packaging materials for semiconductor products, prototyping costs, amortization of purchased technology, and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support, provisions for excess or obsolete inventories, product warranty costs and stock-based compensation expense for personnel engaged in manufacturing support.

The increase in absolute dollars of gross profit in the three and six months ended June 30, 2006 as compared to the three and six months ended June 30, 2005 resulted primarily from the 55.6% and 59.4% increase in net revenue, respectively. Gross margin decreased from 53.0% in the three months ended June 30, 2005 to 51.4% in the three months ended June 30, 2006. Gross margin decreased from 52.3% in the six months ended June 30, 2005 to 51.6% in the six months ended June 30, 2006. The primary factors that contributed to these reductions in gross margin were (i) an increase in stock-based compensation expense resulting from the adoption of SFAS 123R, as well as an increase in provisions for excess and obsolete inventory and warranty costs, partially offset by (ii) improvements as a percentage of revenue in manufacturing overhead due to our significant growth. For a further discussion of stock-based compensation expense, see “Stock-Based Compensation Expense,” below.

Gross margin has been and will likely continue to be impacted in the future by competitive pricing programs, fluctuations in silicon wafer costs and assembly, packaging and testing costs, product warranty costs, provisions for excess or obsolete inventories, possible future changes in product mix, the introduction of products with lower margins, stock-based compensation expense, and the amortization of purchased technology, among other factors.

Research and Development and Selling, General and Administrative Expenses

The following tables present research and development and selling, general and administrative expenses for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended					Three Months Ended
	June 30, 2006(1)					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
						(Restated)
	(In thousands, except percentages)

Research and development	$	280,024		29.7	%	$	161,991		26.8	%	$	118,033		72.9	%
Selling, general and administrative		121,982		13.0			64,899		10.7			57,083		88.0


	Six Months Ended					Six Months Ended
	June 30, 2006(1)					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
						(Restated)
			(In thousands, except percentages)

Research and development	$	531,718		28.9	%	$	316,575		27.4	%	$	215,143		68.0	%
Selling, general and administrative		234,881		12.7			126,947		11.0			107,934		85.0


(1)		The amounts included in the three and six months ended June 30, 2006 reflect the adoption of SFAS 123R. In accordance with the modified prospective transition method, our unaudited condensed consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Notes 1 and 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

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, costs related to engineering design tools and computer hardware, prototyping costs, subcontracting costs and facilities expenses.

The increase in research and development expense in the three and six months ended June 30, 2006 as compared to the three and six months ended June 30, 2005 resulted primarily from increase of $68.5 million and $123.0 million, respectively, in stock-based compensation and an increase of $32.5 million and $59.1 million, respectively, in personnel-related expenses. These increases are primarily attributable to (i) our adoption of SFAS 123R, (ii) an increase in the number of employees engaged in research and development activities since June 30, 2005, resulting from both direct hiring and acquisitions, and (iii) an increase in cash compensation levels. For a further discussion of stock-based compensation expense, see “Stock-Based Compensation Expense,” below.

Based upon past experience, we anticipate that research and development expense will continue to increase over the long term as a result of the growth and diversification of the markets we serve, new product opportunities, changes in our compensation policies, and any expansion into new markets and technologies.

We remain committed to significant research and development efforts to extend our technology leadership in the wired and wireless communications markets in which we operate. We currently hold more than 1,900 U.S. patents, and 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 increase in selling, general and administrative expense in the three and six months ended June 30, 2006 as compared to the three and six months ended June 30, 2005 resulted primarily from increase of $31.7 million and $55.8 million, respectively, in stock-based compensation, and an increase of $23.7 million and $46.9 million increases in legal fees and personnel-related expenses. These increases are primarily attributable to (i) our adoption of SFAS 123R, (ii) the cost of ongoing litigation, (iii) an increase in the number of employees engaged in selling, general and administrative activities since June 30, 2005, resulting from both direct hiring and acquisitions, and (iv) an increase in cash compensation levels. For a further discussion of stock-based compensation expense, see “Stock-Based Compensation Expense,” below. For a further discussion of our litigation matters, see Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements.

Based upon past experience, we anticipate that selling, general and administrative expense will continue to increase over the long-term to support any expansion of our operations through periodic changes in our infrastructure, changes in our compensation policies, acquisition and integration activities, international operations, and current and future litigation.

Stock-Based Compensation Expense

The following table presents details of total stock-based compensation expense that is included in each functional line item in our unaudited condensed consolidated statements of operations:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006(1)		2005		2006(1)		2005
			(Restated)				(Restated)
			(In thousands)

Cost of revenue	$	7,105	$	1,007	$	13,391	$	2,066
Research and development		86,420		17,872		156,425		33,409
Selling, general and administrative		38,940		7,268		70,635		14,811

	$	132,465	$	26,147	$	240,451	$	50,286


(1)		The amounts included in the three and six months ended June 30, 2006 reflect the adoption of SFAS 123R. In accordance with the modified prospective transition method, our unaudited condensed consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Notes 1 and 7 of Notes to Unaudited Condensed Consolidated Financial Statements.

The adoption of SFAS 123R will continue to have a significant adverse impact on our reported results of operations, although it should not have a material impact on our overall financial position. The amount of unearned stock-based compensation currently estimated to be expensed in the period 2006 through 2011 related to unvested share-based payment awards at June 30, 2006 is $1.054 billion. Of this amount, $218.1 million, $390.7 million $257.8 million, $159.3 million and $27.9 million are currently estimated to be recorded in the remainder of 2006, in 2007, 2008, 2009 and thereafter, respectively. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately 1.6 years. Approximately 97% of the total unearned stock-based compensation at June 30, 2006 will be expensed by the end of 2009. If there are any modifications or cancellations of the underlying unvested securities, 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.

We granted employee stock options to purchase 12.4 million shares of our Class A common stock and 6.2 million restricted stock units in the second quarter of 2006 as part of our Class A regular annual equity compensation review program. We will recognize up to $415.4 million of stock-based compensation expense, net of forfeitures, related to those awards. This unearned stock-based compensation is being amortized ratably over the service periods of the underlying stock options and restricted stock units, generally 48 months and 16 quarters, respectively.

Amortization of Purchased Intangible Assets

The following table presents details of the amortization of purchased intangible assets included in each expense category above:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
			(In thousands)

Cost of revenue	$	2,744	$	3,244	$	5,725	$	5,534
Operating expense		605		1,040		1,688		1,952

	$	3,349	$	4,284	$	7,413	$	7,486

At June 30, 2006 the unamortized balance of purchased intangible assets that will be amortized to future cost of revenue and other operating expenses was $30.4 million and $3.6 million, respectively. This expense will be amortized ratably through 2011. If we acquire additional purchased intangible assets in the future, our cost of revenue or other operating expenses will be increased by the amortization of those assets.

In-Process Research and Development

In the six months ended June 30, 2006 and 2005, we recorded IPR&D of $5.2 million and $6.7 million, respectively. The amounts allocated to IPR&D in the six months ended June 30, 2006 and 2005 were determined through established valuation techniques used in the high technology industry and were expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed.

Interest and Other Income, Net

The following tables present interest and other income, net, for the three and six months ended June 30, 2006 and 2005:


	Three Months Ended					Three Months Ended
	June 30, 2006					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(In thousands, except percentages)

Interest income, net	$	28,194		3.0	%	$	10,678		1.7	%	$	17,516		164.0	%
Other income, net		1,448		0.2			679		0.1			769		113.3


	Six Months Ended					Six Months Ended
	June 30, 2006					June 30, 2005
			% of Net					% of Net					%
	Amount		Revenue			Amount		Revenue			Increase		Change
	(In thousands, except percentages)

Interest income, net	$	51,932		2.8	%	$	18,636		1.5	%	$	33,296		178.7	%
Other income, net		3,219		0.2			777		0.1			2,442		314.3

Interest income, net, reflects interest earned on cash and cash equivalents and marketable securities balances. Other income, net, primarily includes recorded gains and losses on strategic investments as well as gains and losses on foreign currency transactions and dispositions of property and equipment. The increase in interest income, net, was the result of an overall increase in our cash and marketable securities balances and an increase in market interest rates. Our cash and marketable securities balances increased from $1.547 billion at June 30, 2005 to $2.377 billion at June 30, 2006. The weighted average interest rates earned for the three months ended June 30, 2006 and 2005 were 4.76% and 3.16%, respectively. The weighted average interest rates earned for the six months ended June 30, 2006 and 2005 were 4.58% and 2.93%, respectively.

Provision for Income Taxes

We recorded tax provisions of $4.7 million and $8.1 million for the three and six months ended June 30, 2006, respectively, and a tax benefit of $0.6 million and a tax provision of $2.4 million for the three and six months ended June 30, 2005, respectively. Our effective tax rates were 4.2% and 3.5% for the three and six months ended June 30, 2006, respectively, and (9.8%) and 4.0% for the three and six months ended June 30, 2005, respectively.

The difference between the our effective tax rates and the 35% federal statutory rate resulted primarily from domestic losses recorded without income tax benefit, foreign earnings taxed at rates lower than the federal statutory rate and certain foreign tax benefits recorded for the three and six months ended June 30, 2006 and June 30, 2005. During the three months ended June 30, 2005 our Singapore operations were granted certain additional tax incentives, which reduced our tax provision for the three months ended June 30, 2005 by approximately $4.6 million.

We utilize the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes, or SFAS 109. We record 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. SFAS 109 further states that 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 losses in the U.S. and certain foreign jurisdictions, and the full utilization of its 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 losses, we recorded net deferred tax assets of $1.3 million and $1.4 million at June 30, 2006 and December 31, 2005, respectively, in accordance with SFAS 109.

Subsequent Event

We recorded total charges of $10.9 million in the three months ended September 30, 2006 and expect to record $50.6 million in the three months ended December 31, 2006 in connection with payments we have decided to make to or on behalf of certain current and former employees related to consequences of the equity award review, as well as non-cash stock-based compensation expense we incurred related to the extension of the post-service stock option exercise period for certain former employees. The payments are to remunerate participants in the employee stock purchase plan who were unable to purchase shares thereunder during the period in which we were not current in our SEC reporting obligations, to remediate adverse tax consequences, if any, to individuals that may result from the equity award review, and to compensate individuals for the value of stock options that expired or would have expired during the period in which we were not current in our SEC reporting obligations.

Liquidity and Capital Resources

Working Capital and Cash and Marketable Securities. The following table presents working capital and cash and marketable securities:


	June 30,		December 31,
	2006		2005			Increase
	(In thousands)

Working capital	$	2,327,834	$	1,736,382	(1)	$	591,452

Cash and cash equivalents(2)	$	1,838,372	$	1,437,276		$	401,096
Short-term marketable securities(2)		366,894		295,402			71,492
Long-term marketable securities		171,961		142,843			29,118

	$	2,377,227	$	1,875,521		$	501,706


(1)		Restated.

(2)		Included in working capital.

Our working capital increased in the six months ended June 30, 2006 primarily related to cash provided by operations and cash proceeds received from issuances of common stock in connection with the exercise of employee stock options, offset in part by cash paid for the repurchase of shares of our Class A common stock, the acquisition of Sandburst Corporation, and the purchase of long-term marketable securities and property and equipment.

Cash Provided and Used in the Six Months Ended June 30, 2006 and 2005. Cash and cash equivalents increased to $1.838 billion at June 30, 2006 from $1.437 billion at December 31, 2005 as a result of cash provided by operating and financing activities, offset in part by cash used in investing activities.

In the six months ended June 30, 2006 our operating activities provided $377.0 million in cash. This was primarily the result of $223.8 million in net income and $275.7 million in net non-cash operating expenses offset in part by $122.5 million in net cash used by changes in operating assets and liabilities. Non-cash items included in net income in the six months ended June 30, 2006 included depreciation and amortization, stock-based compensation expense, amortization of purchased intangible assets and IPR&D. In the six months ended June 30, 2005 our operating activities provided $230.2 million in cash. This was primarily the result of $59.1 million in net income, $92.2 million in net non-cash operating expenses and $78.9 million in net cash provided by changes in operating assets and liabilities. Non-cash items included in net income in the six months ended June 30, 2005 included depreciation and amortization, stock-based compensation expense, amortization of purchased intangible assets and IPR&D.

Accounts receivable increased $100.9 million to $408.3 million in the six months ended June 30, 2006. The increase in accounts receivable was primarily the result of the $120.5 million increase in net revenue in the three months ended June 30, 2006 to $941.1 million, as compared with $820.6 million in the three months ended December 31, 2005. 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 continues to increase as it has in the most recent past, 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.

Inventories increased $83.5 million to $278.0 million in the six months ended June 30, 2006, primarily in response to higher levels of purchase orders received from our customers and the buildup of buffer inventories based upon our forecast of future demand for certain key products. In the future, our inventory levels will continue to be determined based on the level of purchase orders received and the stage at which our products are in their respective product life cycles as well as competitive situations in the marketplace. Such considerations are balanced against the risk of obsolescence or potentially excess inventory levels.

Investing activities used $205.6 million in cash in the six months ended June 30, 2006, which was primarily the result of $67.9 million of net cash paid for the acquisition of Sandburst, the purchase of $37.2 million of capital equipment to support operations, and $100.6 million used in the net purchase of marketable securities. Investing activities used $154.0 million in cash in the six months ended June 30, 2005, which was primarily the result of $116.5 million used in the net purchase of marketable securities, $24.0 million of net cash paid for two acquisitions and the purchase of $13.4 million of capital equipment to support operations.

Our financing activities provided $229.7 million in cash in the six months ended June 30, 2006, which was primarily the result of $477.7 million in net proceeds received from issuances of common stock upon exercises of stock options and common stock purchases through our employee stock purchase plan, which was offset in part by $246.1 million in repurchases of our Class A common stock pursuant to our share repurchase program. Our financing activities provided $78.8 million in cash in the six months ended June 30, 2005, which was primarily the result of $99.4 million in net proceeds received from issuances of common stock upon exercises of stock options and common stock purchases through our employee stock purchase plan, which was offset in part by $18.2 million in repurchase of our class A common stock and a $2.5 million payment on debt assumed in connection with an acquisition.

Due to the increase in the price of our Class A common stock, a greater number of stock options were exercised by employees, and we received more proceeds from the exercise of stock options, in the six months ended June 30, 2006 than during the six months ended June 30, 2005. The timing and number of stock option exercises and the amount of cash proceeds we receive through those exercises 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 to employees, which will reduce future growth in the number of stock options available for exercise. 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 have determined to allow employees to elect to have a portion of the shares issuable upon vesting of restricted stock units during 2006 withheld to satisfy withholding taxes and to make corresponding cash payments to the appropriate tax authorities on each 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 exercise of employee stock options and the purchase of common stock through our employee stock purchase plan, will be sufficient to cover our working capital needs, capital expenditures, investment requirements, commitments and repurchases of our Class A common stock 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. We could raise such funds by selling equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. 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 have filed a universal shelf registration statement on SEC Form S-3 that allows us to sell, in one or more public offerings, shares of our Class A common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $750 million. We have not issued any securities under the universal shelf registration statement. Because one of the eligibility requirements for use of a Form S-3 is that an issuer must have timely filed all SEC reports required to be filed during the preceding twelve calendar months, we will not be able to issue shares under the Form S-3 until December 1, 2007. If we elect to raise additional funds, we may not be able to obtain such funds on a timely basis or 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 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:


	•	the overall levels of sales of our products and gross profit 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;

	•	litigation expenses, settlements and judgments;

	•	volume price discounts and customer rebates;

	•	the levels of inventory and accounts receivable that we maintain;

	•	acquisitions of other businesses, assets, products or technologies;

	•	changes in our compensation policies;

	•	issuance of restricted stock units and the related payments in cash for withholding taxes due from employees during 2006 and possibly during future years;

	•	capital improvements for new and existing facilities;


	•	technological advances;

	•	our competitors’ responses to our products;

	•	our relationships with suppliers and customers;

	•	the availability of sufficient foundry, assembly and test capacity and packaging materials;

	•	expenses related to our restructuring plans;

	•	the level of exercises of stock options and stock purchases under our employee stock purchase plan; and

	•	general economic conditions and specific conditions in the semiconductor industry and wired and wireless communications markets, including the effects of recent international conflicts and related uncertainties.

In addition, we may require additional capital to accommodate planned future growth, hiring, infrastructure and facility needs.


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*

We maintain an investment portfolio of various holdings, types and maturities. We do not use derivative financial instruments. We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.

Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of June 30, 2006 the carrying value of our cash and cash equivalents approximated fair value.

Marketable securities, consisting of U.S. Treasury and agency obligations, commercial paper, corporate notes and bonds, time deposits, foreign notes and certificates of deposits, are generally classified as held-to-maturity and are stated at cost, adjusted for amortization of premiums and discounts to maturity. In addition, in the past certain of our short term marketable securities were classified as available-for-sale and were stated at fair value, which was equal to cost due to the short term maturity of these securities. In the event that there were to be a difference between fair value and cost in any of our available-for-sale securities, unrealized gains and losses on these investments would be reported as a separate component of accumulated other comprehensive income (loss). Our investment policy for marketable securities requires that all securities mature in three years or less, with a weighted average maturity of no longer than 18 months. As of June 30, 2006 the carrying value and fair value of these securities were $538.9 million and $535.9 million, respectively. The fair value of our marketable securities fluctuates based on changes in market conditions and interest rates; however, given the short-term maturities, we do not believe these instruments are subject to significant market or interest rate risk.

The carrying value, maturity and estimated fair value of our cash equivalents and marketable securities as of June 30, 2006 and December 31, 2005, respectively, were as follows:


	Carrying															Fair
	Value															Value
	June 30,			Maturity												June 30,
	2006			2006			2007			2008			2009			2006
	(In thousands, except interest rates)

Investments
Cash equivalents	$	1,062,458		$	1,062,458		$	—		$	—		$	—		$	1,062,459
Weighted average interest rate		5.24	%		5.24	%		—			—			—
Marketable securities	$	538,855		$	267,691		$	178,686		$	78,572		$	13,906		$	535,875
Weighted average interest rate		4.64	%		4.69	%		4.38	%		4.95	%		5.30	%


	Carrying												Fair
	Value												Value
	December 31,			Maturity									December 31,
	2005			2006			2007			2008			2005
	(In thousands, except interest rates)

Investments
Cash equivalents	$	835,598		$	835,598		$	—		$	—		$	835,202
Weighted average interest rate		4.38	%		4.38	%		—			—
Marketable securities	$	438,245		$	295,402		$	103,985		$	38,858		$	435,702
Weighted average interest rate		3.77	%		3.62	%		3.94	%		4.45	%

Our strategic equity investments are generally classified as available-for-sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss) for publicly traded investments. We have also invested in privately held companies, the majority of which can still be considered to be in the start-up or development stage. We make investments in key strategic businesses and other industry participants to establish strategic relationships, expand existing relationships and achieve a return on our investment. These investments are inherently risky, as the markets for the technologies or products these companies have under development are typically in the early stages and may never materialize. Likewise, the development projects of these companies may not be successful. In addition, early stage companies often fail for various other reasons. Consequently, we could lose our entire investment in these companies. As of June 30, 2006, the carrying and fair value of our strategic investments was $4.5 million.


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 Acting 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.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, our current management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e). Based on this evaluation, which included the findings of the voluntary review and the restatement described herein, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level at June 30, 2006 because of a material weakness in internal control over financial reporting. Since the material weakness was remediated as of the date of this filing, our principal executive officer and principal financial officer have determined that disclosure controls and procedures are effective at a reasonable assurance level as of the date of this filing.

We recently completed a voluntary review of our equity award practices. The review covered all grants of options and other equity awards made since our initial public offering in April 1998. During the course of the equity award review, we identified instances in which: (i) option grants failed to meet the measurement date criteria of APB 25; (ii) we did not notify some of the employee-recipients of their option grants for extended periods; (iii) grants made to some consultants were erroneously accounted for under APB 25 as if they had been made to employees; (iv) grants were made to employees upon acceptance of their employment offers at Broadcom rather than as of or after the actual commencement of employment; and (v) modifications made to employee stock options were not accounted for in accordance with APB 25. Details of the results of the equity award review and the restatement of our financial statements are discussed in the Explanatory Note and in Note 2 of Notes to

Consolidated Financial Statements in Part IV, Item 15 of the amended Annual Report on Form 10-K/A for the year ended December 31, 2005 filed with the SEC January 23, 2007.

The voluntary review found that in June 2003 we implemented revisions to our equity award processes and procedures. As a result, the processes were formalized and a consistent procedure was implemented for the Equity Award and Compensation Committees. In addition, the composition of the Equity Award Committee was changed to include an independent director. Our review of the equity award granting practices has determined that our process and practices in effect since June 2003 are sound and have been consistently adhered to. Management has not identified any instances of inappropriate measurement dates under APB 25 for option grants or other equity awards made since May 2003.

The restatement covers our financial statements for the years 1998 through 2005 and for the three months ended March 31, 2006. The adjustments to our financial statements for 2005 and for the three months ended March 31, 2006 were principally amortization of deferred compensation resulting from revisions made to measurement dates for certain options granted prior to June 2003.

In assessing the findings of the voluntary review and the restatement of our financial statements in the context of paragraph 139 of Public Company Accounting Oversight Board Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with An Audit of Financial Statements (“AS 2”), management has concluded that there was a material weakness as of December 31, 2005 under paragraph 139 with respect to our former chief financial officer’s role in the application of accounting principles to the equity award granting process prior to June 2003, including the impact on the 2005 financial statements of amortizing deferred compensation related to those equity awards.

Under paragraph 139 of AS 2, certain interactions of qualitative and quantitative considerations in the area of controls over the selection and application of accounting policies that are in conformity with generally accepted accounting principles result in at least a significant deficiency. The conduct review directed by the Audit Committee with the assistance of independent legal counsel Kaye Scholer LLP and with the forensic accounting assistance of LECG, LLC, found that our former Chief Financial Officer failed to provide proper advice concerning proper accounting standards or to establish proper procedures as they pertain to the option granting process prior to June 2003. As a result, management, consistent with paragraph 139 of AS 2, has determined that a material weakness existed as of December 31, 2005 with respect to our former Chief Financial Officer’s role in the application of accounting principles to the equity award granting process prior to June 2003, including the impact on the 2005 financial statements of amortizing deferred compensation related to those equity awards.

This material weakness was initially identified in conjunction with the voluntary review and was remediated upon the retirement of our former chief financial officer on September 19, 2006.

Management’s assessment of internal control over financial reporting with respect to 2005 included a review of the overall control environment. This included controls that mitigate the risk of management override, including: (i) the participation of independent directors on the Audit, Compensation, Equity Award, and Nominating & Corporate Governance Committees, with minutes recorded and maintained by the Legal Department; (ii) inclusion of multiple personnel in reviews of reserves and disclosures; (iii) no direct financial system add/update capabilities for executive management; (iv) employee and third party complaint procedures (including the ability for employees to make anonymous complaints); (v) a Code of Ethics and Corporate Conduct; (vi) an Internal Audit function; (vii) a Corporate Compliance Officer; (viii) general Finance employee surveys that include questions regarding ethics; and (ix) processes that include checks and balances on management. The Audit, Compensation, and Nominating & Corporate Governance Committees are composed entirely of independent directors. The Equity Award Committee includes an independent director. Broadcom’s Code of Ethics and Corporate Conduct provides general guidance with respect to the accuracy of financial reports as well as compliance and complaint procedures. As of the date of this filing, these controls continue to be in effect.

In addition, Broadcom’s controls over the equity award process as of December 31, 2005 included the following controls to prevent and/or detect, at a reasonable assurance level, any future instances of improper accounting for equity awards:


	•	Awards to newly hired employees are compiled by our Human Resources Department and are submitted to the relevant committee for approval only on or after the commencement of employment. As a practice, equity awards are not made to consultants. All awards are communicated to the Shareholder Services Department by the Human Resources Department (or, in the case of patent incentive awards, by the Legal Department) for approval by the Equity Award or Compensation Committee (each of which typically meets on a regular basis). The lists of equity awards approved by the relevant committee include specific allocation of awards to individuals. Awards are entered into our equity award administration system promptly after they are approved by the relevant committee (a grant to a consultant would be detected by our Shareholder Services Department at this point).

	•	A member of the Legal Department attends Compensation and Equity Award Committee meetings, records minutes, and confirms that awards comply with equity plans.

	•	The exercise price for each option grant is equal to or greater than the closing price of our Class A common stock on the date of approval. We would record deferred compensation if for any reason the exercise price of any option grant were lower than the closing price of our Class A common stock on the date of approval.

	•	Formal resolutions approving equity awards are reconciled to the data maintained in the equity award administration system on a monthly basis. The Human Resources Department validates new awards reflected in the equity award administration system.

	•	Timely notification of equity awards is sent (electronically or by mail) to employee recipients. The equity awards are uploaded from the equity award administration system to an online brokerage website, at which time grants are available for viewing by employees. Additionally, for members of the Board of Directors and Section 16 Officers, a Form 4 is filed with the SEC within two business days after the grant date.

	•	The Human Resources system and the equity award administration system are periodically reconciled to reflect the cancellation of awards held by employees whose employment with Broadcom has terminated.

	•	Any proposed modifications to equity awards (e.g., accelerations and exercise extensions) are communicated by the Human Resources Department to, and regular inquiry is made of the Human Resources Department by, the Shareholder Services Department. Changes are approved by the appropriate Board committee.

	•	The issuance of shares upon exercise or release of equity awards recorded in our equity award administration system is periodically reconciled to the records of our transfer agent.

As of the date of this filing, these controls continue to be in effect. Currently, the Compensation Committee and Equity Award Committee each holds monthly equity award meetings based upon a predetermined schedule.

There has been no change in our internal control over financial reporting during the three months ended June 30, 2006 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 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 fraud, 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 error or fraud may occur and not be detected.

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.

Item 1A. Risk Factors

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our amended and subsequent reports on Forms 10-K/A, 10-K, 10-Q/A, 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs with material adverse effects on Broadcom, our business, financial condition, results of operations and/or liquidity could be seriously harmed. In that event, the market price for our Class A common stock will likely decline, and you may lose all or part of your investment.

Our operating results for 2006 and prior periods have been materially and adversely impacted by the results of the voluntary review of our past equity award practices. Any related action by a governmental agency could result in civil or criminal sanctions against certain of our former officers, directors and/or employees and might result in such sanctions against us and/or certain of our current officers, directors and/or employees. Such matters and civil litigation relating to our past equity award practices or the January 2007 restatement of our financial statements could result in significant costs and the diversion of attention of our management and other key employees.

In connection with our previously announced equity award review, we restated our financial statements for each of the years ended December 31, 1998 through December 31, 2005, and have restated our financial statements for the first quarter of 2006 as well. Accordingly, you should not rely on financial information included in the reports on Form 10-K, Form 10-Q and Form 8-K previously filed by Broadcom, and the related opinions of our independent registered public accounting firm, and all earnings press releases and similar communications issued by us, for all periods ended on or before March 31, 2006, which have been superseded in their entirety by the information contained in the amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and the amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006.

Based on the results of the equity award review, the Audit Committee concluded that, pursuant to APB 25 and related interpretations, the accounting measurement dates for most of the stock option grants awarded between June 1998 and May 2003, covering options to purchase 232.9 million shares of our Class A or Class B common stock, differed from the measurement dates previously used for such awards. As a result, revised measurement dates were applied to the affected option grants and Broadcom recorded a total of $2.259 billion in additional stock-based compensation expense for the years 1998 through 2005. After related tax adjustments of $38.7 million, the restatement resulted in total net adjustments of $2.220 billion for the years 1998 through 2005. This amount is net of forfeitures related to employee terminations. The additional stock-based compensation expense is being amortized over the service period relating to each option, typically four years, with approximately 95% of the total expense being recorded in years prior to 2004. Additional stock-based compensation expense will be recorded in the first quarter of 2006 and thereafter pursuant to the provisions of SFAS 123R.

These expenses had the effect of decreasing income from operations, net income, and net income per share (basic and diluted) in affected periods in which we reported a profit, and increasing loss from operations, net loss, and net loss per share in affected periods in which we reported a loss. Information regarding the effect of the restatement on our financial statements for various periods is provided in Note 2 of Notes to Consolidated

Financial Statements, included in Part IV, Item 15 of our amended Annual Report on Form 10-K/A for the year ended December 31, 2005 and Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of our amended Quarterly Report on Form 10-Q/A for the three months ended March 31, 2006.

In June 2006 we received an informal request for information from the staff of the Los Angeles regional office of the Securities and Exchange Commission regarding our option granting practices. In December 2006 we were informed that the SEC issued a formal order of investigation in the matter. We are cooperating with the SEC investigation, but do not know when or how it will be resolved or what, if any, actions the SEC may require us to take as part of the resolution of that matter.

Broadcom has also been informally contacted by the U.S. Attorney’s Office for the Central District of California and has been asked to produce on a voluntary basis documents, many of which we previously provided to the SEC. We are cooperating with this request. Any action by the SEC, the U.S. Attorney’s Office or other governmental agency could result in civil or criminal sanctions against certain of our former officers, directors and/or employees and might result in such sanctions against us and/or certain of our current officers, directors and/or employees.

Additionally, as discussed in Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, we currently are engaged in civil litigation with parties that claim, among other allegations, that certain of our current and former officers improperly dated stock option grants to enhance their own profits on the exercise of such options or for other improper purposes. Although we and the other defendants intend to defend these claims vigorously, there are many uncertainties associated with any litigation, and we cannot assure you that these actions will be resolved without substantial costs and/or settlement charges. We have entered into indemnification agreements with each of our present and former directors and officers. Under those agreements, Broadcom is required to indemnify each such director or officer against expenses, including attorneys’ fees, judgments, fines and settlements, paid by such individual in connection with the pending litigation (other than indemnified liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest).

The resolution of the pending investigations by the SEC and U.S. Attorney’s Office, the defense of our pending civil litigation and any additional litigation relating to our past equity award practices or the January 2007 restatement of our financial statements could result in significant costs and diversion of the attention of management and other key employees.

The implementation of new accounting rules related to the expensing of stock-based awards will negatively impact our operating results in periods beginning with the first quarter of 2006. Any subsequent changes in accounting rules may also have an adverse effect on our results of operations.

We adopted SFAS 123R effective January 1, 2006. SFAS 123R requires all share-based payment awards to employees, including grants of stock options, restricted stock units and employee stock purchase rights, to be recognized in our financial statements based on their respective grant date fair values and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition.

The adoption of SFAS 123R will have a significant adverse impact on our reported results of operations because the stock-based compensation expense is charged directly against our reported earnings. Stock-based compensation expense and unearned stock-based compensation will increase to the extent that we increase our work force, grant additional equity awards to employees or assume unvested equity awards in connection with acquisitions.

Any other subsequent changes in the accounting rules applicable to Broadcom may also have an adverse effect on our results of operations.