BROADCOM CORP
10-Q, 2000-11-14
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                          -----------------------------

                                    FORM 10-Q


[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the quarterly period ended    SEPTEMBER 30, 2000
                                    -----------------------

    OR

[ ] 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                                             33-0480482
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)


                               16215 ALTON PARKWAY
                          IRVINE, CALIFORNIA 92618-3616
              (Address of principal executive offices and zip code)

                                 (949) 450-8700
              (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  X   No
                                       ---     ---

The number of shares of the registrant's common stock, $0.0001 par value,
outstanding as of October 31, 2000: 152,861,711 shares of Class A common stock
and 82,341,239 shares of Class B common stock.

<PAGE>   2

                              BROADCOM CORPORATION

                               QUARTERLY REPORT ON
                                    FORM 10-Q
                                NINE MONTHS ENDED
                               SEPTEMBER 30, 2000

                                      INDEX

                                                                            Page
                                                                            ----
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets at
         September 30, 2000 (Unaudited) and December 31, 1999                 1

         Unaudited Condensed Consolidated Statements of Operations for
         the Three and Nine Months Ended September 30, 2000 and 1999          2

         Unaudited Condensed Consolidated Statements of Cash Flows
         for the Nine Months Ended September 30, 2000 and 1999                3

         Notes to Unaudited Condensed Consolidated Financial Statements       4

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                 12

Item 3.  Quantitative and Qualitative Disclosures about Market Risk          38

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                   39

Item 2.  Change in Securities and Use of Proceeds                            40

Item 3.  Defaults Upon Senior Securities                                     42

Item 4.  Submission of Matters to a Vote of Security Holders                 42

Item 5.  Other Information                                                   42

Item 6.  Exhibits and Reports on Form 8-K                                    42

Signatures                                                                   43

<PAGE>   3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                              BROADCOM CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           September 30,      December 31,
                                                               2000              1999(1)
                                                           (Unaudited)
                                                          -------------       ------------
<S>                                                        <C>                 <C>
ASSETS
Current assets:
    Cash and cash equivalents                              $   377,813         $ 180,816
    Short-term investments                                     104,570            90,059
    Accounts receivable, net                                   152,484            92,124
    Inventory                                                   44,471            19,177
    Deferred taxes                                               8,980             8,380
    Other current assets                                        25,807            12,950
                                                           -----------         ---------
         Total current assets                                  714,125           403,506
Property and equipment, net                                     85,961            51,151
Long-term investments                                               --             9,351
Deferred taxes                                                 293,766           137,779
Goodwill and other intangible assets, net                    1,354,419                --
Other assets                                                    24,963             7,966
                                                           -----------         ---------
         Total assets                                      $ 2,473,234         $ 609,753
                                                           ===========         =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Trade accounts payable                                 $    92,818         $  46,458
    Wages and related benefits                                  14,279            15,430
    Income taxes payable                                        29,068             6,179
    Accrued liabilities                                         25,058            19,952
    Current portion of long-term debt                            1,152             1,787
                                                           -----------         ---------
         Total current liabilities                             162,375            89,806
Long-term debt, less current portion                               702             3,075
Shareholders' equity:
    Common stock                                             2,629,682           451,294
    Notes receivable from employees                            (13,561)           (1,821)
    Deferred compensation                                     (461,157)          (12,632)
    Retained earnings                                          155,193            80,031
                                                           -----------         ---------
         Total shareholders' equity                          2,310,157           516,872
                                                           -----------         ---------
         Total liabilities and shareholders' equity        $ 2,473,234         $ 609,753
                                                           ===========         =========
</TABLE>

---------------
(1)  The consolidated balance sheet as of December 31, 1999 has been restated to
     give retroactive effect to subsequent acquisitions accounted for using the
     pooling-of-interests method.

                             See accompanying notes.


                                       1
<PAGE>   4

                              BROADCOM CORPORATION

            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                   Three Months Ended           Nine Months Ended
                                                      September 30,               September 30,
                                                ------------------------      ----------------------
                                                   2000          1999(1)        2000         1999(1)
                                                ---------       --------      --------      --------
<S>                                             <C>             <C>           <C>           <C>
Revenue                                         $ 319,155       $139,561      $755,923      $359,227
Cost of revenue (2)                               135,908         56,308       317,430       145,316
                                                ---------       --------      --------      --------
Gross profit                                      183,247         83,253       438,493       213,911
Operating expense:
    Research and development (2)                   67,945         30,635       163,350        84,295
    Selling, general and administrative (2)        30,148         14,869        72,097        43,211
    Stock-based compensation                       27,615            959        30,655         2,816
    Amortization of goodwill and
        purchased intangible assets                24,936             --        24,936            --
    In-process research and development            45,660             --        45,660            --
    Merger-related costs                               --          4,088         4,745        15,210
Litigation settlement costs                            --             --            --        17,036
                                                ---------       --------      --------      --------
Income (loss) from operations                     (13,057)        32,702        97,050        51,343
Interest and other income, net                      4,934          2,156        12,984         5,869
                                                ---------       --------      --------      --------
Income (loss) before income taxes                  (8,123)        34,858       110,034        57,212
Provision for income taxes                         11,241         10,264        34,872        17,730
                                                ---------       --------      --------      --------
Net income (loss)                               $ (19,364)      $ 24,594      $ 75,162      $ 39,482
                                                =========       ========      ========      ========
Basic earnings (loss) per share                 $    (.09)      $    .12      $    .35      $    .20
                                                =========       ========      ========      ========
Diluted earnings (loss) per share               $    (.09)      $    .10      $    .29      $    .17
                                                =========       ========      ========      ========
Weighted average shares (basic)                   220,510        203,756       215,444       199,660
                                                =========       ========      ========      ========
Weighted average shares (diluted)                 220,510        238,333       257,111       232,469
                                                =========       ========      ========      ========

(2) Excludes stock-based compensation as follows:

Cost of revenue                                 $     615       $     37      $    690      $    112
Research and development                           20,636            659        22,789         1,879
Selling, general and administrative                 6,364            263         7,176           825
                                                ---------       --------      --------      --------
Total                                           $  27,615       $    959      $ 30,655      $  2,816
                                                =========       ========      ========      ========
</TABLE>

--------------
(1)  The consolidated statements of operations for the three and nine months
     ended September 30, 1999 have been restated to give retroactive effect to
     subsequent acquisitions accounted for using the pooling-of-interests
     method.

                             See accompanying notes.

                                       2

<PAGE>   5

                              BROADCOM CORPORATION

            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  Nine Months Ended
                                                                    September 30,
                                                              -------------------------
                                                                 2000          1999(1)
                                                              ---------       ---------
<S>                                                           <C>             <C>
OPERATING ACTIVITIES
Net income                                                    $  75,162       $  39,482
Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
      Depreciation and amortization                              15,752          11,710
      Amortization of stock-based compensation                   31,289           3,820
      Amortization of goodwill and purchased intangibles         24,936              --
      Purchased in-process research and development              45,660              --
      Tax benefit from exercise of stock options and
         stock purchase plan                                     77,544          23,848
      Deferred taxes                                            (69,492)        (10,160)
      Change in operating assets and liabilities:
         Accounts receivable                                    (59,520)        (22,087)
         Inventory                                              (23,072)         (4,932)
         Other assets                                           (37,243)         (8,567)
         Accounts payable                                        40,162          33,525
         Income taxes                                            22,149           6,265
         Other accrued liabilities                               (1,922)         20,911
                                                              ---------       ---------
Net cash provided by operating activities                       141,405          93,815

INVESTING ACTIVITIES
Purchases of property and equipment                             (47,085)        (22,496)
Net cash received from purchase acquisitions                     10,658              --
Purchases of held-to-maturity investments                       (13,668)        (23,020)
Proceeds from sale of held-to-maturity investments                8,508           1,770
                                                              ---------       ---------
Net cash used in investing activities                           (41,587)        (43,746)

FINANCING ACTIVITIES
Proceeds from long-term obligations                                 250             458
Payments on long-term obligations                                (1,592)         (7,254)
Payments on capital lease obligations                            (3,034)           (430)
Net proceeds from issuance of common stock                      100,726          40,813
Proceeds from repayment of notes receivable
    from employees                                                  829             918
                                                              ---------       ---------
Net cash provided by financing activities                        97,179          34,505
                                                              ---------       ---------
Increase in cash and cash equivalents                           196,997          84,574
Cash and cash equivalents at beginning of period                180,816          77,555
                                                              ---------       ---------
Cash and cash equivalents at end of period                    $ 377,813       $ 162,129
                                                              =========       =========
Supplemental disclosure of non-cash activities:
      Notes receivable from employees in connection
         with exercise of stock options                       $      --       $     394
                                                              =========       =========
      Purchase of equipment through capital leases            $     168       $   1,792
                                                              =========       =========
</TABLE>

---------
(1)  The consolidated statement of cash flows for the nine months ended
     September 30, 1999 has been restated to give retroactive effect to
     subsequent acquisitions accounted for using the pooling-of-interests
     method.

                             See accompanying notes.

                                       3

<PAGE>   6

                              BROADCOM CORPORATION

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2000

1.       Basis of Presentation

         The condensed consolidated financial statements included herein are
unaudited; however, they contain all normal recurring accruals and adjustments
which, in the opinion of management, are necessary to present fairly the
consolidated financial position of Broadcom Corporation and its subsidiaries
(collectively, the "Company") at September 30, 2000 and the consolidated results
of the Company's operations and cash flows for the three and nine months ended
September 30, 2000 and 1999. These condensed consolidated financial statements
have been restated to include the pooled operations of each of the Company's
prior acquisitions. All intercompany accounts and transactions have been
eliminated. It should be understood that accounting measurements at interim
dates inherently involve greater reliance on estimates than at yearend. The
results of operations for the three and nine months ended September 30, 2000 are
not necessarily indicative of the results to be expected for the full year.

         The accompanying unaudited condensed consolidated financial statements
do not include footnotes and certain financial presentations normally required
under generally accepted accounting principles. 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, 1999,
included in the Company's Current Report on Form 8-K/A filed with the Securities
and Exchange Commission ("SEC") on July 10, 2000.

Recent Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133"). Statement 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. The Company is required to and will adopt
Statement 133 in the fourth quarter of fiscal 2000. Management does not expect
the initial adoption of Statement 133 will have a significant effect on the
Company's consolidated results of operations or financial position.

         In December 1999 the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes
certain areas of the Staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company believes
that its current revenue recognition policies comply with SAB 101.

         In March 2000 the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44
clarifies the definition of an employee for purposes of applying Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"), the criteria for determining whether a plan qualifies as a


                                       4


<PAGE>   7

noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000 but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998 or January 12, 2000.
The provisions of FIN 44 change the accounting for an exchange of unvested
employee stock options and restricted stock awards in a purchase business
combination. The new rules require the intrinsic value of the unvested awards be
allocated to deferred compensation and recognized as non-cash compensation
expense over the remaining future vesting period. The Company adopted these new
rules in its third fiscal quarter (beginning July 1, 2000) for acquisitions
accounted for as purchase business combinations.

2.       Business Combinations

Purchase Transactions

        In July 2000 the Company completed the acquisition of Innovent Systems,
Inc. ("Innovent"), a developer of radio frequency integrated circuits for
wireless data communications. In connection with the acquisition, the Company
issued an aggregate of 2,339,149 shares of its Class A common stock in exchange
for all outstanding shares of Innovent preferred and common stock and reserved
605,961 additional shares of its Class A common stock for issuance upon exercise
of outstanding employee stock options and other rights of Innovent. The share
issuances were exempt from registration pursuant to section 3(a)(10) of the
Securities Act of 1933, as amended. Portions of the shares issued will be held
in escrow pursuant to the terms of the acquisition agreement as well as various
employee share repurchase agreements.

        In August 2000 the Company completed the acquisition of Puyallup
Integrated Circuit Company, Inc., ("Puyallup"), a provider of integrated circuit
design services including full chip designs and embedded macro blocks for
microprocessors, system-on-a-chip and ASIC designs. In connection with the
acquisition, the Company issued an aggregate of 148,539 shares of its Class A
common stock in exchange for all outstanding shares of Puyallup common stock and
reserved 139,993 additional shares of its Class A common stock for issuance upon
exercise of outstanding employee stock options and other rights of Puyallup. The
share issuances were exempt from registration pursuant to section 3(a)(10) of
the Securities Act of 1933, as amended. Portions of the shares issued will be
held in escrow pursuant to the terms of the acquisition agreement as well as
various employee share repurchase agreements.

        In September 2000 the Company completed the acquisition of Altima
Communications, Inc. ("Altima"), a supplier of networking integrated circuits
for the small-to-medium sized business networking market. In connection with the
acquisition, the Company issued an aggregate of 1,661,784 shares of its Class A
common stock in exchange for all outstanding shares of Altima preferred and
common stock and reserved 875,111 additional shares of its Class A common stock
for issuance upon exercise of outstanding employee stock options and other
rights of Altima. The share issuances were exempt from registration pursuant to
section 3(a)(10) of the Securities Act of 1933, as amended. Portions of the
shares issued will be held in escrow pursuant to the terms of the acquisition
agreement as well as various employee share repurchase agreements. In addition
to the purchase consideration, the Company has reserved 2,889,667 additional
shares of its Class A common stock for future issuance to customers upon
exercise of outstanding performance-based warrants of Altima that become
exercisable upon satisfaction of certain customer purchase requirements.

         These acquisitions have been accounted for under the purchase method of
accounting. The Company is in the process of obtaining an independent appraisal
of the fair value of the tangible and intangible assets acquired in order to
allocate the purchase price in accordance with Accounting Principles Board
Opinion No. 16. The Company does not expect that the final allocation of
purchase price will produce materially different results from those reflected
herein. The preliminary purchase price was allocated as follows based upon
management's best estimate of the tangible and intangible assets and in-process
research and development:


                                       5
<PAGE>   8

<TABLE>
<CAPTION>
                                           Innovent          Altima      Puyallup         Total
                                           --------       ----------   ------------     ----------
                                                                     (in thousands)
<S>                                        <C>            <C>               <C>         <C>
Net tangible assets (liabilities)          $  6,875       $      930        $  (621)    $    7,184
Acquisition costs                               423            1,025            160          1,608
In-process research & development            41,690            3,970             --         45,660
Goodwill and other intangibles              265,647        1,075,726         37,982      1,379,355
Deferred tax liabilities                    (71,354)         (21,267)        (8,767)      (101,388)
Deferred compensation                       281,982          159,490         35,934        477,406
                                           --------       ----------        -------     ----------
Total consideration                        $525,263       $1,219,874        $64,688     $1,809,825
                                           ========       ==========        =======     ==========
</TABLE>

         The total consideration for the three purchase transactions consists in
aggregate of approximately 8,660,204 shares of common stock, including (a)
approximately 3,064,471 shares of common stock valued at $575.3 million based
upon the Company's stock price for a short period just before and after the
companies reached agreement and the proposed transactions were announced, (b)
approximately 2,889,667 shares for performance-based warrants issued to
customers valued at $689.4 million based upon the Company's stock price on the
day the acquisitions closed, and (c) approximately 2,706,066 shares of
restricted common stock and employee stock options valued at $545.1 million in
accordance with FIN 44.

         In-process research and development ("IPR&D") totaled in aggregate
$45.7 million. The amounts allocated to IPR&D were determined through
established valuation techniques in the high-technology industry and were
expensed upon acquisition as it was determined that the projects had not reached
technological feasibility and no alternative future uses existed.

         The fair value of the IPR&D for each of the acquisitions was determined
using the income approach. Under the income approach, the expected future cash
flows from each project under development are estimated and discounted to their
net present value at an appropriate risk-adjusted rate of return. Significant
factors considered in the calculation of the rate of return are the
weighted-average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving
technological success and market acceptance. Each project was analyzed to
determine the unique technological innovations, the existence and reliance upon
core technology, the existence of any alternative future use or current
technological feasibility, and the complexity, cost and time to complete the
remaining development. Future cash flows for each project were estimated based
upon forecasted revenues and costs, taking into account product life cycles, and
market penetration and growth rates.

         The IPR&D charge includes only the fair value of IPR&D completed. The
fair value of developed technology is included in identifiable intangible
assets, and the fair values of IPR&D to-be-completed and future research and
development are included in goodwill. The Company believes the amounts recorded
as IPR&D, as well as developed technology, represent fair value and approximate
the amounts an independent party would pay for these projects.

         As of the acquisition dates of Innovent, Puyallup and Altima,
development projects were in process. Research and development costs to bring
the products from the acquired companies to technological feasibility are not
expected to have a material impact on the Company's future results of operations
or financial condition.


                                       6


<PAGE>   9

         Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of five years. Reviews are regularly performed
to determine whether the carrying value of the asset is impaired. Impairment is
based on the excess of the carrying amount over the fair value of those assets.
No impairment has been indicated to date.

         Deferred stock-based compensation, which is included in the purchase
price of the acquisitions, has been valued in accordance with FIN 44. This
amount is being amortized over the remaining vesting period (generally three to
four years) of the underlying restricted common stock and stock options assumed.

         The results of operations of the three acquired companies are included
in the consolidated financial statements from their respective dates of
acquisition.

         The pro forma statements of operations data below gives effect to the
three acquisitions as if they had occurred at the beginning of fiscal 1999.
The following unaudited pro forma statements of operations data includes
amortization of goodwill, identified intangibles and stock-based compensation
but excludes the charge for acquired IPR&D. This pro forma data is presented for
informational purposes only and does not purport to be indicative of the results
of future operations nor of the results that would have occurred had the
acquisitions taken place at the beginning of fiscal 1999.

                                            Nine Months Ended
                                              September 30,
                                      -----------------------------
                                          2000              1999
                                      ------------      -----------
                                   (In thousands, except per share data)

         Net revenue                   $ 775,750         $ 362,345
         Net loss                      $(149,593)        $(275,462)
         Net loss per share            $    (.68)        $   (1.36)


                                       7

<PAGE>   10

3.       Earnings (Loss) Per Share

         The following table sets forth the computation of earnings (loss) per
share:

<TABLE>
<CAPTION>
                                           Three Months Ended               Nine Months Ended
                                              September 30,                   September 30,
                                        -------------------------       -------------------------
                                           2000           1999            2000             1999
                                        ---------       ---------       ---------       ---------
                                                 (In thousands, except per share data)
<S>                                     <C>             <C>             <C>             <C>

Numerator: Net income (loss)            $ (19,364)      $  24,594       $  75,162       $  39,482
                                        =========       =========       =========       =========
Denominator:
    Weighted-average shares
      outstanding                         223,078         209,449         218,470         206,204
    Less: nonvested common shares
      outstanding                          (2,568)         (5,693)         (3,026)         (6,544)
                                        ---------       ---------       ---------       ---------
Denominator for basic earnings per
  common share                            220,510         203,756         215,444         199,660
Effect of dilutive securities:
    Nonvested common shares                    --           5,000           3,007           4,905
    Stock options                              --          29,577          38,660          27,893
    Warrants                                   --              --              --              11
                                        ---------       ---------       ---------       ---------
Denominator for diluted earnings
  per common share                        220,510         238,333         257,111         232,469
                                        =========       =========       =========       =========
Basic earnings (loss) per share         $    (.09)      $     .12       $     .35       $     .20
                                        =========       =========       =========       =========
Diluted earnings (loss) per share       $    (.09)      $     .10       $     .29       $     .17
                                        =========       =========       =========       =========
</TABLE>

4.       Inventory

         Inventory is stated at the lower of cost (first-in, first-out) or
market, and consists of the following:

                                      September 30,    December 31,
                                          2000             1999
                                      ------------      ----------
                                             (In thousands)

         Work in process                $24,312          $11,878
         Finished goods                  20,159            7,299
                                        -------          -------
                                        $44,471          $19,177
                                        =======          =======

5.       Long-Term Debt

         The following is a summary of the Company's long-term debt and other
loans, including debt and loans assumed in connection with acquisitions:

<TABLE>
<CAPTION>
                                                          September 30,   December 31,
                                                               2000           1999
                                                          --------------  ------------
                                                                  (In thousands)

<S>                                                           <C>           <C>
    Notes payable at rates from 3.0% to 8.58% secured
      by certain of the Company's assets                      $    --       $   531
    Line of credit at a 12.0% rate secured by certain of
      the Company's assets                                         --           770
    Capitalized lease obligations payable in varying
      monthly installments at rates from 7.8% to 14.7%          1,854         3,561
                                                              -------       -------
                                                                1,854         4,862
     Less current portion of long-term debt                    (1,152)       (1,787)
                                                              -------       -------
                                                              $   702       $ 3,075
                                                              =======       =======
</TABLE>



                                       8
<PAGE>   11

6.       Shareholders' Equity

         On February 11, 2000 the Company effected a two-for-one stock split of
its Class A common stock and Class B common stock in the form of a 100% stock
dividend. All share numbers and per share amounts contained in these notes and
in the accompanying consolidated financial statements have been retroactively
restated to reflect this change in the Company's capital structure.

7.      Litigation

        In July 1997 the Company commenced an action against Sarnoff Corporation
and Sarnoff Digital Communications, Inc., now known as NxtWave Communications,
Inc. (collectively, "Sarnoff"), in the California Superior Court alleging breach
of contract, fraud, misappropriation of trade secrets, false advertising, trade
libel, intentional interference with prospective economic advantage and unfair
competition. The claims center on Sarnoff's violation of a non-disclosure
agreement entered into with the Company with respect to limited use of certain
of the Company's technology and on inaccurate comparisons that the Company
believes Sarnoff has made in its product advertising and in statements to
potential customers and others. This action was removed to the United States
District Court for the Central District of California, and was stayed pending
resolution of an action Sarnoff had brought against the Company in April 1997 in
New Jersey Superior Court. Following the decision in the New Jersey action in
the Company's favor in early 1999, Sarnoff filed a motion for summary judgment
in the California case on the basis that the issues therein had been or should
have been previously litigated in the New Jersey action under the New Jersey
"entire controversy" doctrine. Following oral argument in August 1999, the
District Court granted Sarnoff's motion and dismissed the Company's claims on
the grounds that they should have been brought as part of the New Jersey action.
The Company believes that the California action involves facts, circumstances
and claims unrelated to those at issue in the New Jersey action, and has filed
an appeal of the District Court's ruling. Briefing of the appeal in the Ninth
Circuit Court of Appeals is now complete and the parties await a date for oral
argument in the case.

        In March 2000 Intel Corporation ("Intel")and its subsidiary Level One
Communications, Inc. ("Level One") filed a complaint in California Superior
Court asserting claims against the Company for misappropriation of trade
secrets, unfair competition, and tortious interference with existing contractual
relations by the Company in connection with its recent hiring of three former
Intel employees. The complaint sought injunctive relief, an accounting, damages,
exemplary damages and attorneys' fees. Intel/Level One filed a first amended
complaint on April 28, 2000 seeking additional relief and containing certain
additional allegations, but asserting the same causes of action as the original
complaint. On May 25, 2000 the Court concluded a preliminary injunction hearing
in the matter. The Court denied Intel/Level One's request for injunctive relief
restricting the positions in which the three employees could work for the
Company, but issued an order granting certain other preliminary relief. The
Company has denied any wrongdoing or liability and has instructed its attorneys
to vigorously defend the action. On June 30, 2000 the Company filed a
cross-complaint against Intel/Level One, and on September 18, 2000, amended that
cross-complaint. The Company's amended cross-complaint includes causes of action
against Intel/Level One for unfair competition, trade secret misappropriation,
and tortious interference with contractual relations. On September 25, 2000 the
Company filed a motion for preliminary injunction, which asks the Court to
enjoin Intel/Level One from further unfair competition and seeks other relief,
including enjoining the marketing, sampling, distribution, shipment or sale of
certain products. The motion was heard on November 8, 2000, and a decision from
the Court is pending. The litigation is currently in the discovery stage and is
scheduled for trial in March 2001.

        In August 2000 Intel filed a complaint in the United States District
Court for the District of Delaware against the Company asserting that (i) the
Company infringes five Intel patents relating to video compression, high-speed
networking and semiconductor packaging, (ii) the Company induces the
infringement of such patents, and (iii) the Company contributorily infringes
such patents. The complaint sought a preliminary and permanent injunction
against the Company as well as the recovery of monetary damages, including
treble damages for willful infringement. Intel has not yet identified which
products allegedly infringe its patents. The Company has not yet answered the
complaint, but on October 10, 2000 the Company filed a motion to dismiss, or in
the alternative, to transfer venue; this motion is currently pending before the
court. The Company believes that it has strong defenses to Intel's claims. The
parties are currently in the initial stages of discovery in the action. The
Court has tentatively scheduled a hearing on patent claims construction to
commence in September 2001 and a trial to begin in October 2001.

        On October 6, 2000 the Company filed a complaint for declaratory
judgment in the United States District Court for the Northern District of
California against Intel asserting that the patents asserted by Intel in the
Delaware action are not infringed.

        Although the Company believes that it has strong defenses and is
defending the Delaware action vigorously, a finding of infringement by the
Company as to one or more of the patents in this action could lead to liability
for monetary damages (which could be trebled in the event that the infringement
were found to have been willful), the issuance of an injunction requiring that
the Company withdraw various products from the market, and indemnification
claims by the Company's customers or strategic partners, each of which events
could have a material adverse effect on the Company's, business, results of
operations and financial condition.

        In September 1998 Motorola, Inc. ("Motorola") filed a complaint in the
United States District Court for the District of Massachusetts against AltoCom,
Inc. ("AltoCom")(and co-defendant, PC-Tel, Inc.) asserting that (i) AltoCom's
V.34 and V.90 compliant software modem technology infringes several patents
owned by Motorola, (ii) AltoCom induces its V.34 and V.90 licensees to infringe
such patents, and (iii) AltoCom contributorily infringes such patents. The
complaint sought a preliminary and permanent injunction against AltoCom as well
as the recovery of monetary damages, including treble damages for willful
infringement. In October 1998 Motorola affirmatively dismissed its case in the
District of Massachusetts and filed a substantially similar complaint in the
United States District Court for the District of Delaware. AltoCom has filed an
answer and affirmative defenses to the District of Delaware complaint. AltoCom
has also asserted a counterclaim requesting declaratory relief that AltoCom has
not infringed the Motorola patents and that such patents are invalid and/or
unenforceable as well as a counterclaim requesting declaratory and injunctive
relief based on a breach of


                                       9
<PAGE>   12
contract theory. AltoCom believes that it has strong defenses to Motorola's
claims on invalidity, noninfringement and inequitable conduct grounds. In May
2000 Motorola filed an amended complaint alleging that AltoCom's technology
infringes an additional Motorola patent. The parties are currently engaged in
discovery in the action. AltoCom became a subsidiary of the Company on August
31, 1999. In September 1999 PC-Tel, Inc., the co-defendant in the case, reached
a settlement with Motorola.

        Although AltoCom believes that it has strong defenses and is defending
the action vigorously, a finding of infringement by AltoCom as to at least one
of the patents in this action could lead to liability for monetary damages
(which could be trebled in the event that the infringement were found to have
been willful), the issuance of an injunction requiring that AltoCom withdraw
various products from the market, and indemnification claims by AltoCom's
customers or strategic partners, each of which events could have a material
adverse effect on AltoCom's, and possibly the Company's, business, results of
operations and financial condition.

        In December 1999 Level One filed a complaint in the United States
District Court for the Eastern District of California against Altima
Communications, Inc., asserting that Altima's AC108R repeater products infringe
a U.S. patent owned by Level One. The complaint sought an injunction against
Altima as well as the recovery of monetary damages, including treble damages for
willful infringement. Altima filed an answer and affirmative defenses to the
complaint in the Eastern District of California. In March 2000 Level One filed a
related complaint in the U.S. International Trade Commission ("ITC"), seeking an
exclusion order and cease and desist order based on alleged infringement of the
same patent. Monetary damages are not available in the ITC. The ITC instituted
an investigation in April 2000. Altima filed an answer and affirmative defenses
to the complaint in the ITC. In July 2000 Intel and Level One filed a second
complaint in the ITC, asserting that certain of Altima's repeater, switch, and
transceiver products infringe three additional U.S. patents owned by Level One
or Intel. The ITC instituted a second investigation in August 2000, and the
Administrative Law Judge assigned to hear the cases issued an order in August
2000 granting a motion to consolidate the two investigations. In September 2000,
Altima filed declaratory judgment actions against Intel and Level One,
respectively, in the United States District Court for the Northern District of
California asserting that Altima has not infringed the three additional Intel
and Level One patents and that such patents are invalid or unenforceable.
Pursuant to statute, Altima is entitled to a stay of all proceedings in the
three District Court actions while the ITC investigation is pending. The Level
One action in the Eastern District of California has already been stayed and
Altima has formally requested a stay of both of the Northern District of
California actions.

        Altima believes it has strong defenses to the claims of Level One and
Intel on noninfringement, invalidity, and inequitable conduct grounds. The
parties are currently engaged in discovery in the consolidated ITC action, and a
hearing on the merits before the ITC Administrative Law Judge is scheduled to
begin in April 2001. Altima became a subsidiary of the Company on September 7,
2000.

        Although Altima believes that it has strong defenses and is defending
the action vigorously, a finding of infringement by Altima as to the patent in
the Eastern District of California action could lead to liability for monetary
damages (which could be trebled in the event that the infringement were found to
have been willful) and the issuance of an injunction requiring that Altima
withdraw various products from the market. A finding against Altima in the
consolidated ITC action could result in the exclusion of certain Altima products
from entering the United States. Any finding adverse to Altima in these actions
could also result in indemnification claims by Altima's customers or strategic
partners. Any of the foregoing events could have a material adverse effect on
Altima's, and possibly the Company's, business, results of operations and
financial condition.

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

        The pending lawsuits involve complex questions of fact and law and could
require the expenditure of significant costs and diversion of resources to
defend. Although management currently believes the outcome of outstanding legal
proceedings, claims and litigation will not have a material adverse effect on
the Company's business, results of operations or financial condition, the
results of litigation are inherently uncertain, and an adverse outcome is at
least reasonably possible. The Company is unable to estimate the range of
possible loss from outstanding litigation, and no amounts have been provided for
such matters in the accompanying consolidated financial statements.

8.       Subsequent Events

Completed Business Combinations

         On October 3, 2000 the Company completed the acquisition of NewPort
Communications, Inc. ("NewPort"), a supplier of mixed-signal integrated circuits
for the high-speed communications infrastructure market. In connection with the
acquisition, the Company issued an aggregate of 5,211,050 shares of its Class A
common stock in exchange for all outstanding shares of NewPort preferred and
common stock and reserved 411,088 additional shares of Class A common stock for
issuance upon exercise of outstanding employee stock



                                       10
<PAGE>   13
options and other rights of NewPort. The share issuances were exempt from
registration pursuant to section 3(a)(10) of the Securities Act of 1933, as
amended. Portions of the shares issued will be held in escrow pursuant to the
terms of the acquisition agreement as well as various employee share repurchase
agreements. In connection with the acquisition, the Company will record a
one-time charge for purchased in-process research and development expenses
related to the acquisition in its fourth fiscal quarter ending December 31,
2000.

         On October 6, 2000 the Company completed the acquisition of Silicon
Spice Inc. ("Silicon Spice"), a developer of communications processors and other
technology for high-density voice, fax and data packet transmission over wide
area networks. In connection with the acquisition, the Company issued an
aggregate of 3,864,161 shares of its Class A common stock in exchange for all
outstanding shares of Silicon Spice preferred and common stock and reserved
1,126,885 additional shares of Class A common stock for issuance upon exercise
of outstanding employee stock options, warrants and other rights of Silicon
Spice. The share issuances were exempt from registration pursuant to section
3(a)(10) of the Securities Act of 1933, as amended. Portions of the shares
issued will be held in escrow pursuant to the terms of the acquisition agreement
as well as various employee share repurchase agreements. In connection with the
acquisition, the Company will record a one-time charge for purchased in-process
research and development expenses related to the acquisition in its fourth
fiscal quarter ending December 31, 2000.

Pending Business Combinations

         On October 4, 2000 the Company announced that it had signed a
definitive agreement to acquire Element 14, Inc. ("Element 14"), a developer of
high-port density, low-power digital subscriber line chipsets, software and
communications processor technology. In connection with the acquisition, the
Company will issue in aggregate approximately 2,650,000 shares of its Class A
common stock in exchange for all outstanding shares of Element 14 preferred and
common stock and upon exercise of outstanding employee stock options, warrants
and other rights of Element 14. The merger transaction is expected to close
within 60 days and will be accounted for under the purchase method of
accounting. The boards of directors of both companies have approved the merger,
which awaits approval by Element 14's shareholders and the satisfaction of
regulatory requirements and other customary closing conditions. The Company
expects to record a one-time charge for purchased in-process research and
development expenses related to the acquisition in its fourth fiscal quarter
ending December 31, 2000.

         On October 17, 2000 the Company announced that it had signed a
definitive agreement to acquire Allayer Communications ("Allayer"), a developer
of high-performance enterprise and optical networking communications chips. In
connection with the acquisition, the Company will issue in aggregate about
1,230,000 shares of its Class A common stock in exchange for all outstanding
shares of Allayer's preferred and common stock and upon exercise of outstanding
employee stock options and other rights of Allayer. If certain performance goals
are satisfied, the Company will issue up to an additional 300,000 shares of its
Class A common stock to the shareholders and option holders of Allayer. The
merger transaction is expected to close within 60 days and will be accounted for
under the purchase method of accounting. The boards of directors of both
companies have approved the merger, which awaits approval by Allayer's
shareholders and the satisfaction of regulatory requirements and other customary
closing conditions. The Company expects to record a one-time charge for
purchased in-process research and development expenses related to the
acquisition in its fourth fiscal quarter ending December 31, 2000. In addition
to the purchase consideration, the Company will reserve an aggregate of
approximately 790,000 shares of its Class A common stock for future issuance to
customers upon exercise of outstanding performance-based warrants of Allayer
that become exercisable upon satisfaction of certain customer purchase
requirements.


                                       11
<PAGE>   14
         On November 6, 2000 the Company announced that it had signed a
definitive agreement to acquire SiByte, Inc. ("SiByte"), a developer of
high-performance microprocessor solutions for broadband networking. In
connection with the acquisition, the Company will issue in aggregate up to
9,300,000 shares of its Class A common stock in exchange for all outstanding
shares of SiByte's preferred and common stock and upon exercise of outstanding
employee stock options and other rights of SiByte. About 5,600,000 of the
Company's shares will be issuable at closing of the acquisition; approximately
3,700,000 additional shares will be reserved for future issuance to the
shareholders and option holders of SiByte upon satisfaction of certain
performance goals. The merger transaction is expected to close within 60 days
and will be accounted for under the purchase method of accounting. The boards of
directors of both companies have approved the merger, which awaits approval by
SiByte's shareholders and the satisfaction of regulatory requirements and other
customary closing conditions. The Company expects to record a one-time charge
for purchased in-process research and development expenses related to the
acquisition in its fourth fiscal quarter ending December 31, 2000. In addition
to the purchase consideration, the Company will reserve approximately 1,800,000
million shares of its Class A common stock for future issuance to customers upon
the exercise of outstanding performance-based warrants of SiByte that become
exercisable upon satisfaction of certain customer purchase requirements.

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 the Consolidated Financial Statements and related Notes thereto contained
elsewhere in this Report. The information contained in this Quarterly Report on
Form 10-Q is not a complete description of our business or the risks associated
with an investment in our common stock. We urge you to carefully review and
consider the various disclosures made by us in this Report and in our other
reports filed with the SEC, including our Annual Report on Form 10-K for the
year ended December 31, 1999 and our subsequent reports on Forms 10-Q, 8-K and
8-K/A, that discuss our business in greater detail.

         The section entitled "Risk Factors" set forth below, and similar
discussions in our other SEC filings, discuss some of the important risk factors
that may affect our business, results of operations and financial condition. You
should carefully consider those risks, in addition to the other information in
this Report and in our other filings with the SEC, before deciding to invest in
our company or to maintain or increase your investment.

         This Report contains forward-looking statements which include, but are
not limited to, statements concerning projected revenues, expenses, gross profit
and income, the need for additional capital, Year 2000 compliance, market
acceptance of our products, our ability to consummate acquisitions and integrate
their operations successfully, the competitive nature of our markets, our
ability to achieve further product integration, the status of evolving




                                       12
<PAGE>   15

technologies and their growth potential, our production capacity, our ability to
migrate to smaller process geometries, and the success of pending litigation.
These forward-looking statements are based on our current expectations,
estimates and projections about our industry, management's beliefs, and certain
assumptions made by us. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," "may," "will" and variations of these
words or similar expressions are intended to identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances, including any
underlying assumptions, are forward-looking statements. These 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. We undertake no obligation to revise
or update publicly any forward-looking statements for any reason.

         All share numbers and per share amounts in this Report have been
retroactively adjusted to reflect our 2-for-1 stock splits, each in the form of
a 100% stock dividend, effective February 17, 1999 and February 11, 2000,
respectively.

OVERVIEW

         We are the leading provider of highly integrated silicon solutions that
enable broadband digital transmission of voice, video and data. These integrated
circuits permit the cost effective delivery of high-speed, high-bandwidth
networking using existing communications infrastructures that were not
originally designed for the transmission of broadband digital content. Using
proprietary technologies and advanced design methodologies, we design, develop
and supply integrated circuits for a number of the most significant broadband
communications markets, including the markets for cable set-top boxes, cable
modems, high-speed local, metropolitan and wide area networks, home networking,
Voice over Internet Protocol ("VoIP"), carrier access, residential broadband
gateways, direct broadcast satellite and terrestrial digital broadcast, optical
networking, digital subscriber lines ("xDSL") and wireless communications. From
our inception in 1991 through 1994, we were primarily engaged in product
development and the establishment of strategic customer and foundry
relationships. During that period, we generated the majority of our revenue from
development work performed for key customers. We began shipping our products in
1994, and subsequently our revenue has grown predominately through sales of our
semiconductor products. We intend to continue to enter into development
contracts with key customers, but expect that development revenue will
constitute a decreasing percentage of our total revenue. We also generate a
small percentage of our product revenue from sales of software and software
support and sales of system-level reference designs.

         We recognize product revenue at the time of shipment. Provision is
concurrently made for estimated product returns, which historically have been
immaterial. Our products typically carry a one-year warranty. We recognize
development revenue when earned. Revenue from licensed software is recognized at
the time of shipment, provided that we have vendor-specific objective evidence
of the fair value of each element of the software offering. Revenue from
post-contract customer support and any other future deliverables is deferred and
earned over the support period or as contract elements are delivered.



                                       13
<PAGE>   16

         From time to time, our key customers have placed large orders causing
our quarterly revenue to fluctuate significantly. We expect these fluctuations
will continue in the future. Sales to our five largest customers, including
sales to their respective manufacturing subcontractors, decreased to
approximately 63.9% of our revenue in the nine months ended September 30, 2000
as compared to 71.8% in the nine months ended September 30, 1999. We expect that
our key customers will continue to account for a significant portion of our
revenue for 2000 and in the future.

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

         o  our product mix;

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

         o  competitive pricing strategies;

         o  the mix of product revenue and development revenue; and

         o  manufacturing cost efficiencies and inefficiencies.

         For example, newly-introduced products generally have higher average
selling prices and gross margins, both of which typically decline over product
life cycles due to competitive pressures and volume pricing agreements. Our
gross margin and operating results in the future may continue to fluctuate as a
result of these and other factors.

         The sales cycle for the test and evaluation of our products can range
from three to six months or more, with an additional three to six months or more
before a customer commences volume production of equipment incorporating our
products. Due to these lengthy sales cycles, we may experience a significant
delay between increasing expenses for research and development and selling,
general and administrative efforts, and the generation of corresponding revenue,
if any. Furthermore, during 2000 and thereafter, we intend to continue to
increase our investment in research and development, selling, general and
administrative functions and inventory as we expand our operations through
indigenous growth and acquisitions. We anticipate that the rate of new orders
may vary significantly from month to month. Consequently, if anticipated sales
and shipments in any quarter do not occur when expected, expenses and inventory
levels could be disproportionately high, and our operating results for that
quarter, and potentially future quarters, would be materially and adversely
affected.


                                       14
<PAGE>   17

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999

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

<TABLE>
<CAPTION>
                                                   Three Months Ended       Nine Months Ended
                                                     September 30,            September 30,
                                                   -------------------      ------------------
                                                   2000        1999(1)      2000       1999(1)
                                                   -----       -------      -----      -------
<S>                                                <C>          <C>         <C>         <C>

    Revenue                                        100.0%       100.0%      100.0%      100.0%
    Cost of revenue                                 42.6         40.3        42.0        40.5
                                                   -----        -----       -----       -----
    Gross profit                                    57.4         59.7        58.0        59.5
    Operating expense:
        Research and development                    21.3         22.0        21.7        23.5
        Selling, general and administrative          9.4         10.7         9.5        12.0
        Stock-based compensation                     8.7          0.7         4.1         0.8
        Amortization of goodwill and
        purchased intangible assets                  7.8           --         3.3          --
        In-process research and development         14.3           --         6.0          --
        Merger-related costs                          --          2.9         0.6         4.2
        Litigation settlement costs                   --           --          --         4.7
                                                   -----        -----       -----       -----
    Income (loss) from operations                   (4.1)        23.4        12.8        14.3
    Interest and other income, net                   1.5          1.6         1.8         1.6
                                                   -----        -----       -----       -----
    Income (loss) before income taxes               (2.6)        25.0        14.6        15.9
    Provision for income taxes                       3.5          7.4         4.7         4.9
                                                   -----        -----       -----       -----
    Net income (loss)                               (6.1)%       17.6%        9.9%       11.0%
                                                   =====        =====       =====       =====
</TABLE>

-------------
(1) Restated to give retroactive effect to acquisitions accounted for using the
    pooling-of-interests method.

         Business Combinations. During the three months ended September 30, 2000
we completed the acquisitions of Innovent, Puyallup and Altima. These
acquisitions were accounted for as purchase transactions. Accordingly, the
accompanying financial statements include the results of operations of the
acquired companies as of their respective acquisition dates. See Note 2 of Notes
to Unaudited Condensed Consolidated Financial Statements. The restated condensed
consolidated financial statements also include the pooled operations of each of
our prior acquisitions, which were accounted for using the pooling-of-interests
method.

         Revenue. Revenue consists of product revenue generated principally by
sales of our semiconductor products, and to a lesser extent, from sales of
software and software support and development revenue generated under
development contracts with our customers. Revenue for the three months ended
September 30, 2000 was $319.2 million, an increase of $179.6 million or 128.7%
from revenue of $139.6 million in the three months ended September 30, 1999.
Revenue for the nine months ended September 30, 2000 was $755.9 million, an
increase of $396.7 million or 110.4% from revenue of $359.2 million in the nine
months ended September 30, 1999. This growth in revenue resulted mainly from
increases in volume shipments of our semiconductor products for the high-speed
networking market, cable set-top boxes and cable modems.



                                       15

<PAGE>   18

         Gross Profit. Gross profit represents revenue less the cost of revenue.
Cost of revenue includes the cost of purchasing the finished silicon wafers
processed by independent foundries, and costs associated with assembly, test and
quality assurance for those products, as well as costs of personnel and
equipment associated with manufacturing support and contracted development work.
Gross profit for the three months ended September 30, 2000 was $183.2 million or
57.4% of revenue, an increase of $100.0 million as compared with gross profit of
$83.3 million or 59.7% of revenue in the three months ended September 30, 1999.
Gross profit for the nine months ended September 30, 2000 was $438.5 million or
58.0% of revenue, an increase of $224.6 million as compared with gross profit of
$213.9 million or 59.5% of revenue in the nine months ended September 30, 1999.
The increase in gross profit was mainly attributable to the significant increase
in the volume of semiconductor product shipments. The decrease in gross profit
as a percentage of revenue was largely driven by volume-pricing agreements and
competitive pricing strategies on certain high volume products. We expect that
gross profit as a percentage of revenue will continue to decline in future
periods due to higher anticipated silicon wafer costs and as volume-pricing
agreements and competitive pricing strategies continue to take effect. In
addition, our gross profit may be affected by the future introduction of certain
lower margin products.

         Research and Development Expense. Research and development expense
consists primarily of salaries and related costs of employees engaged in
research, design and development activities, costs related to engineering design
tools, and subcontracting costs. Research and development expense for the three
months ended September 30, 2000 was $67.9 million or 21.3% of revenue, an
increase of $37.3 million as compared with research and development expense of
$30.6 million or 22.0% of revenue for the three months ended September 30, 1999.
Research and development expense for the nine months ended September 30, 2000
was $163.3 million or 21.7% of revenue, an increase of $79.1 million as compared
with research and development expense of $84.3 million or 23.5% of revenue for
the nine months ended September 30, 1999. The increase in research and
development expense in absolute dollars was primarily due to the addition of
personnel and the investment in design tools for the development of new products
and the enhancement of existing products. The decrease in research and
development expense as a percentage of revenue reflected the significant
increase in revenue in the three and nine months ended September 30, 2000 as
compared to the respective prior year period. We expect that research and
development expense in absolute dollars will continue to increase for the
foreseeable future as a result of indigenous growth and acquisitions.

         Selling, General and Administrative Expense. Selling, general and
administrative expense consists primarily of personnel-related expenses,
professional fees and facilities expenses. Selling, general
and administrative expense for the three months ended September 30, 2000 was
$30.1 million or 9.4% of revenue, an increase of $15.3 million as compared with
selling, general and administrative expense of $14.9 million or 10.7% of revenue
for the three months ended September 30, 1999. Selling, general and
administrative expense for the nine months ended September 30, 2000 was $72.1
million or 9.5% of revenue, an increase of $28.9 million as compared with
selling, general and administrative expense of $43.2 million or 12.0% of revenue
for the nine months ended September 30, 1999. The increase in absolute dollars
reflected higher personnel related costs resulting from the hiring of additional
sales and marketing personnel, senior management and administrative





                                       16
<PAGE>   19
\
personnel, increased facilities expenses and legal and other professional fees.
The decrease in selling, general and administrative expense as a percentage of
revenue reflected the significant increase in revenue during the three and nine
months ended September 30, 2000 as compared with the respective prior year
period. We expect that selling, general and administrative expense in absolute
dollars will continue to increase for the foreseeable future to support the
planned continued expansion of our operations through indigenous growth and
acquisitions and as a result of periodic changes and additions to our
infrastructure to support increased headcount, acquisition and integration
activities, and international operations.

         Stock-Based Compensation. Stock-based compensation represents the
difference between the fair value of the common stock for accounting purposes
and the exercise price of such options at the date of underlying employee stock
options grant in accordance with FIN 44. Stock-based compensation for the three
months ended September 30, 2000 was $27.6 million or 8.7% of revenue, an
increase of $26.7 million as compared with stock-based compensation of $1.0
million or 0.7% of revenue for the three months ended September 30, 1999.
Stock-based compensation for the nine months ended September 30, 2000 was $30.7
million or 4.1% of revenue, an increase of $27.8 million as compared with
stock-based compensation of $2.8 million or 0.8% of revenue for the nine months
ended September 30, 1999. The increase in stock-based compensation in the three
and nine months ended September 30, 2000 relates primarily to stock options
granted to certain employees of acquired companies that we assumed in the
various purchase transactions completed during the third quarter of fiscal 2000.
We have presented these amounts as a reduction of shareholders' equity and are
amortizing these amounts ratably over the respective vesting periods of the
applicable options. See Note 2 of Notes to Unaudited Condensed Consolidated
Financial Statements. We expect to incur additional stock-based compensation
expenses in future periods as a result of these purchase transactions and the
additional purchase transactions expected to close during the fourth quarter of
fiscal 2000.

         Amortization of Goodwill and Purchased Intangible Assets. Amortization
of goodwill and purchased intangible assets includes the amortization of
goodwill and other purchased intangible assets relating to various purchase
transactions completed during the third quarter of fiscal 2000. The amortization
of goodwill and purchased intangible assets for the three and nine months ended
September 30, 2000 was $24.9 million or 7.8% and 3.3% of revenue, respectively.
No amortization of goodwill and purchased intangible assets were incurred in the
three and nine months ended September 30, 1999. See Note 2 of Notes to Unaudited
Condensed Consolidated Financial Statements. We expect to incur additional
amortization of goodwill and purchased intangible assets in future periods as a
result of these purchase transactions and the additional purchase transactions
expected to close during the fourth quarter of fiscal 2000.

         In-Process Research and Development. In-process research and
development relates to various purchase transactions completed during the third
quarter of fiscal 2000. The in-process research and development cost for the
three and nine months ended September 30, 2000 was $45.7 million or 14.3% and
6.0% of revenue, respectively. No in-process research and development costs were
incurred in the three and nine months ended September 30, 1999. See Note 2 of
Notes to Unaudited Condensed Consolidated Financial Statements. We expect to
incur additional in-process research and development costs in future periods as
a result of these purchase transactions and the additional purchase transactions
expected to close during the fourth quarter of fiscal 2000.



                                       17
<PAGE>   20

         Merger-Related Costs. Merger-related costs are costs incurred in
connection with acquisitions accounted for using the pooling-of-interests method
and consist primarily of transaction costs, such as fees for investment bankers,
attorneys, accountants, and other related fees and expenses, certain
restructuring costs related to the disposal of assets and the write-down of
unutilized assets, and adjustments to conform the accounting policies of the
acquired companies to those of our Company. No merger-related costs were
incurred for the three months ended September 30, 2000 as compared with
merger-related costs of $4.1 million for the three months ended September 30,
1999. The decrease in merger-related costs resulted primarily from the fact that
we did not enter into any pooling-of-interests acquisitions during the three
months ended September 30, 2000. Merger-related costs for the nine months ended
September 30, 2000 were $4.7 million as compared with merger-related costs of
$15.2 million for the nine months ended September 30, 1999. This decrease in
merger-related costs resulted primarily from the fact that an investment banking
fee was incurred in connection with a fiscal 1999 transaction while no such
investment banking fees were incurred during the nine months ended September 30,
2000.

         Litigation Settlement Costs. Litigation settlement costs consist
primarily of settlement fees and associated attorneys' fees, expenses and court
costs. No litigation settlement costs were incurred in the three and nine months
ended September 30, 2000 and the three months ended September 30, 1999.
Litigation settlement costs of approximately $17.0 million were incurred in the
nine months ended September 30, 1999.

         Interest and Other Income, Net. Interest and other income, net reflects
interest earned on average cash, cash equivalents and investment balances, less
interest on our long-term debt and capital lease obligations. Interest and other
income, net for the three months ended September 30, 2000 was $4.9 million, an
increase of $2.7 million as compared with $2.2 million in the three months ended
September 30, 1999. Interest and other income, net for the nine months ended
September 30, 2000 was $13.0 million, an increase of $7.1 million as compared
with $5.9 million in the nine months ended September 30, 1999. The increase was
principally due to higher cash balances available to invest resulting from cash
generated by operations and the exercise of employee stock options.

         Provision for Income Taxes. We utilize the liability method of
accounting for income taxes as set forth in Financial Accounting Standards Board
Statement 109 ("Statement 109"), Accounting for Income Taxes. Our effective tax
rates for the three and nine months ended September 30, 2000 were (138%) and
32%, respectively. Our effective tax rates for the three and nine months ended
September 30, 1999 were 29% and 30%, respectively. The federal statutory income
tax rate was 35% for each period.

         Our effective tax rates for the three and nine months ended September
30, 2000 were affected by intangible expenses resulting from acquisitions
accounted for under the purchase method of accounting, and benefits from
research and development credits. For the three and nine months ended September
30, 1999, our effective tax rate was reduced by research and development
credits.


                                       18
<PAGE>   21

LIQUIDITY AND CAPITAL RESOURCES

         Since our inception, we have financed our operations through a
combination of sales of equity securities and cash generated by operations. At
September 30, 2000 we had $551.8 million in working capital, and $482.4 million
in cash, cash equivalents and short-term investments. At December 31, 1999 we
had $313.7 million in working capital, $270.9 million in cash, cash equivalents
and short-term investments, and $9.4 million in long-term investments.

         Operating activities provided cash in the amount of $141.4 million for
the nine months ended September 30, 2000. This was primarily the result of net
income, the non-cash impact of depreciation and amortization including the
amortization of stock-based compensation, goodwill and purchased intangibles,
purchased in-process research and development, tax benefit from the exercise of
stock options, increases in accounts payable and an increase in income taxes
partially offset by increases in accounts receivable, inventory, deferred tax
assets and prepaid expenses and other assets. Operating activities provided cash
in the amount of $93.8 million for the nine months ended September 30, 1999.
This was primarily the result of net income, the non-cash impact of depreciation
and amortization including amortization of stock-based compensation, tax benefit
from the exercise of stock options, increases in accounts payable, income taxes
and other accrued liabilities, partially offset by increases in accounts
receivable, deferred tax assets, inventory and prepaid expenses and other
assets.

         In the nine months ended September 30, 2000 our investing activities
used $47.1 million in cash for the purchase of capital equipment to support our
expanding operations, provided $10.7 million in cash as a result of cash
received from purchase acquisitions, and used a net $5.2 million in cash for the
purchase of held-to-maturity securities. In the nine months ended September 30,
1999 our investing activities used $22.5 million in cash for the purchase of
capital equipment and a net $21.3 million in cash for the purchase of
held-to-maturity investments.

         Cash provided by financing activities was $97.2 million in the nine
months ended September 30, 2000, primarily from $100.7 million in proceeds from
the issuance of common stock, partially offset by $4.6 million in payments on
long-term obligations and capital leases of acquired companies. Financing
activities provided cash of $34.5 million in the nine months ended September 30,
1999, primarily from $40.8 million in proceeds from the issuance of common
stock, partially offset by $7.7 million in payments on long-term obligations and
capital leases of acquired companies.

         We believe that our existing cash, cash equivalents and investments on
hand, together with cash that we expect to generate from our operations, will be
sufficient to meet our capital needs for at least the next twelve months.
However, it is possible that we may need or choose to raise additional funds to
fund our activities beyond the next year or to consummate acquisitions of other
businesses, products or technologies. We could raise such funds by selling more
stock to the public or to selected investors, or by borrowing money. In
addition, even though we may not need additional funds, we may still elect to
sell additional equity securities or obtain credit facilities for other reasons.
We may not be able to obtain additional funds on favorable terms, or 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 the holders of our common stock.



                                       19
<PAGE>   22

         We had commitments totaling approximately $17.2 million as of September
30, 2000 primarily for the purchase of engineering design tools, computer
hardware and information systems infrastructure. During 1999 we spent
approximately $48.4 million on capital equipment to support our expanding
operations. We expect that we will spend more than that amount during 2000 to
purchase additional engineering design tools, computer hardware, test equipment,
information systems and leasehold improvements, as our operations continue to
expand and as we integrate and upgrade the capital equipment and facilities of
acquired companies. We may finance these purchases from our cash and cash
equivalents and investments on hand, cash generated from our operations,
borrowings, equity offerings, or a combination thereof.

         Although we believe we have sufficient capital to fund our activities
for at least the next twelve months, our future capital requirements may vary
materially from those now planned. The amount of capital that we will need in
the future will depend on many factors, including:

         o  the market acceptance of our products;

         o  the levels of promotion and advertising that will be required to
            launch our new products and achieve and maintain a competitive
            position in the marketplace;

         o  volume price discounts;

         o  our business, product, capital expenditure and research and
            development plans and product and technology roadmaps;

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

         o  capital improvements to new and existing facilities;

         o  technological advances;

         o  our competitors' response to our products; and

         o  our relationships with suppliers and customers.

         In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.

YEAR 2000 COMPLIANCE

         To date we have not experienced any known material Year 2000 problems
in our products, our internal systems or facilities, or the products, systems
and services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly. We did not incur material costs to identify and address specific Year
2000 compliance issues. We could, however, incur additional costs in addressing
any residual Year 2000 issues, which could have a material and adverse effect on
our business.



                                       20
<PAGE>   23

RISK FACTORS

         BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE
YOUR INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN OUR OTHER
FILINGS WITH THE SEC, INCLUDING OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999 AS WELL AS OUR SUBSEQUENT REPORTS ON FORMS 10-Q, 8-K AND
8-K/A. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING
OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR
THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF
ANY OF THESE RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS
OF OPERATIONS COULD BE SERIOUSLY HARMED. IN THAT EVENT, THE MARKET PRICE FOR OUR
CLASS A COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. AS A RESULT, WE MAY
FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

         Our quarterly revenues and operating results have fluctuated
significantly in the past and may continue to vary from quarter to quarter due
to a number of factors, many of which are not within our control. If our
operating results do not meet the expectations of securities analysts or
investors, our stock price may decline. Fluctuations in our operating results
may be due to a number of factors, including the following:

         o  the volume of our product sales and pricing concessions on volume
            sales;

         o  the timing, rescheduling or cancellation of significant customer
            orders;

         o  the gain or loss of a key customer;

         o  the qualification, availability and pricing of competing products
            and technologies and the resulting effect on sales and pricing of
            our products;

         o  silicon wafer pricing and the availability of foundry and assembly
            capacity and raw materials;

         o  the risks inherent in our acquisitions of technologies and
            businesses, including the timing and successful completion of
            technology and product development through volume production,
            integration issues, costs and unanticipated expenditures, changing
            relationships with customers, suppliers and strategic partners,
            potential contractual, intellectual property or employment issues,
            accounting treatment and charges, and the risks that the acquisition
            cannot be completed successfully or that anticipated benefits are
            not realized;

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

         o  the timing of customer-industry qualification and certification of
            our products and the risks of non-qualification or
            non-certification;

         o  the rate at which our present and future customers and end users
            adopt Broadcom technologies in our target markets;

         o  the rate of adoption and acceptance of new industry standards in our
            target markets;

         o  the effects of new and emerging technologies;



                                       21
<PAGE>   24

         o  intellectual property disputes and customer indemnification claims;

         o  the effectiveness of our product cost reduction efforts;

         o  fluctuations in the manufacturing yields of our third party
            semiconductor foundries and other problems or delays in the
            fabrication, assembly, testing or delivery of our products;

         o  the risks of producing products with new suppliers and at new
            fabrication and assembly facilities;

         o  the risks and uncertainties associated with our international
            operations;

         o  problems or delays that we may face in shifting our products to
            smaller geometry process technologies and in achieving higher levels
            of design integration;

         o  our ability to retain and hire key executives, technical personnel
            and other employees in the numbers, with the capabilities, and at
            the compensation levels that we need to implement our business and
            product plans;

         o  changes in our product or customer mix;

         o  the quality of our products and any remediation costs;

         o  the effects of natural disasters and other events beyond our
            control;

         o  the level of orders received that we can ship in a fiscal quarter;

         o  potential business disruptions, claims, expenses and other
            difficulties resulting from residual "Year 2000" problems in
            computer-based systems used by us, our suppliers or our customers;

         o  economic and market conditions in the semiconductor industry and the
            broadband communications markets; and

         o  general economic and market conditions.

         We intend to continue to increase our operating expenses in 2000 and in
the future. A large portion of our operating expenses, including rent, salaries
and capital lease expenditures, is fixed and difficult to reduce or change.
Accordingly, if our total revenue does not meet our expectations, we probably
would not be able to adjust our expenses quickly enough to compensate for the
shortfall in revenue. In that event, our business, financial condition and
results of operations would be materially and adversely affected.

         Due to all of the foregoing factors, and the other risks discussed in
this report, you should not rely on quarter-to-quarter comparisons of our
operating results as an indication of future performance.

BECAUSE WE DEPEND ON A FEW SIGNIFICANT CUSTOMERS FOR A SUBSTANTIAL PORTION OF
OUR REVENUES, THE LOSS OF A KEY CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS. IN
ADDITION, IF WE ARE UNABLE TO CONTINUE TO SELL EXISTING AND NEW PRODUCTS TO OUR
KEY CUSTOMERS IN SIGNIFICANT QUANTITIES OR TO ATTRACT NEW SIGNIFICANT CUSTOMERS,
OUR FUTURE OPERATING RESULTS COULD BE ADVERSELY AFFECTED.

         We have derived a substantial portion of our revenues in the past from
sales to a relatively small number of customers. As a result, the loss of any
significant customer could materially and adversely affect our financial
condition and results of operations. Sales to Motorola, Cisco and 3Com,
including




                                       22
<PAGE>   25

sales to their respective manufacturing subcontractors, accounted for
approximately 23.9%, 14.8% and 14.6%, respectively, of our revenue in the nine
months ended September 30, 2000. In the nine months ended September 30, 2000
sales to our five largest customers, including sales to their respective
manufacturing subcontractors, decreased to 63.9% of our total revenues compared
to 66.6% in the year ended December 31, 1999. We expect that our key customers
will continue to account for a substantial portion of our revenues for 2000 and
in the future. Accordingly, our future operating results will continue to depend
on the success of our largest customers and on our ability to sell existing and
new products to these customers in significant quantities.

         We may not be able to maintain or increase sales to certain of our key
customers for a variety of reasons, including the following:

         o  Most of our customers can stop incorporating our products into their
            own products with limited notice to us and suffer little or no
            penalty.

         o  Our agreements with our customers typically do not require them to
            purchase a minimum amount of our products.

         o  Many of our customers have pre-existing relationships with our
            current or potential competitors that may affect their decision to
            purchase our products.

         o  Our customers face intense competition from other manufacturers that
            do not use our products.

         o  Some of our customers offer or may offer products that compete with
            our products.

         o  Our longstanding relationships with some of our larger customers may
            also deter other potential customers who compete with these
            customers from buying our products.

         In addition, in order to attract new customers or retain existing
customers, we may offer certain customers favorable prices on our products. If
these prices are lower than the prices paid by our existing customers, we would
have to offer the same lower prices to certain of our customers who have
contractual "most favored nation" pricing arrangements. In that event, our
average selling prices and gross margins would decline. The loss of a key
customer, a reduction in our sales to any key customer or our inability to
attract new significant customers could materially and adversely affect our
business, financial condition or results of operations.

WE FACE INTENSE COMPETITION IN THE BROADBAND COMMUNICATIONS MARKETS AND
SEMICONDUCTOR INDUSTRY, WHICH COULD REDUCE OUR MARKET SHARE IN EXISTING MARKETS
AND AFFECT OUR ENTRY INTO NEW MARKETS.

         The broadband communications markets and semiconductor industry are
intensely competitive. We expect competition to continue to increase in the
future as industry standards become well known and as other competitors enter
our target markets. We currently compete with a number of major domestic and
international suppliers of integrated circuits in the markets for cable set-top
boxes, cable modems, high-speed local, metropolitan and wide area networks, home
networking, Voice over Internet Protocol ("VoIP"), carrier




                                       23
<PAGE>   26

access, residential broadband gateways, direct broadcast satellite and
terrestrial digital satellite, optical networking, digital subscriber lines
("xDSL") and wireless communications, including without limitation the markets
for products such as network interface cards and LAN-on-motherboard solutions.
We also compete with suppliers of system- and motherboard-level solutions
incorporating integrated circuits that are proprietary or sourced from
manufacturers other than Broadcom. This competition has resulted and may
continue to result in declining average selling prices for our products. In all
of our target markets, we also may face competition from newly established
competitors and suppliers of products based on new or emerging technologies. We
also expect to encounter further consolidation in the markets in which we
compete.

         Many of our competitors operate their own fabrication facilities and
have longer operating histories and presence in key markets, greater name
recognition, larger customer bases and significantly greater financial, sales
and marketing, manufacturing, distribution, technical and other resources than
we do. As a result, these competitors may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements. They may also be
able to devote greater resources to the promotion and sale of their products. In
addition, current and potential competitors have established or may establish
financial or strategic relationships among themselves or with existing or
potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Existing or new competitors may also
develop technologies in the future that more effectively address the
transmission of digital information through existing analog infrastructures or
through new digital infrastructures at lower costs than our technologies.
Increased competition has in the past and is likely to continue to result in
price reductions, reduced gross margins and loss of market share. We cannot
assure you that we will be able to continue to compete successfully or that
competitive pressures will not materially and adversely affect our business,
financial condition and results of operations.

OUR ACQUISITION STRATEGY MAY REQUIRE US TO UNDERTAKE SIGNIFICANT CAPITAL
INFUSIONS, BE DILUTIVE TO OUR EXISTING SHAREHOLDERS, RESULT IN UNANTICIPATED
CHANGES OR OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, AND RESULT IN
DIFFICULTIES IN ASSIMILATING AND INTEGRATING THE OPERATIONS, PERSONNEL,
TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES.

         A key element of our business strategy involves expansion through the
acquisition of businesses, products or technologies that allow us to complement
our existing product offerings, expand our market coverage, increase our
engineering workforce or enhance our technological capabilities. Between January
1, 1999 and September 30, 2000, we acquired Maverick Networks, Epigram, Inc.,
Armedia, Inc., HotHaus Technologies Inc., AltoCom, Inc., Digital Furnace
Corporation, BlueSteel Networks, Inc., Stellar Semiconductor, Inc., Pivotal
Technologies Corp., Innovent Systems, Inc., Puyallup Integrated Circuit Company,
Inc. and Altima Communications, Inc. In October 2000 we completed the
acquisitions of Silicon Spice Inc. and NewPort Communications, Inc. We have also
entered into definitive agreements to acquire Element 14, Inc. Allayer
Communications and SiByte, Inc. We plan to continue to pursue acquisition
opportunities in 2000 and in the future.

         Acquisitions may require significant capital infusions, typically
entail many risks and could result in difficulties in assimilating and
integrating the operations, personnel,




                                       24
<PAGE>   27

technologies, products and information systems of the acquired company. We may
also encounter delays in the timing and successful completion of the acquired
company's technology and product development through volume production, costs
and unanticipated expenditures, changing relationships with customers, suppliers
and strategic partners, or contractual, intellectual property or employment
issues. In addition, the key personnel of the acquired company may decide not to
work for us. The acquisition of another company or its products and technologies
may also require us to enter into a geographic or business market in which we
have little or no prior experience. These challenges could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition, acquisitions may materially and adversely affect our results of
operations because they may require large one-time charges, increased debt or
contingent liabilities, adverse tax consequences, substantial depreciation or
deferred compensation charges, or the amortization of amounts related to
deferred compensation, goodwill and other intangible assets. We may seek to
account for acquisitions under the pooling-of-interests accounting method, but
that method may not be available. Any of these events could cause the price of
our Class A common stock to decline. Acquisitions made entirely or partially for
cash may reduce our cash reserves. Furthermore, if we issue equity or
convertible debt securities in connection with an acquisition, as in the case of
our recent acquisitions, the issuance may be dilutive to our existing
shareholders. In addition, the equity or debt securities that we may issue could
have rights, preferences or privileges senior to those of the holders of our
common stock. Thus, for example, as a consequence of the pooling-of-interest
rules, the securities issued in nine of the fourteen completed acquisitions
described above were Class B common stock, which has voting rights superior to
our publicly-traded Class A common stock.

         We cannot assure you that we will be able to consummate any pending or
future acquisitions or that we will realize the benefits anticipated from these
acquisitions. In the future, we may not be able to find other suitable
acquisition opportunities that are available at attractive valuations, if at
all. Even if we do find suitable acquisition opportunities, we may not be able
to consummate the acquisitions on commercially acceptable terms. Moreover, it
may be difficult for us to successfully integrate any acquired businesses,
products, technologies or personnel, which could materially and adversely affect
our business, financial condition and results of operations.

WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY
AND BROADBAND COMMUNICATIONS MARKETS IN ORDER TO REMAIN COMPETITIVE.

         Our future success will depend on our ability to anticipate and adapt
to changes in technology and industry standards. We will also need to continue
to develop and introduce new and enhanced products to meet our customers'
changing demands. Substantially all of our product revenue in recent fiscal
quarters has been derived from sales of products for the high-speed office
network, cable set-top box and cable modem markets. These markets are
characterized by rapidly changing technology, evolving industry standards,
frequent new product introductions and short product life cycles. In addition,
these markets continue to undergo rapid growth and consolidation. A significant
slowdown in any of these markets or other broadband communications markets could
materially and adversely affect our business, financial condition and results of
operations. Our success will also depend on the ability of our customers to
develop new products and enhance existing products for the broadband
communications markets and to introduce and promote those products successfully.
The




                                       25
<PAGE>   28

broadband communications markets may not continue to develop to the extent or in
the timeframes that we anticipate. If new markets do not develop as we
anticipate, or if our products do not gain widespread acceptance in these
markets, our business, financial condition and results of operations could be
materially and adversely affected.

IF WE DO NOT ANTICIPATE AND ADAPT TO EVOLVING INDUSTRY STANDARDS IN THE
SEMICONDUCTOR INDUSTRY AND BROADBAND COMMUNICATIONS MARKETS, OUR PRODUCTS COULD
BECOME OBSOLETE AND WE COULD LOSE MARKET SHARE.

         Products for broadband communications applications generally are based
on industry standards that are continually evolving. If new industry standards
emerge, our products or our customers' products could become unmarketable or
obsolete. We may also have to incur substantial unanticipated costs to comply
with these new standards. Our past sales and profitability have resulted, to a
large extent, from our ability to anticipate changes in technology and industry
standards and to develop and introduce new and enhanced products incorporating
the new standards. Our ability to adapt to these changes and to anticipate
future standards, and the rate of adoption and acceptance of those standards,
will be a significant factor in maintaining or improving our competitive
position and prospects for growth. We have in the past invested substantial
resources in emerging technologies that did not achieve the market acceptance
that we had expected. Our inability to anticipate the evolving standards in the
semiconductor industry and, in particular the broadband communications markets,
or to develop and introduce new products successfully into these markets could
materially and adversely affect our business, financial condition and results of
operations.

IF WE ARE UNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS SUCCESSFULLY AND IN A
COST-EFFECTIVE AND TIMELY MANNER OR TO ACHIEVE MARKET ACCEPTANCE OF OUR NEW
PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.

         Our future success will depend on our ability to develop new silicon
solutions for existing and new markets, introduce these products in a
cost-effective and timely manner and convince leading equipment manufacturers to
select these products for design into their own new products. Our quarterly
results in the past have been, and are expected in the future to continue to be,
dependent on the introduction of a relatively small number of new products and
the timely completion and delivery of those products to customers. The
development of new silicon devices is highly complex, and from time to time we
have experienced delays in completing the development and introduction of new
products. Our ability to develop and deliver new products successfully will
depend on various factors, including our ability to:

         o  accurately predict market requirements and evolving industry
            standards;

         o  accurately define new products;

         o  timely complete and introduce new product designs;

         o  timely qualify and obtain industry interoperability certification of
            our products and our customers' products into which our products
            will be incorporated;

         o  obtain sufficient foundry capacity;

         o  achieve high manufacturing yields; and

         o  gain market acceptance of our products and our customers' products.



                                       26
<PAGE>   29

         If we are not able to develop and introduce new products successfully
and in a cost-effective and timely manner, our business, financial condition and
results of operations would be materially and adversely affected.

         Our new products generally are incorporated into our customers'
products at the design stage. We have often incurred significant expenditures on
the development of a new product without any assurance that an equipment
manufacturer will select our product for design into its own product. The value
of our products largely depends on the commercial success of our customers'
products and on the extent to which those products accommodate components
manufactured by our competitors. We cannot assure you that we will continue to
achieve design wins. In addition, the equipment that incorporates our products
may never become commercially successful.

WE DEPEND ON TWO INDEPENDENT FOUNDRIES TO MANUFACTURE SUBSTANTIALLY ALL OF OUR
CURRENT PRODUCTS, AND ANY FAILURE TO OBTAIN SUFFICIENT FOUNDRY CAPACITY COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.

         We do not own or operate a fabrication facility. Two outside foundries,
Taiwan Semiconductor Manufacturing Corporation, or TSMC, in Taiwan and Chartered
Semiconductor Manufacturing, or Chartered, in Singapore, currently manufacture
substantially all of our semiconductor devices in current production. In
September 1999 TSMC's principal facility was affected by a significant
earthquake in Taiwan. As a consequence of this earthquake, TSMC suffered power
outages and equipment damage that impaired TSMC's wafer deliveries and, together
with strong demand, could result in wafer shortages and higher wafer pricing
industrywide. In addition, if either TSMC or Chartered experiences financial
difficulties, if either foundry suffers any damage to its facilities or in the
event of any other disruption of foundry capacity, we may not be able to qualify
an alternative foundry in a timely manner. Even our current foundries would need
to have new manufacturing processes qualified if there is a disruption in an
existing process. If we choose to use a new foundry or process, it would
typically take us several months to qualify the new foundry or process before we
can begin shipping products from it. If we cannot accomplish this qualification
in a timely manner, we may still experience a significant interruption in supply
of the affected products.

         Because we rely on outside foundries with limited capacity, we face
several significant risks, including:

         o  a lack of ensured wafer supply and potential wafer shortages and
            higher wafer prices;

         o  limited control over delivery schedules, quality assurance and
            control, manufacturing yields and production costs; and

         o  the unavailability of or potential delays in obtaining access to key
            process technologies.

         In addition, the manufacture of integrated circuits is a highly complex
and technologically demanding process. Although we work closely with our
foundries to minimize the likelihood of reduced manufacturing yields, our
foundries have from time to time experienced lower than anticipated
manufacturing yields. This often occurs during the production of new products or
the installation and start-up of new process technologies.

         The ability of each foundry to provide us with semiconductor devices is
limited by its available capacity. Although we have entered into contractual
commitments to supply specified levels of products to certain of our customers,
we do not have a long-term volume purchase agreement or a guaranteed level of
production capacity with either TSMC or Chartered. Foundry capacity may not be
available when we need it or at reasonable prices. Availability of foundry
capacity has recently been reduced due to strong demand. We place



                                       27
<PAGE>   30

our orders on the basis of our customers' purchase orders, and TSMC and
Chartered can allocate capacity to the production of other companies' products
and reduce deliveries to us on short notice. It is possible that foundry
customers that are larger and better financed than we are, or that have
long-term agreements with TSMC or Chartered, may induce our foundries to
reallocate capacity to them. Such a reallocation could impair our ability to
secure the supply of components that we need. Although we primarily use two
independent foundries, most of our components are not manufactured at both
foundries at any given time and some of our products may be designed to be
manufactured at only one. Accordingly, if one of our foundries is unable to
provide us with components as needed, we could experience significant delays in
securing sufficient supplies of those components. Any of these delays would
likely materially and adversely affect our business, financial condition and
results of operations. We cannot assure you that any of our existing or new
foundries would be able to produce integrated circuits with acceptable
manufacturing yields. Furthermore, our foundries may not be able to deliver
enough semiconductor devices to us on a timely basis, or at reasonable prices.

         Certain of our acquired companies have established relationships with
foundries other than TSMC and Chartered, and we are using these other foundries
to produce the initial products of these acquired companies. We may utilize such
foundries for other products in the future. In using these new foundries, we
will be subject to all of the same risks described in the foregoing paragraphs
with respect to TSMC and Chartered.

WE MAY BE UNABLE TO RETAIN KEY TECHNICAL AND SENIOR MANAGEMENT PERSONNEL AND
ATTRACT ADDITIONAL KEY EMPLOYEES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

         Our future success depends to a significant extent upon the continued
service of our key technical and senior management personnel, in particular, our
co-founder, President and Chief Executive Officer, Dr. Henry T. Nicholas III,
and our co-founder, Vice President of Research & Development and Chief Technical
Officer, Dr. Henry Samueli. We do not have employment agreements with these
executives or any other key employees that govern the length of their service.
The loss of the services of Dr. Nicholas or Dr. Samueli, or certain other key
employees, would likely materially and adversely affect our business, financial
condition and results of operations. Our future success also depends on our
ability to continue to attract, retain and motivate qualified personnel,
particularly digital circuit designers, mixed-signal circuit designers and
systems applications engineers. Competition for these employees is intense. Our
inability to attract and retain additional key employees could have an adverse
effect on our business, financial condition and results of operations.


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<PAGE>   31

OUR INABILITY TO MANAGE OUR SIGNIFICANT RECENT AND ANTICIPATED FUTURE GROWTH
COULD STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES, AND COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.

         During the past year, we have continued to significantly increase the
scope of our operations and expand our workforce, growing from 436 employees as
of December 31, 1998 to 1,785 employees as of September 30, 2000, including
contract and temporary employees and employees who joined us as the result of
acquisitions. This growth has placed, and our anticipated future growth of
operations is expected to continue to place, a significant strain on our
management personnel, systems and resources. We anticipate that we will need to
implement a variety of new and upgraded operational and financial systems,
procedures and controls, including the ongoing improvement of our accounting and
other internal management systems. We also will need to continue to expand,
train, manage and motivate our workforce. All of these endeavors will require
substantial management effort. In the future, we will likely need to expand our
facilities or relocate some or all of our employees or operations from time to
time to support our growth. These relocations could result in temporary
disruptions of our operations or a diversion of management's attention and
resources. If we are unable to effectively manage expanding operations, our
business, financial condition and results of operations could be materially and
adversely affected.

THE LOSS OF ANY OF THE THREE THIRD-PARTY SUBCONTRACTORS THAT ASSEMBLE AND TEST
SUBSTANTIALLY ALL OF OUR CURRENT PRODUCTS COULD DISRUPT OUR SHIPMENTS, HARM OUR
CUSTOMER RELATIONSHIPS AND ADVERSELY AFFECT OUR NET SALES.

         Three third-party subcontractors, ASAT Ltd. in Hong Kong, ST Assembly
Test Services, STATS, in Singapore, and Amkor Technology in the Philippines and
South Korea, assemble and test almost all of our current products. Because we
rely on third-party subcontractors to assemble and test our products, we cannot
directly control our product delivery schedules and quality assurance and
control. This lack of control has in the past, and could in the future, result
in product shortages or quality assurance problems that could increase our
manufacturing, assembly or testing costs. We do not have long-term agreements
with ASAT, STATS or Amkor. We typically procure services from these suppliers on
a per order basis. If either ASAT, STATS or Amkor experiences capacity
constraints or financial difficulties, if any subcontractor suffers any damage
to its facilities or in the event of any other disruption of assembly and
testing capacity, we may not be able to obtain alternative assembly and testing
services in a timely manner. Due to the amount of time that it usually takes us
to qualify assemblers and testers, we could experience significant delays in
product shipments if we are required to find alternative assemblers or testers
for our components. Any problems that we may encounter with the delivery,
quality or cost of our products could materially and adversely affect our
business, financial condition or results of operations.

         We are continuing to develop relationships with additional third-party
subcontractors to assemble and test our products. In using these new
subcontractors, we will be subject to all of the same risks described in the
foregoing paragraph with respect to ASAT, STATS and Amkor.



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<PAGE>   32

AS OUR INTERNATIONAL BUSINESS EXPANDS, OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED AS A RESULT OF LEGAL, BUSINESS AND
ECONOMIC RISKS SPECIFIC TO INTERNATIONAL OPERATIONS.

         We currently obtain substantially all of our manufacturing, assembly
and testing services from suppliers located outside of the United States. In
addition, approximately 13.7% of our revenue in the nine months ended September
30, 2000 was derived from sales to independent customers outside the United
States. We also frequently ship products to our domestic customers'
international manufacturing divisions and subcontractors. In 1999 we established
an international distribution center in Singapore and a design center in The
Netherlands. As a result of our acquisition of HotHaus in August 1999, we now
undertake software design, development and marketing activities in Canada.
Furthermore, as a result of our acquisition of Armedia in May 1999 and Altima in
September 2000, we also undertake design and development activities in India and
Taiwan. In the future, we intend to continue to expand these international
business activities and also to open other design and operational centers
abroad. International operations are subject to many inherent risks, including:

         o  political, social and economic instability;

         o  trade restrictions;

         o  the imposition of governmental controls;

         o  exposure to different legal standards, particularly with respect to
            intellectual property;

         o  burdens of complying with a variety of foreign laws;

         o  import and export license requirements and restrictions of the
            United States and each other country in which we operate;

         o  unexpected changes in regulatory requirements;

         o  foreign technical standards;

         o  changes in tariffs;

         o  difficulties in staffing and managing international operations;

         o  fluctuations in currency exchange rates;

         o  difficulties in collecting receivables from foreign entities; and

         o  potentially adverse tax consequences.

    VARIOUS EXPORT LICENSING REQUIREMENTS, THE SEASONALITY OF INTERNATIONAL
    SALES OR AN INCREASE IN THE VALUE OF THE U.S. DOLLAR RELATIVE TO FOREIGN
    CURRENCIES COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS OR REQUIRE US
    TO MODIFY OUR CURRENT BUSINESS PRACTICES SIGNIFICANTLY.

         Various government export regulations apply to the encryption or other
features contained in some of our products. We have applied for and received
several export licenses under these regulations, but we cannot assure you that
we will obtain any licenses for which we have currently applied or any licenses
that we may apply for in the future. If we do not receive the required licenses,
we may be unable to manufacture the affected products at our foreign foundries
or to ship these products to certain customers located outside the United
States. Moreover, the seasonality of international sales and economic conditions
in our primary overseas markets may negatively impact the demand for our
products abroad. All of




                                       30
<PAGE>   33

our international sales to date have been denominated in U.S. dollars.
Accordingly, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets.
Any one or more of the foregoing factors could materially and adversely affect
our business, financial condition or results of operations or require us to
modify our current business practices significantly. We anticipate that these
factors will impact our business to a greater degree as we further expand our
international business activities.

OUR FUTURE SUCCESS DEPENDS IN SIGNIFICANT PART ON STRATEGIC RELATIONSHIPS WITH
CERTAIN OF OUR CUSTOMERS. IF WE CANNOT MAINTAIN THESE RELATIONSHIPS OR IF THESE
CUSTOMERS DEVELOP THEIR OWN SOLUTIONS OR ADOPT A COMPETITOR'S SOLUTIONS INSTEAD
OF BUYING OUR PRODUCTS, OUR OPERATING RESULTS WOULD BE ADVERSELY AFFECTED.

         In the past, we have relied on our strategic relationships with certain
customers who are technology leaders in our target markets. We intend to pursue
and continue to form these strategic relationships in the future but we cannot
assure you that we will be able to do so. These relationships often require us
to develop new products that typically involve significant technological
challenges. Our partners frequently place considerable pressure on us to meet
their tight development schedules. Accordingly, we may have to devote a
substantial amount of our limited resources to our strategic relationships,
which could detract from or delay our completion of other important development
projects. Delays in development could impair our relationships with our
strategic partners and negatively impact sales of the products under
development. Moreover, it is possible that our customers may develop their own
solutions or adopt a competitor's solution for products that they currently buy
from us. If that happens, our business, financial condition and results of
operations could be materially and adversely affected.

WE MAY EXPERIENCE DIFFICULTIES IN TRANSITIONING TO SMALLER GEOMETRY PROCESS
TECHNOLOGIES OR IN ACHIEVING HIGHER LEVELS OF DESIGN INTEGRATION AND THAT MAY
RESULT IN REDUCED MANUFACTURING YIELDS, DELAYS IN PRODUCT DELIVERIES AND
INCREASED EXPENSES.

         In order to remain competitive, we expect to continue to transition our
products to increasingly smaller geometries. This transition will require us to
redesign certain products and modify the manufacturing processes for our
products. We periodically evaluate the benefits, on a product-by-product basis,
of migrating to smaller geometry process technologies in order to reduce our
costs, and we have begun shifting certain products from .50 micron to .35
micron, .22 micron and smaller geometry processes. In the past, we have
experienced some difficulties in shifting to smaller geometry process
technologies or new manufacturing processes. These difficulties resulted in
reduced manufacturing yields, delays in product deliveries and increased
expenses. We may face similar difficulties, delays and expenses as we continue
to transition our products to smaller geometry processes. We are dependent on
our relationships with our foundries to transition to smaller geometry processes
successfully. We cannot assure you that our foundries will be able to
effectively manage the transition or that we will be able to maintain our
relationships with our foundries. If our foundries or we experience significant
delays in this transition or fail to efficiently implement this transition, our
business, financial condition and results of operations could be materially and
adversely affected. As smaller geometry processes become more prevalent, we
expect to integrate greater levels of functionality, as well as customer and
third party intellectual property, into our products. However, we may not be
able to achieve higher levels of design integration or deliver new integrated
products on a timely basis, or at all.


                                       31

<PAGE>   34

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD HARM OUR COMPETITIVE POSITION.

         Our success and future revenue growth will depend, in part, on our
ability to protect our intellectual property. We primarily rely on patent,
copyright, trademark and trade secret laws, as well as nondisclosure agreements
and other methods, to protect our proprietary technologies and processes.
Despite our efforts to protect our proprietary technologies and processes, it is
possible that certain of our competitors or other parties may obtain, use or
disclose our technologies and processes. We currently hold 17 issued United
States patents and have filed over 400 United States patent applications. We
cannot assure you that any additional patents will be issued. Even if a new
patent is issued, the claims allowed may not be sufficiently broad to protect
our technology. In addition, any of our existing or future patents may be
challenged, invalidated or circumvented. Moreover, any rights granted under
these patents may not provide us with meaningful protection. If our patents do
not adequately protect our technology, then our competitors may be able to offer
products similar to ours. Our competitors may also be able to develop similar
technology independently or design around our patents. Moreover, because we have
participated in developing various industry standards, we may be required to
license some of our technology and patents to others, including competitors, who
develop products based on the adopted standards.

         We generally enter into confidentiality agreements with our employees
and strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, parties may attempt to copy, disclose, obtain or use our products,
services or technology without our authorization. As a result, our technologies
and processes may be misappropriated, particularly in foreign countries where
laws may not protect our proprietary rights as fully as in the United States.

         In addition, some of our customers have entered into agreements with us
that grant them the right to use our proprietary technology if we ever fail to
fulfill our obligations under those agreements, including product supply
obligations, and do not correct this failure within a specified time period.
Moreover, we often incorporate the intellectual property of our strategic
customers into our own designs, and have certain obligations not to use or
disclose their intellectual property without their authorization. We cannot
assure you that our efforts to prevent the misappropriation or infringement of
our intellectual property or the intellectual property of our customers will
succeed. In the future, we may have to engage in litigation to enforce our
intellectual property rights, protect our trade secrets or determine the
validity and scope of the proprietary rights of others, including our customers.
This litigation may be very expensive and time consuming, divert management's
attention and materially and adversely affect our business, financial condition
and results of operations.

INFRINGEMENT OR OTHER CLAIMS AGAINST US COULD ADVERSELY AFFECT OUR ABILITY TO
MARKET OUR PRODUCTS, REQUIRE US TO REDESIGN OUR PRODUCTS OR SEEK LICENSES FROM
THIRD PARTIES AND SERIOUSLY HARM OUR OPERATING RESULTS.



                                       32
<PAGE>   35

         Companies in the semiconductor industry often aggressively protect and
pursue their intellectual property rights. From time to time, we have received,
and may continue to receive in the future, notices that claim we have infringed
upon, misappropriated or misused other parties' proprietary rights. In March
2000 Intel Corporation and its subsidiary Level One Communications, Inc. filed a
lawsuit against us alleging misappropriation of trade secrets, unfair
competition and tortious interference with existing contractual relations
related to our recent hiring of three former Intel employees. In August 2000
Intel filed a lawsuit against us alleging infringement of five Intel patents. In
1999 we settled litigation with Stanford Telecommunications, Inc. that related
to the alleged infringement of one of Stanford's patents by several of our cable
modem products. In 1999 we prevailed in litigation with Sarnoff Corporation and
NxtWave Communications, Inc., formerly Sarnoff Digital Communications, Inc.,
which alleged that we misappropriated and misused certain of their trade secrets
in connection with our hiring of five former Sarnoff employees. Our subsidiary,
AltoCom, is the defendant in patent litigation brought by Motorola, Inc.
relating to software modem technology. Our new subsidiary, Altima, is the
defendant in patent litigation and International Trade Commission proceedings
brought by Intel and Level One. Although we are defending the pending litigation
vigorously, it is possible that we will not prevail in pending or future
lawsuits. In addition, we may be sued in the future by other parties who claim
that we have infringed their patents or misappropriated or misused their trade
secrets, or who may seek to invalidate one of our patents. Any of these claims
may materially and adversely affect our business, financial condition and
results of operations. For example, in a patent or trade secret action, a court
could issue an injunction against us that would require us to withdraw or recall
certain products from the market or redesign certain products offered for sale
or under development. In addition, we may be liable for damages for past
infringement and royalties for future use of the technology. We may also have to
indemnify certain customers and strategic partners under our agreements with
such parties if a third party alleges or if a court finds that we have infringed
upon, misappropriated or misused another party's proprietary rights. Even if
claims against us are not valid or successfully asserted, these claims could
result in significant costs and a diversion of management and personnel
resources to defend. In that event, our business, financial condition and
results of operations would likely be materially and adversely affected. If any
claims or actions are asserted against us, we may seek to obtain a license under
a third party's intellectual property rights. However, we may not be able to
obtain a license on commercially reasonable terms, if at all.

OUR PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES. A CUSTOMER MAY DECIDE TO
CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH COULD CAUSE US TO LOSE ANTICIPATED
SALES. IN ADDITION, OUR AVERAGE PRODUCT CYCLES TEND TO BE SHORT AND, AS A
RESULT, WE MAY HOLD EXCESS OR OBSOLETE INVENTORY WHICH COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.

         After we have developed and delivered a product to a customer, our
customer will often test and evaluate our product prior to designing its own
equipment to incorporate our product. Our customer may need three to six months
or longer to test and evaluate our product and an additional three to six months
or more to begin volume production of equipment that incorporates our product.
Due to this lengthy sales cycle, we may experience delays from the time we
increase our operating expenses and our investments in inventory until the time
that we generate revenues for these products. It is possible that we may never
generate any revenues from these products after incurring such expenditures.
Even if a customer selects our product to incorporate into its equipment, we
have no assurances that such customer will ultimately market and sell their
equipment or that such efforts by our customer will be successful. The delays
inherent in our lengthy sales cycle increase the risk





                                       33
<PAGE>   36

that a customer will decide to cancel or change its product plans. Such a
cancellation or change in plans by a customer could cause us to lose sales that
we had anticipated. In addition, our business, financial condition and results
of operations could be materially and adversely affected if a significant
customer curtails, reduces or delays orders during our sales cycle or chooses
not to release equipment that contains our products.

         While our sales cycles are typically long, our average product life
cycles tend to be short as a result of the rapidly changing technology
environment in which we operate. As a result, the resources devoted to product
sales and marketing may not generate material revenues for us, and from time to
time, we may need to write off excess and obsolete inventory. If we incur
significant marketing and inventory expenses in the future that we are not able
to recover, and we are not able to compensate for those expenses, our operating
results could be adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions, and we still have higher cost
products in inventory, our operating results would be harmed.

BECAUSE WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, ANY SIGNIFICANT
CANCELLATIONS OR DEFERRALS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.

         We typically sell products pursuant to purchase orders that customers
can generally cancel or defer on short notice without incurring a significant
penalty. Any significant cancellations or deferrals could materially and
adversely affect our business, financial condition and results of operations. In
addition, cancellations or deferrals could cause us to hold excess inventory,
which could reduce our profit margins and restrict our ability to fund our
operations. We recognize revenue upon shipment of products to a customer. If a
customer refuses to accept shipped products or does not timely pay for these
products, we could incur significant charges against our income. These charges
could materially and adversely affect our operating results.

THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSES AND
IN UNDETECTED DEFECTS OR BUGS, WHICH COULD ADVERSELY AFFECT THE MARKET
ACCEPTANCE OF NEW PRODUCTS AND DAMAGE OUR REPUTATION WITH CURRENT OR PROSPECTIVE
CUSTOMERS.

         Highly complex products such as the products that we offer frequently
contain defects and bugs when they are first introduced or as new versions are
released. We have in the past experienced, and may in the future experience,
these defects and bugs. If any of our products contain defects or bugs, or have
reliability, quality or compatibility problems, our reputation may be damaged
and customers may be reluctant to buy our products, which could materially and
adversely affect our ability to retain existing customers or attract new
customers. In addition, these defects or bugs could interrupt or delay sales to
our customers. In order to alleviate these problems, we may have to invest
significant capital and other resources. Although our products are tested by our
suppliers, our customers and ourselves, it is possible that our new products
will contain defects or bugs. If any of these problems are not found until after
we have commenced commercial production of a new product, we may be required to
incur additional development costs and product recall, repair or replacement
costs. These problems may also result in claims against us by our customers or
others. In addition, these problems may divert our technical and other resources
from other development efforts. Moreover, we would likely lose, or experience a
delay in, market acceptance of the affected product or products, and we could
lose credibility with our current and prospective customers.



                                       34
<PAGE>   37

OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.

         We operate in the semiconductor industry, which is cyclical and subject
to rapid technological change. From time to time, the semiconductor industry has
experienced significant economic downturns, characterized by diminished product
demand, accelerated erosion of prices and excess production capacity. This
industry also periodically experiences increased demand and production capacity
constraints. Accordingly, our quarterly results may vary significantly as a
result of the general conditions in the semiconductor industry.

OUR CALIFORNIA FACILITIES AND THE FACILITIES OF ONE OF THE TWO INDEPENDENT
FOUNDRIES UPON WHICH WE RELY TO MANUFACTURE SUBSTANTIALLY ALL OF OUR CURRENT
PRODUCTS ARE LOCATED IN REGIONS THAT ARE SUBJECT TO EARTHQUAKES AND OTHER
NATURAL DISASTERS.

         Our California facilities, including our principal executive offices,
are located near major earthquake fault lines. If there is a major earthquake or
any other natural disaster in a region where one of our facilities is located,
our business could be materially and adversely affected. In addition, TSMC, one
of the two outside foundries upon which we rely to manufacture substantially all
of our semiconductor devices, is located in Taiwan, a country that is also
subject to earthquakes. Any earthquake or other natural disaster in Taiwan could
materially disrupt TSMC's production capabilities and could result in our
experiencing a significant delay in delivery, or substantial shortage, of wafers
and possibly in higher wafer prices.

CHANGES IN CURRENT OR FUTURE LAWS OR REGULATIONS OR THE IMPOSITION OF NEW LAWS
OR REGULATIONS BY THE FCC, OTHER FEDERAL OR STATE AGENCIES OR FOREIGN
GOVERNMENTS COULD IMPEDE THE SALE OF OUR PRODUCTS OR OTHERWISE HARM OUR
BUSINESS.

         The Federal Communications Commission has broad jurisdiction over each
of our target markets. Although current FCC regulations and the laws and
regulations of other federal or state agencies are not directly applicable to
our products, they do apply to much of the equipment into which our products are
incorporated. As a result, the effects of regulation on our customers or the
industries in which they operate may, in turn, materially and adversely impact
our business, financial condition and results of operations. FCC regulatory
policies that affect the ability of cable operators or telephone companies to
offer certain services or other aspects of their business may impede the sale of
our products. For example, in the past we have experienced delays when products
incorporating our chips failed to comply with FCC emissions specifications. We
and our customers may also be subject to regulation by countries other than the
United States. Foreign governments may impose tariffs, duties and other import
restrictions on components that we obtain from non-domestic suppliers and may
impose export restrictions on products that we sell internationally. These
tariffs, duties or restrictions could materially and adversely affect our
business, financial condition and results of operations. Changes in current laws
or regulations or the imposition of new laws and regulations in the United
States or elsewhere could also materially and adversely affect our business.



                                       35
<PAGE>   38

CERTAIN OF OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES CAN CONTROL
THE OUTCOME OF MATTERS THAT REQUIRE THE APPROVAL OF OUR SHAREHOLDERS, AND
ACCORDINGLY WE WILL NOT BE ABLE TO ENGAGE IN CERTAIN TRANSACTIONS WITHOUT THEIR
APPROVAL.

         As of September 30, 2000 our directors and executive officers
beneficially owned approximately 31.4% of our outstanding common stock and 70.3%
of the total voting control held by our shareholders. In particular, as of
September 30, 2000 our two founders, Dr. Henry T. Nicholas III and Dr. Henry
Samueli, beneficially owned a total of approximately 30.2% of our outstanding
common stock and 67.9% of the total voting control held by our shareholders.
Accordingly, these shareholders currently have enough voting power to control
the outcome of matters that require the approval of our shareholders. These
matters include the election of a majority of our Board of Directors, the
issuance of additional shares of Class B common stock, and the approval of most
significant corporate transactions, including a merger, consolidation or sale of
substantially all of our assets. In addition, these insiders currently also
control the management of our business. Because of their significant stock
ownership, we will not be able to engage in certain transactions without the
approval of these shareholders. These transactions include proxy contests,
mergers, tender offers, open market purchase programs or other purchases of our
Class A common stock that could give our shareholders the opportunity to receive
a higher price for their shares than the prevailing market price at the time of
such purchases.

OUR STOCK PRICE IS HIGHLY VOLATILE. ACCORDINGLY, YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES OF COMMON STOCK AT OR ABOVE THE PRICE YOU PAID FOR THEM.

         The market price of our Class A common stock has fluctuated
substantially in the past and is likely to continue to be highly volatile and
subject to wide fluctuations. Since our initial public offering in April 1998,
our Class A common stock has traded at prices as low as $11.75 and as high as
$274.75 per share. These fluctuations have occurred and may continue to occur in
response to various factors, many of which we cannot control, including:

         o  quarter-to-quarter variations in our operating results;

         o  announcements of technological innovations or new products by our
            competitors, customers or us;

         o  general conditions in the semiconductor industry and
            telecommunications and data communications equipment markets;

         o  changes in earnings estimates or investment recommendations by
            analysts;

         o  changes in investor perceptions; or

         o  changes in expectations relating to our products, plans and
            strategic position or those of our competitors or customers.

         In addition, the market prices of securities of Internet-related and
other high technology companies have been especially volatile. This volatility
has significantly affected the market prices of securities of many technology
companies for reasons frequently unrelated to the operating performance of the
specific companies. Accordingly, you may not be able to resell your shares of
common stock at or above the price you paid. In the past, companies that have
experienced volatility in the market price of their securities have been the
subject of



                                       36
<PAGE>   39

securities class action litigation. If we were the object of a securities class
action litigation, it could result in substantial losses and divert management's
attention and resources from other matters.

OUR PRODUCTS AND INTERNAL INFORMATION SYSTEMS AND THE PRODUCTS AND SYSTEMS OF
OUR CUSTOMERS AND THE THIRD PARTY SUPPLIERS WHO FABRICATE, TEST AND ASSEMBLE OUR
PRODUCTS MAY BE NEGATIVELY IMPACTED BY YEAR 2000 COMPLIANCE PROBLEMS.

         Many existing computer systems, software applications and embedded
computer chips, software and firmware in control devices use only two digits to
identify a year in the date field. These systems, applications and control
devices need to accept four digit entries to distinguish 21st Century dates from
20th Century dates. In addition, they may not correctly process "leap year"
dates or may fail to recognize February 29, 2000 as a leap year date as a result
of an exception to the calculation of leap years that will occur in the Year
2000 and otherwise occurs only once every 400 years. As a result, these systems
and applications had to be upgraded to comply with the Year 2000 requirements or
risk system failure, miscalculations or other disruptions to normal business
activities.

         To date we have not experienced any known material Year 2000 problems
in our products, our internal systems or facilities, or the products, systems
and services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly. We did not incur material costs to identify and address specific Year
2000 compliance issues. We could however incur additional costs in addressing
any residual Year 2000 issues, which could have a material and adverse effect on
our business.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE THROUGH THE ISSUANCE OF
ADDITIONAL EQUITY OR CONVERTIBLE DEBT SECURITIES OR BY BORROWING MONEY, AND
ADDITIONAL FUNDS MAY NOT BE AVAILABLE ON TERMS ACCEPTABLE TO US.

         We believe that our existing cash, cash equivalents and investments on
hand, together with the cash that we expect to generate from our operations,
will be sufficient to meet our capital needs for at least the next twelve
months. However, it is possible that we may need to raise additional funds to
fund our activities beyond the next year or to consummate acquisitions of other
businesses, products, or technologies. We could raise these funds by selling
more stock to the public or to selected investors, or by borrowing money. In
addition, even though we may not need additional funds, we may still elect to
sell additional equity securities or obtain credit facilities for other reasons.
We may not be able to obtain additional funds on favorable terms, or at all. If
adequate funds are not available, we may be required to curtail our operations
significantly or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain technologies or
potential markets. 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 the holders of our
common stock.


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<PAGE>   40

         It is possible that our future capital requirements may vary materially
from those now planned. The amount of capital that we will need in the future
will depend on many factors, including:

         o  the market acceptance of our products;

         o  the levels of promotion and advertising that will be required to
            launch our new products and achieve and maintain a competitive
            position in the marketplace;

         o  volume price discounts;

         o  our business, product, capital expenditure and research and
            development plans and product and technology roadmaps;

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

         o  capital improvements to new and existing facilities;

         o  technological advances;

         o  our competitors' response to our products; and

         o  our relationships with suppliers and customers.

         In addition, we may require additional capital to accommodate planned
growth, hiring, infrastructure and facility needs or to consummate acquisitions
of other businesses, products or technologies.

OUR ARTICLES OF INCORPORATION AND BYLAWS CONTAIN ANTI-TAKEOVER PROVISIONS THAT
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.

         Our articles of incorporation and bylaws contain provisions that may
prevent or discourage a third party from acquiring us, even if the acquisition
would be beneficial to our shareholders. In addition, we have in the past issued
and will in the future issue shares of Class B common stock in connection with
certain acquisitions, upon exercise of certain stock options, and for other
purposes. Class B shares have superior voting rights entitling the holder to ten
votes for each share held on matters that we submit to a shareholder vote (as
compared with one vote per share in the case of our publicly-held Class A common
stock). Our Board of Directors also has the authority to fix the rights and
preferences of shares of our preferred stock and to issue such shares without a
shareholder vote. It is possible that the provisions in our charter documents,
the existence of supervoting rights by holders of our Class B common stock, our
officers' ownership of a majority of the Class B common stock and the ability of
our Board of Directors to issue preferred stock may prevent parties from
acquiring us. In addition, these factors may discourage third parties from
bidding for our Class A common stock at a premium over the market price for this
stock. Finally, these factors may also materially and adversely affect the
market price of our Class A common stock, and the voting and other rights of the
holders of our common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Reference is made to the section titled Quantitative and Qualitative
Disclosures about Market Risk, in the Company's Current Report on Form 8-K/A
filed with the SEC on July 10, 2000.



                                       38
<PAGE>   41

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        In July 1997 the Company commenced an action against Sarnoff Corporation
and Sarnoff Digital Communications, Inc., now known as NxtWave Communications,
Inc. (collectively, "Sarnoff"), in the California Superior Court alleging breach
of contract, fraud, misappropriation of trade secrets, false advertising, trade
libel, intentional interference with prospective economic advantage and unfair
competition. The claims center on Sarnoff's violation of a non-disclosure
agreement entered into with the Company with respect to limited use of certain
of the Company's technology and on inaccurate comparisons that the Company
believes Sarnoff has made in its product advertising and in statements to
potential customers and others. This action was removed to the United States
District Court for the Central District of California, and was stayed pending
resolution of an action Sarnoff had brought against the Company in April 1997 in
New Jersey Superior Court. Following the decision in the New Jersey action in
the Company's favor in early 1999, Sarnoff filed a motion for summary judgment
in the California case on the basis that the issues therein had been or should
have been previously litigated in the New Jersey action under the New Jersey
"entire controversy" doctrine. Following oral argument in August 1999, the
District Court granted Sarnoff's motion and dismissed the Company's claims on
the grounds that they should have been brought as part of the New Jersey action.
The Company believes that the California action involves facts, circumstances
and claims unrelated to those at issue in the New Jersey action, and has filed
an appeal of the District Court's ruling. Briefing of the appeal in the Ninth
Circuit Court of Appeals is now complete and the parties await a date for oral
argument in the case.

        In March 2000 Intel Corporation ("Intel") and its subsidiary Level One
Communications, Inc. ("Level One") filed a complaint in California Superior
Court asserting claims against the Company for misappropriation of trade
secrets, unfair competition, and tortious interference with existing contractual
relations by the Company in connection with its recent hiring of three former
Intel employees. The complaint sought injunctive relief, an accounting, damages,
exemplary damages and attorneys' fees. Intel/Level One filed a first amended
complaint on April 28, 2000 seeking additional relief and containing certain
additional allegations, but asserting the same causes of action as the original
complaint. On May 25, 2000 the Court concluded a preliminary injunction hearing
in the matter. The Court denied Intel/Level One's request for injunctive relief
restricting the positions in which the three employees could work for the
Company, but issued an order granting certain other preliminary relief. The
Company has denied any wrongdoing or liability and has instructed its attorneys
to vigorously defend the action. On June 30, 2000 the Company filed a
cross-complaint against Intel/Level One, and on September 18, 2000, amended that
cross-complaint. The Company's amended cross-complaint includes causes of action
against Intel/Level One for unfair competition, trade secret misappropriation,
and tortious interference with contractual relations. On September 25, 2000 the
Company filed a motion for preliminary injunction, which asks the Court to
enjoin Intel/Level One from further unfair competition and seeks other relief,
including enjoining the marketing, sampling, distribution, shipment or sale of
certain products. The motion was heard on November 8, 2000, and a decision from
the Court is pending. The litigation is currently in the discovery stage and is
scheduled for trial in March 2001.

        In August 2000 Intel filed a complaint in the United States District
Court for the District of Delaware against the Company asserting that (i) the
Company infringes five Intel patents relating to video compression, high-speed
networking and semiconductor packaging, (ii) the Company induces the
infringement of such patents, and (iii) the Company contributorily infringes
such patents. The complaint sought a preliminary and permanent injunction
against the Company as well as the recovery of monetary damages, including
treble damages for willful infringement. Intel has not yet identified which
products allegedly infringe its patents. The Company has not yet answered the
complaint, but on October 10, 2000 the Company filed a motion to dismiss, or in
the alternative, to transfer venue; this motion is currently pending before the
court. The Company believes that it has strong defenses to Intel's claims. The
parties are currently in the initial stages of discovery in the action. The
Court has tentatively scheduled a hearing on patent claims construction to
commence in September 2001 and a trial to begin in October 2001.

        On October 6, 2000 the Company filed a complaint for declaratory
judgment in the United States District Court for the Northern District of
California against Intel asserting that the patents asserted by Intel in the
Delaware action are not infringed.

        Although the Company believes that it has strong defenses and is
defending the Delaware action vigorously, a finding of infringement by the
Company as to one or more of the patents in this action could lead to liability
for monetary damages (which could be trebled in the event that the infringement
were found to have been willful), the issuance of an injunction requiring that
the Company withdraw various products from the market, and indemnification
claims by the Company's customers or strategic partners, each of which events
could have a material adverse effect on the Company's, business, results of
operations and financial condition.

        In September 1998 Motorola, Inc. ("Motorola") filed a complaint in the
United States District Court for the District of Massachusetts against AltoCom,
Inc. ("AltoCom")(and co-defendant, PC-Tel, Inc.) asserting that (i) AltoCom's
V.34 and V.90 compliant software modem technology infringes several patents
owned by Motorola, (ii) AltoCom induces its V.34 and V.90 licensees to infringe
such patents, and (iii) AltoCom contributorily infringes such patents. The
complaint sought a preliminary and permanent injunction against AltoCom as well
as the recovery of monetary damages, including treble damages for willful
infringement. In October 1998 Motorola affirmatively dismissed its case in the
District of Massachusetts and filed a substantially similar complaint in the
United States District Court for the District of Delaware. AltoCom has filed an
answer and affirmative defenses to the District of Delaware complaint. AltoCom
has also asserted a counterclaim requesting declaratory relief that AltoCom has
not infringed the Motorola patents and that such patents are invalid and/or
unenforceable as well as a counterclaim requesting declaratory and injunctive
relief based on a breach of



                                       39
<PAGE>   42
contract theory. AltoCom believes that it has strong defenses to Motorola's
claims on invalidity, noninfringement and inequitable conduct grounds. In May
2000 Motorola filed an amended complaint alleging that AltoCom's technology
infringes an additional Motorola patent. The parties are currently engaged in
discovery in the action. AltoCom became a subsidiary of the Company on August
31, 1999. In September 1999 PC-Tel, Inc., the co-defendant in the case, reached
a settlement with Motorola.

        Although AltoCom believes that it has strong defenses and is defending
the action vigorously, a finding of infringement by AltoCom as to at least one
of the patents in this action could lead to liability for monetary damages
(which could be trebled in the event that the infringement were found to have
been willful), the issuance of an injunction requiring that AltoCom withdraw
various products from the market, and indemnification claims by AltoCom's
customers or strategic partners, each of which events could have a material
adverse effect on AltoCom's, and possibly the Company's, business, results of
operations and financial condition.

        In December 1999 Level One filed a complaint in the United States
District Court for the Eastern District of California against Altima
Communications, Inc., asserting that Altima's AC108R repeater products infringe
a U.S. patent owned by Level One. The complaint sought an injunction against
Altima as well as the recovery of monetary damages, including treble damages for
willful infringement. Altima filed an answer and affirmative defenses to the
complaint in the Eastern District of California. In March 2000 Level One filed
a related complaint in the U.S. International Trade Commission ("ITC"), seeking
an exclusion order and cease and desist order based on alleged infringement of
the same patent. Monetary damages are not available in the ITC. The ITC
instituted an investigation in April 2000. Altima filed an answer and
affirmative defenses to the complaint in the ITC. In July 2000 Intel and Level
One filed a second complaint in the ITC, asserting that certain of Altima's
repeater, switch, and transceiver products infringe three additional U.S.
patents owned by Level One or Intel. The ITC instituted a second investigation
in August 2000, and the Administrative Law Judge assigned to hear the cases
issued an order in August 2000 granting a motion to consolidate the two
investigations. In September 2000, Altima filed declaratory judgment actions
against Intel and Level One, respectively, in the United States District Court
for the Northern District of California asserting that Altima has not infringed
the three additional Intel and Level One patents and that such patents are
invalid or unenforceable. Pursuant to statute, Altima is entitled to a stay of
all proceedings in the three District Court actions while the ITC investigation
is pending. The Level One action in the Eastern District of California has
already been stayed and Altima has formally requested a stay of both of the
Northern District of California actions.

        Altima believes it has strong defenses to the claims of Level One and
Intel on noninfringement, invalidity, and inequitable conduct grounds. The
parties are currently engaged in discovery in the consolidated ITC action, and a
hearing on the merits before the ITC Administrative Law Judge is scheduled to
begin in April 2001. Altima became a subsidiary of the Company on September 7,
2000.

        Although Altima believes that it has strong defenses and is defending
the action vigorously, a finding of infringement by Altima as to the patent in
the Eastern District of California action could lead to liability for monetary
damages (which could be trebled in the event that the infringement were found to
have been willful) and the issuance of an injunction requiring that Altima
withdraw various products from the market. A finding against Altima in the
consolidated ITC action could result in the exclusion of certain Altima products
from entering the United States. Any finding adverse to Altima in these actions
could also result in indemnification claims by Altima's customers or strategic
partners. Any of the foregoing events could have a material adverse effect on
Altima's, and possibly the Company's, business, results of operations and
financial condition.

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

        The pending lawsuits involve complex questions of fact and law and could
require the expenditure of significant costs and diversion of resources to
defend. Although management currently believes the outcome of outstanding legal
proceedings, claims and litigation will not have a material adverse effect on
the Company's business, results of operations or financial condition, the
results of litigation are inherently uncertain, and an adverse outcome is at
least reasonably possible. The Company is unable to estimate the range of
possible loss from outstanding litigation, and no amounts have been provided for
such matters in the accompanying consolidated financial statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        On February 29, 2000 in connection with our acquisition of Digital
Furnace Corporation, we issued an aggregate of 664,734 shares of our Class B
common stock in exchange for all shares of Digital Furnace's preferred and
common stock and reserved 85,266 additional shares of our Class B common stock
for issuance upon exercise of outstanding Digital Furnace employee stock options
and other rights of Digital Furnace.

        On March 1, 2000 in connection with our acquisition of BlueSteel
Networks, Inc., we issued an aggregate of 678,227 shares of our Class B common
stock in exchange for all shares of BlueSteel's preferred and common stock and
reserved 132,151 additional shares of our Class B common stock for issuance upon
exercise of outstanding BlueSteel employee stock options and other rights of
BlueSteel.

        On March 1, 2000 in connection with our acquisition of Stellar
Semiconductor Inc., we issued an aggregate of 672,346 shares of our Class B
common stock in exchange for all shares of Stellar's preferred and common stock
and reserved 112,877 additional shares of our Class B common stock for issuance
upon exercise of outstanding Stellar employee stock options and other rights of
Stellar.

        On May 31, 2000 in connection with our acquisition of Pivotal
Technologies Corp., we issued an aggregate of 1,895,823 shares of our Class B
common stock in exchange for all shares of Pivotal's preferred and common stock
and reserved 43,419 additional shares of our Class B common stock for issuance
upon exercise of outstanding employee stock options and other rights of Pivotal.



                                       40
<PAGE>   43
        On July 19, 2000 in connection with our acquisition of Innovent
Systems, Inc., we issued an aggregate of 2,339,149 shares of our Class A common
stock in exchange for all shares of Innovent's preferred and common stock and
reserved 605,961 additional shares of our Class A common stock for issuance upon
exercise of outstanding employee stock options and other rights of Innovent.

        On August 31, 2000 in connection with our acquisition Puyallup
Integrated Circuit Company, Inc., we issued an aggregate of 148,539 shares of
our Class A common stock in exchange for all outstanding shares of Puyallup
common stock and reserved 139,993 additional shares of our Class A common stock
for issuance upon exercise of outstanding employee stock options and other
rights of Puyallup.

        On September 7, 2000 in connection with our acquisition of Altima
Communications, Inc., we issued an aggregate of 1,661,784 shares of our Class A
common in exchange for all outstanding shares of Altima preferred and common
stock and reserved 875,111 additional shares of our Class A common stock for
issuance upon exercise of outstanding employee stock options and other rights of
Altima. In addition to the purchase consideration, we reserved 2,889,667 shares
of our Class A common stock for future issuance to customers upon exercise of
outstanding performance-based warrants of Altima that become exercisable upon
satisfaction of certain customer purchase requirements.

        The offer and sale of the securities described above were effected
without registration in reliance on the exemption afforded by section 3(a)(10)
of the Securities Act of 1933, as amended. The foregoing issuances were
approved, after a hearing upon the fairness of the terms and conditions of the
transaction, by the California Department of Corporations under authority to
grant such approval as expressly authorized by the laws of the State of
California.



                                       41
<PAGE>   44

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

ITEM 5. OTHER INFORMATION

        None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a) Exhibits

            27.1 -- Financial Data Schedule

        (b) Reports on Form 8-K

         On July 10, 2000 the Company filed a report on Form 8-K/A to provide
restated historical consolidated financial statements as of December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
to reflect the pooled operations of Digital Furnace Corporation, BlueSteel
Networks, Inc., Stellar Semiconductor, Inc. and Pivotal Technologies Corp.

         On July 21, 2000 the Company filed a report on Form 8-K relating to its
second quarter earnings press release and to disclose the completion of the
Company's acquisition of Innovent Systems, Inc. on July 19, 2000.

         On August 2, 2000 the Company filed a report on Form 8-K to disclose
the completion of the Company's acquisition of Innovent Systems, Inc on July 19,
2000.

         On August 4, 2000 the Company filed a report on Form 8-K relating to
its agreement to acquire Altima Communications, Inc.

         On August 9, 2000 the Company filed a report on Form 8-K relating to
its agreement to acquire Silicon Spice Inc.

         On August 16, 2000 the Company filed a report on Form 8-K relating to
its agreement to acquire NewPort Communications, Inc.

         On September 22, 2000 the Company filed a report on Form 8-K to
disclose the completion of the Company's acquisition of Altima Communications,
Inc.




                                       42
<PAGE>   45

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                           BROADCOM CORPORATION,
                                           A CALIFORNIA CORPORATION
                                           (Registrant)



November 14, 2000                          /s/ WILLIAM J. RUEHLE
                                           -------------------------------------
                                           William J. Ruehle
                                           Vice President and Chief Financial
                                           Officer (Principal Financial Officer)


                                           /s/ SCOTT J. POTERACKI
                                           -------------------------------------
                                           Scott J. Poteracki
                                           Corporate Controller and Senior
                                           Director of Finance (Principal
                                           Accounting Officer)



                                       43
<PAGE>   46
                                 EXHIBIT INDEX

         EXHIBIT
         NUMBER                   DESCRIPTION
         -------                  -----------
          27.1              Financial Data Schedule


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