InterDigital Annual Report 2003

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FY2003 Annual Report · InterDigital

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R3_7007 ID_AR03_cover 04/21/04 6:43 PM Page 1

Wireless technologies to move your ideas®

InterDigital Communications Corporation
781 Third Avenue
King of Prussia, PA 19406 USA
www.interdigital.com

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InterDigital Communications Corporation Annual Report 2003

R3_7007 ID_AR03_cover 04/21/04 6:47 PM Page 2

For every wireless barrier, there is a breakthrough. Today, when the “send”
button is pushed on a digital wireless device, InterDigital’s technology
makes the connection possible.

Every day, wireless engineers face the same set of challenges. Defy the
laws of physics and coax just a little more out of the network, or handheld
device. More performance. Greater range. Higher bandwidth. Smaller size.
Longer battery life.

Innovations that can give equipment producers a competitive advantage

in this fast moving, ever-changing industry.

That’s our job. We’re InterDigital Communications Corporation, an

industry pioneer.

InterDigital helped to shape and influence the standards, and their
underlying technologies, for 2G and 3G wireless products. Today, we’re
a leading architect, designer and provider of advanced wireless technology
and product platforms. Advanced inventions, technology and systems
developed by InterDigital are embedded in 2G, 2.5G and 3G devices around
the world.

Corporate Information

Annual Meeting of Shareholders
Thursday, June 3, 2004
2:00 p.m. EDT
Sheraton Park Ridge Hotel
King of Prussia, Pennsylvania USA

Common Stock Information
The primary market for InterDigital’s
common stock is the Nasdaq National
Market. InterDigital trades under the
ticker symbol “IDCC.”

Registrar and Transfer Agent
Shareholders with questions concerning
stock certificates, shareholder records,
account information, dividends, or stock
transfer should contact InterDigital’s
transfer agent:
American Stock Transfer and Trust Co.
Customer Service
59 Maiden Lane
New York, New York 10038 USA
+1 800.937.5449
http://www.amstock.com

Independent Auditors
PricewaterhouseCoopers
Philadelphia, Pennsylvania USA

Investor Relations
Janet Meenehan Point
Senior Director, Investor Relations
+1 610.878.7866
e-mail: janet.point@interdigital.com

Corporate Office and Development Facility
781 Third Avenue
King of Prussia, Pennsylvania 19406 USA
+1 610.878.7800

Development Facilities
Two Huntington Quadrangle, 4th Floor
Melville, New York 11747 USA

1450 South Babcock Street
Melbourne, Florida 32901 USA

InterDigital Canada Ltée
1000 Sherbrooke Street West
10th Floor
Montreal, Quebec, Canada
H3A 3G4

Corporate Ombudsman
To report concerns anonymously or confi-
dentially about InterDigital accounting, inter-
nal accounting controls or auditing matters,
please write:
Office of the Ombudsman
PO Box 60814
King of Prussia, PA 19406 USA

Contact the InterDigital Board of Directors
To report concerns of a non-audit or non-
accounting nature to InterDigital’s Board of
Directors, please email:
Directors@InterDigital.com
or write
InterDigital Board of Directors
781 Third Avenue
King of Prussia, PA 19406 USA

Web Site
http://www.interdigital.com

Trademarks
InterDigital holds a number of trademarks
worldwide, including InterDigital,® Wireless
technologies to move your ideas.®

InterDigital_10-K_2003 / pg. 2
InterDigital_10-K_2003 / pg. 2
pg. 2

Financial Highlights

Year ended December 31,

$ : in thousands, except per share data

Total revenue
Income (loss) from operations

Other income

Net income (loss) applicable to

common shareholders

Net income (loss) per share applicable

to common shareholders

Total cash, cash equivalents and

short-term investments

Total assets
Total shareholders’ equity

2003

2002

2001

$ 114,574
29,541
10,580

$ 87,895
9,240
—

$ 52,562
(20,493)
—

34,332

2,375

(19,421)

.58

.04

(.36)

105,927
205,165
97,485

87,566
191,178
78,791

90,363
148,381
60,274

To Our Shareholders:

Your Company continued its record of strong performance in 2003. In the five years since we
changed the Company’s emphasis, we have successfully transitioned to a financially stable,
premier patent licensing and technology product development company concentrating on the
standards-based wireless communications market. With growing success as a pioneer of
innovative wireless technologies, we are well positioned to deliver sustainable growth in
enterprise value. We are succeeding by pursuing a strategy that, through reinvestments, lever-
ages our cash flows from patent licensing to substantially grow our offerings of wireless tech-
nology and product solutions. Our long-term goal, which we are pursuing in stages, is to
become a preferred provider of advanced modem solutions for the wireless industry. To
accomplish that goal, we are offering to combine intellectual property licensing with technol-
ogy products that enhance the competitive offerings of our customers.

Highlights of an Outstanding Year – 2003

Growth in recurring royalties and cash flows
Addition of new licensees
Strong market participation by our licensees
Progress in the development of our technology product offerings
Growth of our portfolio of patented technologies
Successful acquisition of patent and technology assets
Repurchase of two million shares of our Company’s common stock

In last year’s report, we outlined our objectives for 2003. We’re pleased to report sig-

nificant progress against our goals, including the following highlights:

We strengthened our market position through the acquisition of assets of Windshift
Holdings Inc., formerly known as Tantivy Communications, expanding our position in cdma2000®
and gaining access to the WLAN market with smart antenna technology that shows early
promise as a solution that can improve the performance of WLAN and cellular products.

By continuing our investment in WCDMA technology and product development, we
completed a robust Frequency Division Duplex (FDD) protocol stack for use in handsets with
our partner, Infineon Technologies. The strength of that product’s performance enabled
Infineon to secure its first Third Generation (3G) chipset customer in 2003, Chinese equipment
producer Huawei Technologies. Early in 2004, Infineon announced a second customer for
its advanced chipsets, DBTel, a leading handset brand in China and Taiwan. Under our
agreement with Infineon, InterDigital is entitled to royalties as Infineon delivers chipsets
incorporating our protocol stack software to their customers.

pg. 02

We completed the development of a fully standards-compliant Time Division Duplex (TDD)
technology suite and successfully delivered the technology blocks to Nokia. This is the
culmination of five years of pioneering work where we helped to define the worldwide TDD
standards and built and successfully demonstrated a complete TDD technology platform that
delivers high speed voice and data capability for mobile users.

We accelerated the pace of our Second Generation (2G, 2.5G) and 3G patent licensing pro-
gram with the addition of five new licensees and the renewal of an important license agreement.
We strengthened our balance sheet while completing both an acquisition and a share
repurchase program. At year-end, our cash and short-term investment balance had grown by
approximately 20% over the previous year.

Codifying and communicating our corporate governance principles were very important
initiatives in 2003. In taking these steps, we have provided the investment community with
a clearer statement about our commitment to protect and enhance shareholder value. We
also added three new independent directors to our Board. These individuals bring to
InterDigital industry experience, rich and diverse management backgrounds, and creative
thinking that will benefit the Company for many years.

Strong Financial Performance
We extended our record of strong financial performance in 2003, growing revenues by 30%
over 2002, to almost $115 million, and recording positive cash flow of $45.9 million before
financing activities and an asset acquisition. Further, our cash position was enhanced in early
2004 after receipts of approximately $35 million from Ericsson, Sony Ericsson and Sharp.

We reported net income of $34.3 million and earnings per share of $0.58 (diluted)
for the year. We are particularly proud of these results given our continuing commitment to
making significant investment in the development of advanced wireless technologies to
enable high performance products.

Recurring royalty revenues from patent licensing increased 58%, to $92.9 million from
$58.9 million in 2002. The March 2003 license agreement with Sony Ericsson contributed
to our strong performance, generating $32.9 million in revenue and $34.9 million in cash.
NEC and Sharp were also important contributors in 2003. NEC established itself as a leading
supplier of 3G equipment to NTT DoCoMo and Hutchison. Sharp’s continued success as a
leading camera phone supplier helped improve its share of the global handset market. These
two licensees contributed $61.8 million of our revenues and $77.7 million of our cash flow
in 2003. We are optimistic that our licensing royalty revenues will continue to grow as our
licensees enjoy success in the market and as 3G products are deployed in key markets
around the world in 2004 and beyond.

pg. 03

Harry G. Campagna
Chairman of the Board

Expanding Licensing Revenue Opportunities Worldwide
Our licensing team continues to deliver new agreements that contribute to our financial
strength and build the enterprise value of your Company.

In 2003, we established five new agreements with equipment manufacturers —
Sony Ericsson, Ericsson, Research in Motion, High Tech Computer, and Nakayo. Some of the
most innovative devices in the market are being produced by these new licensees.
Additionally, we renewed an important license agreement with Sharp.

In March 2003, we resolved a long-running dispute with Ericsson and established
a foundation for positive business relationships with Ericsson and Sony Ericsson, signing
2G GSM/TDMA and 2.5G GSM/GPRS/TDMA patent license agreements with both companies.
We believe that the license agreements with Ericsson and Sony Ericsson established the
financial terms necessary to define the royalty obligations of Nokia Corporation and Samsung
Electronics on 2G GSM/TDMA and 2.5G GSM/GPRS/EDGE/TDMA products under their existing
patent license agreements with us. Both Nokia and Samsung have formally requested arbitra-
tion as a route to resolve the contract issues associated with their license agreements. We remain
very confident in our position with respect to both the Samsung and Nokia license agreements.
While we strive to license the use of our inventions through mutually agreed terms, from
time to time, we may find it necessary to institute legal action in order to protect the value
of our intellectual property. In March 2004 our subsidiary, Tantivy Communications, filed suit
against Lucent Technologies alleging patent infringement. We are dedicated to seeking new
ways to leverage our world-class capabilities in licensing through innovative business rela-
tionships and agreements that create future revenue opportunities for us and our partners.

Successfully Migrating Technology to 3G Product Solutions
From the beginning of our strategic transformation five years ago, we looked forward to the
time when we would introduce standards-compliant, mobile wireless technology products to
the industry. That time is here.

At the 3GSM Congress in Cannes, France in February 2004, we demonstrated pre-commercial
versions of our expanded suite of advanced wireless solutions. With our partner, Infineon, we
demonstrated our jointly developed, fully standards-compliant WCDMA FDD protocol stack
embedded in a demonstration handset that streamed video images and accessed the Internet at
384 kilobits per second. Reflecting the intimacy and effectiveness of our partnership, Infineon
and Huawei displayed similar demonstration handsets acknowledging InterDigital’s contribu-
tions. During the show, Infineon announced a second design win with DBTel. DBTel’s selection
of Infineon’s platform provides testimony to the product competitiveness of Infineon’s offering.

pg. 04

Howard E. Goldberg
President and Chief Executive Officer

We also showcased planned new solutions, including the evolution of our FDD solution to
incorporate key components of High Speed Downlink Packet Access (HSDPA) technology that
is targeted to deliver data rates up 14 megabits per second in mobile products. We introduced
our subscriber-based smart antenna technology targeted for WLAN and mobile cellular appli-
cations, and demonstrated our complete TDD technology platform. Our technology solutions
are designed to offer important benefits to semiconductor producers, operators and wireless
equipment makers, including improved signal strength to the cell edge, enhanced network
capacity, reduced signal interference, lower power requirements which can extend battery
life and low cost implementation in finished products.

Plans for 2004
Our agenda for 2004 reflects our intense commitment to build sustainable value in your
Company. This year we are focused on:

Strengthening the attractiveness and market relevance of our technology and
intellectual property
Broadening our licensing program
Establishing new business relationships
Managing our costs and maintaining the strength of our balance sheet

For decades, we have been developing fundamental enabling technology that is now
incorporated into wireless products worldwide. From that solid base, we are investing in new
technologies and monetizing the value of those investments by growing our base of licensees
and technology product customers and partners. Given the depth of talent in our Company, we
are very excited about the value we can create in years to come.

Sincerely,

Harry G. Campagna,
Chairman of the Board

Howard E. Goldberg,
President and Chief Executive Officer

pg. 05

pg. 06

Wireless communications are changing the way people live, work and
play. Through our technology contributions and systems embedded in
wireless communications devices worldwide, we have enabled break-
through technology advances. For more than thirty years, InterDigital
Communications Corporation has been recognized as a pioneer in the
architecture, design and delivery of advanced wireless technology
platforms. Every day, hundreds of millions of consumers and businesses
rely on our inventions to move their ideas.

pg. 07

Developing Technology. We create value through our sustained investment in core
technology development and the adaptation of that technology for use in a broad array
of product applications. Over the course of our history, we have designed and developed
a wide range of technologies that form the basis for the vast majority of wireless
communications around the world today and in the future. We patent many of our inven-
tions and license those inventions to wireless communications equipment producers
and related suppliers. We are constantly working toward the next breakthrough in wireless
communications to bring to equipment producers, and ultimately consumers of their
products, more wireless communications capability at lower costs.

Conceptualization. Start with a concept. Have a vision of a solution to a problem that does not
yet exist. We began developing the constructs for a commercial digital mobile system in the 1980s,
years before the products containing those inventions became widely available. In the early 1990s,
we envisioned a system that would deliver broadband digital wireless voice and data. That system,
incorporating our technology, is now becoming a reality as 3G wireless networks are turned on
around the world.

pg. 08

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Research. To begin to realize
the vision, our engineers out-
line how an advanced system
would work and define and
develop the technology to
bring it to life. Working within
the wireless standards bodies,
our people contribute ideas
that help to build the owner’s
manual for a new way of com-
municating. In this process,
new ideas are patented and
made available for use in
worldwide standards. Our
teams continue to evaluate
alternate solutions to the chal-
lenges presented by a new
design construct and develop
new technology to support
evolving wireless systems and
consumer products.

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Technology Development. Our technology teams
implement concepts into executable code and
rigorously test the performance of the software to
ensure robust performance in a variety of environ-
ments. Through rigorous testing and continuous
improvements of the designs to enhance system
performance, we bring to fruition the concepts into
ready-to-incorporate software and system designs.

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Commercialization. Furthering the development effort, we work with our
customers to implement the software into their products, customizing the
integration to achieve superior performance. In the end, our inventions
enable the wireless systems and consumer devices to work better. What
began as a breakthrough thought ends inside a finished product.

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pg. 10

Intellectual Property. Our inventions lie at the heart of wireless communications. We
have actively contributed hundreds of inventions to the wireless industry. We currently
generate revenues and cash flow primarily through royalties from the licensing of our
patent portfolio. In recent years, we have dramatically increased our pace of invention.
During 2003 we applied for 2,001 new patents, a 156% increase over 2002. In addition,
we posted an 89% increase in the number of patents granted, adding 299 new patents
worldwide, bringing our current portfolio of U.S. and foreign issued patents and patent
applications to approximately 4,000 at the end of 2003. Our success in increasing
the pace and breadth of our innovation reflects our fundamental commitment to be an
industry leader in the creation of pioneering technologies.

A Sampling of our Essential Inventions Embedded in Wireless Products
Seamless Handover. Increases coverage area, accommodates more users and saves battery life.
Joint Detection and Interference Cancellation. Cancels out extraneous noise for a clearer and
crisper reception.
Fundamental System Architecture. InterDigital developed the basic design concepts and method-
ologies by which most commercial TDMA and CDMA wireless systems are implemented worldwide.
Bandwidth on Demand. Enables systems to allocate bandwidth in an extremely efficient manner,
increasing the capacity of a wireless system.
Power Control. Superior power control technology to maximize system capacity and minimize
signal interference and degradation.
Packet Data. An extremely efficient method of transporting packet data over a radio signal, thereby
increasing radio system capacity.
Global Pilot Channel. A reference signal transmitted by the base station that allows reliable and
robust communications by all mobile users.

pg. 11

Building Advanced Technology Products. Our products take the form of software and
reference designs that producers of components, terminals and infrastructure equipment
use to enhance the performance of their products. For our customers, enhanced
performance from our technology means their products make more efficient use of finite
spectrum resources, employ sophisticated management of signal interference, operate
at lower cost and require less power while performing at optimum levels.

Leading equipment producers turn to us for advanced solutions because of our deep
knowledge of wireless systems and our experience in successfully implementing complex
technologies into finished products. They are attracted by the depth of our intellectual
property and our know-how, which is driven by more than 30 years of experience devel-
oping advanced technologies and our extensive contributions to the evolving standards
for wireless products.

pg. 12

Today our products include a robust 3G software protocol stack, developed jointly by InterDigital
and Infineon, now available for use in 3G handsets and other terminals. We are also developing
interference management solutions targeted at the cellular and WLAN markets, including smart
antenna solutions and radio resource management software.

pg. 13

Strategic Partnerships and Licensees. Our strategic partnerships expand our market access,
broaden our technology base, provide manufacturing capability, accelerate innovation
and shorten the time-to-market for our technology product development programs.
Since 2001, we have been in a partnership with Infineon Technologies to jointly develop
the software for inclusion on Infineon’s 3G integrated circuit platform for 3G wireless
terminals. The demonstration phone shown on this page contains this jointly developed
platform and has been used to show the functionality of the software to potential customers.
Over the course of our history we have forged relationships with leading telecom-
munications manufacturers including Nokia, Siemens and Samsung. In addition to our
partnerships, we have established patent license agreements with over 30 manufacturers
of wireless equipment.

“ Our ongoing partnership with InterDigital is very successful. Our joint team has developed and
brought to market a 3G terminal unit protocol stack that, coupled with our multi-media
platform, gives our customers a high degree of functionality and speeds their time-to-market.
With this strong solution, we are already capturing customers.”
Horst Fenske, CTO Secure Mobile Solutions, Infineon Technologies

pg. 14

Iwatsu America, Inc. Japan Radio Company Kokusai Electric Co., Ltd. Kyocera Alcatel Espana America
Telephone & Telegraph Denso Corporation Ericsson Inc. and Telefonaktiebolaget LM Ericsson Hitac
Communication Technologies, Ltd. Hop-On Wireless, Inc. Hughes Network Systems Hop-On Wireless, In
Iwatsu America, Inc. Kokusai Electric Co., Ltd. Japan Radio Company Matsushita Communication Industrie
Co., Ltd. Matsushita Electrical Co. Ltd. Kyocera Corporation Mitsubishi Electric Corp. Nakay
Telecommunications, Inc. NEC Corporation Nokia Corporation Denso Corporation Pacific Comm. Science
Inc. Robert Bosch GmbH OKI Electric Industry, Ltd. Qualcomm, Inc. Alcatel Espana Sanyo Electr
Corporation Samsung Electronics Co. Ltd.Sharp Corporation Hop-On Wireless, Inc. Shintom Company Ericsso
Mobile Communications AB Toshiba Corporation UbiNetics Ltd. Alcatel Espana American Telephone
Telegraph Denso Corporation Ericsson Inc. and Telefonaktiebolaget LM Ericsson High Tech Computer Cor
Hop-On Wireless, Inc. Hitachi Communication Technologies, Ltd. Hughes Network Systems Iwatsu Americ
Inc. Japan Radio Company Nokia Corporation Kyocera Corporation Matsushita Communication Industries Co
Ltd. Matsushita Electrical Co. Ltd. Mitsubishi Electric Corp. Nakayo Telecommunications, Inc. NE
Corporation Nokia Corporation OKI Electric Industry, Ltd. Pacific Comm. Sciences, Inc. Qualcomm, In
Research in Motion, Ltd. Robert Bosch GmbH Samsung Electronics Co. Ltd. Sanyo Electric Corporation Sha
Corporation Shintom Infineon Technologies Sony Ericsson Mobile Communications AB Toshiba Corporatio
UbiNetics Ltd. Alcatel Espana American Telephone & Telegraph Denso Corporation Ericsson Inc. an
Telefonaktiebolaget LM Ericsson High Tech Computer Corp. Hitachi Communication Technologies, Lt
Hughes Network Systems High Tech Computer Corp. Japan Radio Company Kokusai Electric Co., Ltd. Kyoce
Corporation Matsushita Communication Industries Co., Ltd. Matsushita Electrical Co. Ltd. Mitsubishi Electr
Corp. Nakayo Telecommunications, Inc. Ericsson Inc. and Telefonaktiebolaget LM Ericsson NEC Corporatio
OKI Electric Industry, Ltd. Nokia Corporation Pacific Comm. Sciences, Inc. Qualcomm, Inc. Research
Motion, Ltd. Robert Bosch GmbH Research in Motion, Ltd. Samsung Electronics Co. Ltd. Sanyo Electr
Corporation Sharp Corporation Shintom Company Siemens AG Sony Ericsson Mobile Communications A
Toshiba Corporation Sony Ericsson Mobile Communications AB UbiNetics Ltd. Alcatel Espana America
Telephone & Telegraph Denso Corporation High Tech Computer Corp. Hitachi Communication Technologie
Ltd. Hughes Network Systems Hop-On Wireless, Inc. Iwatsu America, Inc. Sharp Corporation Matsushi
Communication Industries Co., Ltd. Japan Radio Company Kokusai Electric Co., Ltd. Kyocera Corporatio
Matsushita Electrical Co. Ltd. Mitsubishi Sierra Wireless, Inc. Electric Corp. Nakayo Telecommunications, In
NEC Corporation Nokia Corporation OKI Electric Industry, Ltd. Pacific Comm. Sciences, Inc. Qualcomm, In
Robert Bosch GmbH Samsung Electronics Co. Ltd. NEC Corporation Sanyo Electric Corporation Sha
Corporation Shintom Company Siemens AG Toshiba Corporation UbiNetics Ltd. Alcatel Espana America
Telephone & Telegraph Denso Corporation Ericsson Inc. and Telefonaktiebolaget LM Ericsson High Tec
Computer Corp. Iwatsu America, Inc. Hitachi Communication Hughes Network Systems Technologie
Ltd.Hop-On Wireless, Inc. Matsushita Communication Industries Co., Ltd.Japan Radio Company Kokus
Electric Co., Ltd. Kyocera Corporation Matsushita Electrical Co. Ltd. Matsushita Communication Industrie
Co., Ltd. Mitsubishi Electric Corp. NEC Corporation Nokia Corporation OKI Electric Industry, Ltd. Pacif
Comm. Sciences, Inc. Nakayo Telecommunications, Inc. Qualcomm, Inc. Research in Motion, Ltd. Robe
Bosch GmbH Samsung Electronics Co. Ltd. Siemens AG Sanyo Electric Corporation Shintom Company Son
Ericsson Mobile Communications AB Toshiba Corporation UbiNetics Ltd. Alcatel Espana American Telephon
& Telegraph Denso Corporation Ericsson Inc. and Telefonaktiebolaget LM Ericsson High Tech Computer Cor
Hitachi Communication Technologies, Ltd. Qualcomm, Inc. Hop-On Wireless, Inc. Hughes Network System
Iwatsu America, Inc. Kokusai Electric Co., Ltd. Japan Radio Company Kyocera Corporation Matsushi
Communication Industries Co., Ltd. Matsushita Electrical Co. Ltd. Nakayo Telecommunications, Inc. NE
Corporation Nokia Corporation Mitsubishi Electric Corp. Siemens AG Robert Bosch GmbH OKI Electr
Industry, Ltd. Pacific Comm. Sciences, Inc. Qualcomm, Inc. Research in Motion, Ltd. Samsung Electronic
Co. Ltd. Sanyo Electric Corporation Iwatsu America, Inc. Siemens AG Shintom Company Sony Ericsson Mobi
Communications AB Toshiba Corporation Toshiba Corporation UbiNetics Ltd. Alcatel Espana America
Telephone & Telegraph Denso Corporation Ericsson Inc. and Telefonaktiebolaget LM Ericsson High Tec
Computer Corp. Hitachi Communication Technologies, Ltd. Hughes Network Systems Hop-On Wireless, In
Iwatsu America, Inc. American Telephone & Telegraph Japan Radio Company Kokusai Electric Co., Lt
Kyocera Corporation Matsushita Communication Industries Co., Ltd. Matsushita Electrical Co. Ltd. Mitsubis
Electric Corp. Nakayo Telecommunications, Inc. Nokia Corporation Network Systems Infineon Technologie
Kyocera Corporation Matsushi
Iwatsu America

Japan Radio Company Kokusai Electric Co

Inc

pg. 15

Performance. We are intensely committed to superior performance. And we are deliv-
ering it. By a variety of measures, we are building the value of your Company. Our pace
of invention, our growth in revenues and recurring royalties have all surged in the last
three years. Importantly, we have grown our cash flow before financing and acquisitions
significantly during this same period. That performance translates into growth in value.

Patent Applications

Patents Granted

2,001

682%

increase

299

579%

increase

158

780

256

pg. 16
pg. 16

Revenue

Recurring Royalties

Cash and Short Term Investments

115

117%

increase

200%

increase

106

18%

increase

$ millions

pg. 17

Creating Value. InterDigital Communi-

cations Corporation’s breakthrough

inventions continue to forge new

advances in wireless technologies.

We are building strong momentum as

a preferred provider of advanced modem

solutions for the wireless industry.

We will leverage that momentum in

every facet of our business to create new

revenue opportunities, grow our cash

flow,and build enterprise value.Given our

pg. 18

position in the industry, the high

quality and market relevance of our

technology and product solutions and

our financial strength, we are optimistic

about our opportunity to build value in

the coming years.We have created a

global company of over 300 employees

focused on achieving our strategic

imperative of sustained, long-term

growth in enterprise value. We are

breaking through barriers every day.

pg. 19

Corporate Governance. At InterDigital, we are constantly seeking to build an organization
that will deliver substantial growth in enterprise value. In doing so, we are committed
to a well-defined and broadly communicated governance policy that will protect our share-
holders’ interests. The oversight functions provided by an experienced and independent
Board of Directors are a central element in sound corporate governance. In 2003, we
added three new independent directors to our Board. These industry veterans will add
to the already diverse and talented set of executives that help guide our organization. Also,
last year, we codified our corporate governance guidelines, reflecting the
commitment of the Board and management to effective policy and decision-making and
to growing long-term shareholder value.

InterDigital Communications Corporation Board of Directors

Harry G. Campagna
Chairman of the Board,
InterDigital
President and
Chief Executive Officer,
Qualitex Co.

D. Ridgely Bolgiano
Chief Scientist,
InterDigital

Steven T. Clontz
President and
Chief Executive Officer,
StarHub Pte. Ltd.

Howard E. Goldberg
President and
Chief Executive Officer,
InterDigital

pg. 20

Ed Kamins
Chief Information Officer
and Senior Vice President,
Avnet, Inc.

Robert S. Roath
Chief Financial Officer
(retired),
RJR Nabisco, Inc.

Robert W. Shaner
President (retired),
Cingular Wireless LLC

Alan P. Zabarsky
Founder and
Chief Executive Officer,
Technology Consulting
Associates, Inc.
Corporate Vice President
(retired), Motorola

2003 Financial Review

pg. 21

Selected Consolidated Financial Data

(in thousands except per share data)

Consolidated Statements of
Operations Data:

Revenues:

Licensing and alliance
Products
Total revenues
Net income (loss) applicable to
common shareholders before
cumulative effect of change in
accounting principle

Net income (loss) per common

share before cumulative effect of
change in accounting
principle - basic

Net income (loss) per common

share before cumulative effect of
change in accounting
principle - diluted

Cumulative effect of change in

2003

2002

2001

2000

1999

$ 114,574
–
$ 114,574

$ 87,895

$ 52,562

$ 51,244

–

5,634

$ 87,895

$ 52,562

$ 56,878

$ 66,171
4,496
$ 70,667

$ 34,332

$ 2,375

$ (19,421)

$ 5,564

$ 26,451

$ 0.62

$ 0.04

$ (0.36)

$ 0.11

$ 0.55

$ 0.58

$ 0.04

$ (0.36)

$ 0.10

0.52

accounting principle

–

$ (53,875)

–

Net income (loss) applicable to

common shareholders

$ 34,332

$ 2,375

$ (19,421)

$ (48,311)

$ 26,451

Net income (loss) per common

share - basic

$ 0.62

$ 0.04

$ (0.36)

$ (0.91)

Net income (loss) per common

share - diluted

$ 0.58

$ 0.04

$ (0.36)

$ (0.91)

0.55

0.52

Weighted average number of

common shares
outstanding - basic

Weighted average number of

common shares
outstanding - diluted
Pro forma effect of change
in accounting principle:

Net income applicable to common
shareholders before cumulative
effect of change in
accounting principle
Net income per share - basic
Net income per share - diluted

Consolidated Balance Sheet Data:

55,271

52,981

53,446

52,855

48,357

59,691

56,099

53,446

57,306

50,495

NA
NA
NA

$ 35,488
$ 0.73
$ 0.70

Cash and cash equivalents
Short-term investments
Working capital
Total assets
Total debt
Total shareholders’ equity

$ 20,877

$ 22,337

$ 17,892

$ 12,343

85,050
112,325
205,165

65,229
111,845
191,178

72,471
87,696
148,381

76,644
87,390
141,625

1,970

2,159

2,342

2,560

$ 97,485

$ 78,791

$ 60,274

$ 73,910

$ 14,592
68,550
95,498
126,571
3,005
$ 109,507

pg. 22

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
The following discussion should be read in conjunction with the Selected Consolidated Financial
Data, and the Consolidated Financial Statements and notes thereto, contained in this document.

We are in the business of designing and developing advanced wireless technology solutions
which we make available for license or sale to semiconductor companies and equipment producers.
Our advanced technology solutions are comprised of inventions, know-how and other technical
data (e.g., software, designs and specifications) related to the design and operation of digital
wireless products. We patent many of our inventions and license those inventions to wireless
communications equipment producers and related suppliers. In addition, we offer for sale or license
various portions of the technology (e.g., reference designs, know-how and software) to producers
of wireless equipment products and components. Our advanced technology solutions have been
developed both independently and in conjunction with certain equipment manufacturers. We also
actively participate in the standard setting process, contributing solutions that are incorporated
from time to time into Standards. In 2003, we generated substantially all of our revenue from
patent license agreements.

Our revenues in 2003 and 2002 included $20.6 million and nearly $8.0 million, respec-
tively, related to our licensees product sales from prior periods. In 2002, our revenues also included
$16.5 million of previously received non-refundable prepayments that were recognized upon our
receipt of evidence that the licensees had discontinued sales of covered products. These non-
recurring items represented 18% and 28% of our total revenues in 2003 and 2002, respectively.
We also recorded $14.0 million of other income in 2003 related to the settlement of a patent
litigation that was not associated with a pre-existing patent license agreement. Unpredictable
amounts like noted above could continue in the future.

In the last three years, we have signed eleven new patent license agreements or amendments
with both new and existing customers, including six license agreements covering 3G technologies.
Over that period, we increased our recurring patent license royalties by approximately 200%, from
$30.8 million in 2001 to $92.9 million in 2003. The increase resulted from both an increase in
the number of licensees and higher royalties from existing licensees during the period on covered
2G and 3G products. We expect that our 2G/3G royalty mix will shift to a higher percentage of 3G
royalties as the decade unfolds due to the emergence of the 3G market and continued matura-
tion of the 2G market coupled with the expiration of certain of our TDMA patents starting in 2006.
Wireless handset manufacturers, including our licensees, experienced declining average sell-
ing prices on mature 2G devices with limited functionality (e.g., voice-only handsets) during 2003.
However, these decreases were offset in large part by both increased volumes and higher aver-
age selling prices on devices with increased functionality and features, such as 3G devices and
camera-enabled 2.5G handsets. Our royalty base differs by licensee. Some royalty obligations are
calculated strictly as a percentage of sales. Other agreements provide for fixed royalties per unit
sold and others provide for combinations or variations thereof. As such, changes in our royalty
revenue from covered handsets may not highly correlate with overall industry changes in aver-
age selling prices. That was the case in 2003 when we experienced limited diminution in per
unit royalties from licensees due to the mix of royalties and related agreements. We believe our
2G licensing revenue will decline over time as a result of the continued maturation of the 2G market
coupled with the expiration of certain of our TDMA patents in coming years.

From time to time, if we believe that a third party is required to license our patents in order
to manufacture and sell digital cellular products and that the third party will not enter into a license,
we may institute legal action against the third party. These legal actions typically take the form

pg. 23

of a patent infringement lawsuit. In March 2004, we filed a patent infringement lawsuit against
Lucent Technologies, Inc. (Lucent) a leading manufacturer of cdma2000 equipment, for infringe-
ment of seven United States patents. The complaint seeks damages for past infringement and
an injunction against future infringement as well as interest, costs, and attorney’s fees. Lucent
has not responded to the complaint.

We and our licensees, in the normal course of business, may have disagreements as to the
rights and obligations of the parties under the applicable license agreement. For example, we
could have a disagreement with a licensee as to the amount of reported sales and royalties.
Currently, we are in separate arbitrations regarding our respective license agreements with
Nokia Corporation (Nokia) and Samsung Electronics Co. Ltd. (Samsung).

Over the last three years, our cost of development has increased from approximately
$44.5 million to approximately $45.9 million and has represented between 54% and 61% of
our total operating expenses. Our development efforts are integral to both establishing product
offerings and expanding our portfolio of wireless patents and will continue to be a substantial
portion of our operating expenses in 2004.

We seek to maintain a strong balance sheet and have increased our cash and short-term invest-
ment position over the last three years from approximately $90.0 million at December 31, 2000
to $105.9 million at December 31, 2003 while maintaining less than $2.5 million of long-term
debt during that period. We achieved this increase while investing approximately $46.5 million
during 2003 to repurchase 2 million shares of our common stock and acquire substantially all
of the operating assets of Windshift Holdings, Inc., formerly known as Tantivy Communications, Inc.
(Windshift). We plan to continue to maintain a strong cash and short-term investment position.
However, we will consider investment opportunities that may require us to reduce our cash and
short-term investment position and/or increase our long-term debt. Such opportunities may
include, but are not limited to, accelerated investment in our internally developed technology
and the acquisition of patents and technology products from third parties.

Critical Accounting Policies and Estimates

Our consolidated financial statements are based on the selection and application of accounting
principles generally accepted in the United States of America, which require us to make estimates
and assumptions that affect the amounts reported in both our consolidated financial statements
and the accompanying notes thereto. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the exercise of judgment.
Actual results could differ from these estimates, and any such differences may be material to
the financial statements. Our significant accounting policies are described in Note 2 to our
consolidated financial statements, and are included in Item 8 of the Form 10-K. We believe the
accounting policies that are of particular importance to the portrayal of the Company’s financial
condition and results, and that may involve a higher degree of complexity and judgment in their
application compared to others, are those relating to revenue recognition, income taxes, and long-
lived intangible patent assets. If different assumptions were made or different conditions had
existed, our financial results could have been materially different.

Revenue Recognition
We derive revenue principally from patent licensing and service agreements. The timing of revenue
recognition and the amount of revenue actually recognized from each source depends upon a
variety of factors, including the specific terms of each agreement and the nature of the deliverables
and obligations. Such agreements are often complex and multi-faceted. These agreements
can include, without limitation, elements related to the settlement of past patent infringement
liabilities, up-front and non-refundable license fees for the use of patents and/or know-how, patent

pg. 24

and/or know-how licensing royalties on covered products sold by licensees, cross licensing terms
between us and other parties, the compensation structure and ownership of intellectual property
rights associated with contractual technology development arrangements, and advanced payments
and fees for service arrangements. Due to the combined nature of some agreements and the inherent
difficulty in establishing reliable, verifiable and objectively determinable evidence of the fair value
of the separate elements of these agreements, the total revenue resulting from such agreements
may sometimes be recognized over the combined performance period. In other circumstances, such
as those agreements involving consideration for past and expected future patent royalty obliga-
tions, the determining factors necessary to allocate revenue across past, current, and future years
may be difficult to establish. In such instances, the appropriate recording of revenue between periods
may require the use of judgment, after consideration of the particular facts and circumstances.
Generally, we will not recognize revenue related to payments that are due greater than twelve months
from the balance sheet date. In all cases, revenue is only recognized after all of the following
criteria are met: (1) written agreements have been executed; (2) delivery of technology or
intellectual property rights has occurred or services have been rendered; (3) fees are fixed and
determinable; and (4) collectibility of fees is reasonably assured.

Patent License Agreements
Upon signing a patent license agreement, we provide the licensee with permission to use our patented
inventions in specific applications. We have no material future obligations associated with such
licenses, other than, in some instances, to provide such licensees with notification of future license
agreements pursuant to most favored licensee rights. Under our patent license agreements, we
typically receive one or a combination of the following forms of payment as consideration for
permitting our licensees to use our patented inventions in their applications and products:

Consideration for Prior Sales: Consideration related to a licensee’s product sales from prior
periods. Such consideration may result from a negotiated agreement with a licensee that
utilized our patented inventions prior to signing a patent license agreement with us or from
the resolution of a disagreement or arbitration with a licensee over the specific terms of an
existing license agreement. In each of these cases, we record the consideration as revenue.
We may also receive consideration from the settlement of patent infringement litigation where
there was no prior patent license agreement. We record the consideration related to such
litigation as other income.

Paid-up Amounts: Up-front, non-refundable royalty payments that fulfill the licensee’s obliga-
tions to us, under a patent license agreement, for the lifetime of the agreement.

Prepayments: Up-front, non-refundable royalty prepayments towards a licensee’s future
obligations to us related to its expected product sales in future periods. Our licensees’
obligations to pay royalties extend beyond the exhaustion of their prepayment balance. Once
a licensee exhausts its prepayment balance, we may provide them with the opportunity to make
another Prepayment toward future sales or it will be required to make Current Royalty Payments.

Current Royalty Payments: Royalty payments covering a licensee’s obligations to us related
to its covered product sales in the current contractual reporting period.

pg. 25

future obligations under these licenses and we can not reliably predict in which periods, within the
term of a license, the licensee will benefit from the use of our patented inventions. We recognize
revenues related to Prepayments as each licensee exhausts its prepayment balance through its
sales of covered products. We generally recognize revenue related to Current Royalty Payments
in the period in which the sales of each licensee’s products occurred.

Licensees that either owe us Current Royalty Payments or have prepayment balances
provide us with quarterly or semi-annual royalty reports that summarize their sales of covered
products and their related royalty obligations to us. We typically receive these royalty reports sub-
sequent to the period in which our licensees’ underlying sales occurred, but prior to the issuance
of our financial statements for that period. In such cases, we recognize the related revenue in
the period the sales occurred. When we do not receive the royalty reports prior to the issuance
of our financial statements, we accrue the related royalty revenue if reasonable estimates of such
amounts can be made. These estimates are based on the historical royalty data of the licensees
involved, currently available third party forecasts of royalty related product sales in the applica-
ble market and, if available, information provided by the licensee. When our licensees formally
report royalties for which we accrued revenues based on estimates, or when they report updates
to prior royalty reports, we adjust revenue in the period in which the final reports are received.
In cases where we receive objective, verifiable evidence that a licensee has discontinued sales
of covered products, we recognize any remaining deferred revenue balance related to unexhausted
Prepayments in the period that we receive such evidence.

Service Revenues
We recognize revenues associated with service arrangements on a straight-line basis, unless
evidence suggests that the revenue is earned or obligations are fulfilled in a different pattern,
over the contractual term of the arrangement or the expected period during which those specified
services will be performed, whichever is longer. Recently, our service agreements have been long-
term in nature and we have recorded revenue from them based on our proportional performance
of services rendered. The terms of these arrangements have provided evidence that this approach
better reflects the pattern in which the revenue has been earned or the obligations have been
fulfilled. When recognizing revenue based on our proportional performance, we measure the
progress of our performance based on the relationship between incurred contract costs and total
estimated contract costs. Our most significant costs have been labor hours and we believe these
costs provide a measure of the progress of our services. The effect of changes to total estimated
contract costs is recognized in the period such changes are determined. Estimated losses, if any,
are recorded when the loss first becomes apparent.

Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method,
deferred tax assets and liabilities are recognized for the estimated future tax consequences attrib-
utable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the Consolidated Statement of Operations
in the period that includes the enactment date. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets if management has determined that it is more likely than
not that such assets will not be realized.

pg. 26

Our accumulated tax losses, which include allowable deductions related to exercised employee
stock options, have generated a federal tax net operating loss (NOL) carryforward of approximately
$123 million and $137 million as of December 31, 2003 and 2002, respectively. Generally
accepted accounting principles require that we establish a net deferred tax asset consisting of
estimated future benefits of existing NOLs, offset by a valuation allowance associated with any
portion of our NOL carryforward for which management believes it is more likely than not we will
be unable to utilize the NOL carryforward to offset future taxes. We believe that the future uti-
lization of our NOL carryforwards is somewhat dependent on our success in three key areas (1)
the market acceptance of our technology products, (2) the outcome of significant outstanding patent
license arbitrations and (3) our ability to sign additional patent license agreements. We will con-
tinue to provide a full valuation allowance on all deferred tax assets, until our success in these
or other areas provides evidence that our NOL carryforward will be utilized. We currently provide
for income taxes only to the extent that we expect to pay cash taxes (primarily foreign withholding
taxes on patent license royalties, state taxes and the federal alternative minimum tax) associ-
ated with current taxable income. It is possible, however, that we could generate taxable income
in the future at levels which would cause management to conclude that it is more likely than
not that we will realize all or a portion of the NOL carryforward benefit. Upon reaching such a
conclusion, we would immediately record the estimated realizable value of some or all of the
deferred tax asset and, after its utilization, would then provide for income taxes at a rate equal to
our combined federal and state effective rates, which would approximate 36% to 39% under current
tax laws. If and when recognized, the tax benefit associated with deductions related to the exer-
cise of employee stock options, representing approximately 78% of our NOLs at December 31, 2003,
will be accounted for as a credit to shareholders’ equity and the remaining portion of the tax ben-
efit will reduce the income tax provision. Subsequent revisions to the estimated realizable value
of the deferred tax asset could cause our provision for income taxes to vary significantly from period
to period, although our cash tax payments would remain unaffected until our NOL carryforward
is fully utilized or has expired.

Patents
We capitalize external costs incurred to obtain patents and patent license rights and amortize
these costs on a straight-line basis over the estimated useful lives of the patents. Due to the uncer-
tainty associated with estimating the useful life of any advanced technology at its inception, we
assign an estimated useful life of 10 years to patents relating to technology developed directly
by the Company. The estimated useful lives of acquired patents and patent rights, however, will
be based on analysis related to each acquisition and may differ from the estimated useful lives
of patents obtained directly by the Company. We assess the potential impairment to all capitalized
net patent costs when there is evidence that events or changes in circumstances indicate that the
carrying amount of these patents may not be recovered. Amortization expense was $3.3 million,
$2.2 million and $1.8 million in 2003, 2002 and 2001, respectively. Accumulated amortization
was $17.1 million and $13.8 million at December 31, 2003 and 2002, respectively.

Contingencies
We recognize contingent liabilities in accordance with SFAS No. 5 “Accounting for Contingencies”.
We do not record contingent gains.

In first quarter 2003, we accrued a $3.4 million liability under an insurance reimbursement
agreement. Our insurance carrier has demanded arbitration, claiming that our obligation under
the agreement is approximately $28.0 million. We have since filed an action seeking a declaratory
judgement that the insurance reimbursement agreement is void and that we are due damages from

pg. 27

our insurance carrier for their bad faith and breach of obligations under a related insurance
policy. At this time, it is impossible to predict the outcome of the litigation and any arbitration,
therefore we have not adjusted our original accrual of $3.4 million.

Significant Transactions

We are due to receive total payments of approximately $14.0 million from Ericsson related
to their sales of infrastructure and terminal products through December 31, 2002. In 2003, we
received $7.0 million from Ericsson and we expect to receive the remaining payments in first
quarter 2004. We recognized the $14.0 million from Ericsson, net of an estimated $3.4 million
associated with a claim under an insurance reimbursement agreement with Federal Insurance
Company (Federal), as other income in first quarter 2003, as the payments from Ericsson rep-
resent the settlement of litigation. The $3.4 million represents a loss contingency and is more fully
discussed in Litigation and Legal Proceedings below.

Ericsson is obligated to pay us an annual license fee of $6.0 million per year for sales of
covered infrastructure products for each of the years 2003 through 2006. The first payment of
$6.0 million was received in February 2004 and the remaining payments are due in quarterly
installments of $1.5 million beginning in May 2004. We are recognizing the related revenue on
a straight-line basis from first quarter 2003 through fourth quarter 2006.

Sony Ericsson
In March 2003, we entered into a worldwide license agreement with Sony Ericsson Mobile
Communications AB (Sony Ericsson) for sales of terminal units compliant with 2G GSM/TDMA
and 2.5G GSM/GPRS/TDMA standards.

We are due to receive total payments of approximately $20.3 million from Sony Ericsson
related to their sales of terminal products through December 31, 2002. In 2003, we received
$8.7 million from Sony Ericsson and we expect to receive the remaining payments in first quarter
2004. Although we reached our agreement with Sony Ericsson at the same time as our resolu-
tion of a patent infringement lawsuit with one of its principals, Ericsson Inc., we never engaged
in litigation with Sony Ericsson. As such, our agreement with Sony Ericsson represents a new
patent license and not a settlement of litigation. We recognized the $20.3 million from Sony
Ericsson as revenue in first quarter 2003.

For the period January 1, 2003 through December 31, 2006, Sony Ericsson is obligated to
pay us a royalty on each licensed product sold. Through December 31, 2003, we received approx-
imately $26.2 million of advance royalty payments based on Sony Ericsson’s projections of sales
of covered products for 2003 and 2004. Once this initial prepayment is exhausted, Sony Ericsson
will have the option to make additional advance royalty payments or pay royalties on an ongoing
basis. In return for making advanced royalty payments, Sony Ericsson has and will receive pre-
payment discounts and credits as opposed to the undiscounted base royalty rate. We record advance
royalty payments as deferred revenue and subsequently recognize the revenue in the periods in
which our licensees exhaust such advance royalty payments through the sale of covered products.
As of December 31, 2003, Sony Ericsson has exhausted approximately $12.7 million of their
advance royalty payments through sales of covered products.

pg. 28

Nokia and Samsung Arbitrations
We believe the license agreements with Ericsson and Sony Ericsson establish the financial terms
necessary to define the royalty obligations of Nokia and Samsung on sales of 2G GSM/TDMA and
2.5G GSM/GPRS/TDMA products under their existing patent license agreements with us. Under
the most favored licensee (MFL) provisions applicable to their respective patent license agreements,
we believe both companies are obligated to pay royalties to us on sales of covered products from
January 1, 2002 by reference to the terms of the Ericsson (for infrastructure products) and Sony
Ericsson (for terminal unit products) license agreements. The MFL provisions include terms for
a period of review, negotiation, and dispute resolution with regard to the determination of the
royalty obligations of both Nokia and Samsung. Nokia and Samsung each dispute our position.
We are currently in separate arbitration proceedings regarding these disputes as more fully dis-
cussed in Litigation and Legal Proceedings below.

We have not recorded revenue associated with the Nokia and Samsung license agreements
related to sales of covered products during any period subsequent to January 1, 2002, and will
not record any such revenue until all elements required for revenue recognition are met.

Sharp
We are party to a non-exclusive, worldwide, generally nontransferable, royalty-bearing, convenience-
based patent license agreement with Sharp Corporation of Japan (Sharp) covering sales of termi-
nal devices compliant with TDMA-based PDC and PHS standards (Sharp PDC/PHS Agreement).
In second quarter 2003, we extended the term of the Sharp PDC/PHS Agreement until April 2008.
Under the extension, Sharp made a $17.5 million up-front payment consisting of a renewal fee
of $2.0 million and a royalty prepayment of $15.5 million. Once the royalty prepayment is
exhausted, Sharp will be obligated to make additional royalty payments, at updated rates, on sales
of licensed products sold through early 2008. The remaining portion of the upfront payment will
be amortized on a straight-line basis over the five-year term of the extension.

We are also party to a separate non-exclusive, worldwide, convenience-based, generally non-
transferable, royalty-bearing patent license agreement with Sharp (Sharp NCDMA/GSM 3G
Agreement) covering sales of GSM, narrowband CDMA and 3G products that expires upon the
last to expire of the patents licensed under the agreement. In 2003, we recorded revenues of
$28.5 million from Sharp, of which approximately $19.5 million is attributable to the Sharp
PDC/PHS Agreement and approximately $9.0 million is attributable to the NCDMA/GSM/3G
Agreement. In 2002 we recorded revenues of $23.5 million and $2.7 million, respectively, from
our PDC/PHS and GSM agreements with Sharp. In 2001 we recorded $15.6 million from our
PDC/PHS agreement with Sharp. In addition, under an amendment to the Sharp NCDMA/GSM/3G
Agreement, Sharp is obligated to make an upfront payment of approximately $17.8 million in
second quarter 2004 as an advance against future royalty obligations.

Acquisition
On July 30, 2003, we entered into an Asset Purchase Agreement (the Asset Purchase Agreement)
with Windshift, pursuant to which we acquired substantially all the assets of Windshift. Included
in the acquisition were patents, patent applications, know-how, and state-of-the art laboratory
facilities related to cdma2000, smart antenna, wireless LAN and other wireless communications
technologies. The acquisition included patents and patent applications to which we had previ-
ously acquired rights under a patent license agreement with Windshift. We acquired these assets
to strengthen our existing cdma2000 patent portfolio and competitive position in that market-
place, to broaden our offering to potential licensees and technology partners and to eliminate
contingent payment obligations we had to Windshift in connection with the license we entered
into with them in 2002 regarding the cdma2000 related patents.

The purchase price for the acquisition was $11.5 million, consisting of approximately
$10.0 million in cash and cancellation of approximately $1.5 million in outstanding indebtedness

pg. 29

owed to us by Windshift. In addition, under the terms of the Asset Purchase Agreement, Windshift
will be entitled to receive, for a period of approximately five years, 1% and 4%, respectively, of
amounts we receive from the licensing or sale of smart antenna and 802.11 intellectual property
acquired from Windshift (the Earn-out). In addition to the purchase price, we incurred approx-
imately $0.4 million of acquisition related costs.

In connection with our acquisition, we opened an engineering design center in Melbourne,
Florida and hired 10 individuals that were formerly employed by Windshift. Beginning July 31, 2003,
we have included the results of the Melbourne design center, amortization of the acquired patents
and depreciation of the acquired fixed assets in our results of operations.

Litigation and Legal Proceedings

Nokia
In July 2003, Nokia requested binding arbitration regarding Nokia’s royalty payment obligations
for its worldwide sales of 2G GSM/TDMA and 2.5G GSM/GPRS/EDGE/TDMA products under the
existing patent license agreement with InterDigital Technology Corporation (ITC), a wholly-
owned subsidiary of InterDigital Communications Corporation. Pursuant to the dispute resolu-
tion provisions of the patent license agreement, the arbitration has been filed in the International
Court of Arbitration of the International Chamber of Commerce (ICC).

The binding arbitration relates to ITC’s claim that the patent license agreements ITC signed
with Ericsson and Sony Ericsson in March 2003 defined the financial terms under which Nokia
would be required to pay royalties on its worldwide sales of 2G GSM/TDMA and 2.5G
GSM/GPRS/EDGE/TDMA products commencing January 1, 2002. Nokia is seeking a determina-
tion that their obligation under our existing patent license agreement is not defined by our license
agreements with Ericsson and Sony Ericsson or has been discharged. Alternatively, Nokia is seek-
ing access to various documents related to previous litigations, negotiations, and arbitrations with
other parties. Nokia also is seeking a ruling that no royalty rate for its sales after January 1, 2002
can be determined by the panel until certain contractual conditions precedent have been satisfied.
Nokia has additionally claimed that, in any event, the panel cannot award money damages.

ITC filed an Answer to Nokia’s Request for Arbitration arguing that the patent license agree-
ments signed with Ericsson and Sony Ericsson in March 2003 defined the financial terms under
which Nokia would be required to pay royalties on its worldwide sales of 2G GSM/TDMA and 2.5G
GSM/GPRS/EDGE/TDMA products commencing January 1, 2002, that Nokia’s duty to pay these
royalties has not been discharged, and that the documents sought by Nokia are not relevant to
the royalty determination. ITC also counterclaimed for an arbitration decision requiring that Nokia
pay us royalties on equivalent terms and conditions as those set forth in the Ericsson and Sony
Ericsson patent license agreements for the period January 1, 2002 to December 31, 2006, and
determining the amount of the royalty and payment terms. During fourth quarter 2003, Nokia
filed a Reply contesting our claims and including additional claims and defenses relating to the
enforceability, validity, and infringement of certain of ITC’s patents. Subsequently Nokia with-
drew from the arbitration its claims pertaining to invalidity and non-infringement of those same
ITC patents but maintains that the validity and infringement of those patents is a factor the
arbitration panel should consider in the arbitration. We do not believe that the issues of patent
validity or infringement are relevant to the arbitrable royalty dispute and intend to vigorously con-
test Nokia’s position. The arbitration panel has informed the parties that January 2005 is the month
during which the panel will conduct the arbitration evidentiary hearing, and, absent a resolution
of this matter or unexpected changes in the arbitration schedule approved by the arbitration panel,
we expect a decision to be rendered thereafter.

pg. 30

request to intervene and opposing the request for access to the documents. While the Court granted
Nokia’s motion to intervene in the Ericsson litigation, the Court has deferred a ruling on Nokia’s
request to gain access to sealed documents pending a determination by the arbitration panel in
the Nokia arbitration proceeding as to whether any sealed document is relevant to such arbitra-
tion proceeding. Nokia subsequently filed a motion to reinstate certain decisions that were vacated
in the now-settled Ericsson litigation. We have opposed Nokia’s motion to reinstate the decisions
and a court decision is pending.

Samsung
In 2002, during an arbitration proceeding, Samsung elected under its 1996 patent license agree-
ment with ITC (1996 Samsung License Agreement) to have Samsung’s royalty obligations com-
mencing January 1, 2002 for 2G GSM/TDMA and 2.5G GSM/GPRS/EDGE/TDMA wireless
communications products to be determined in accordance with the terms of the Nokia patent
license agreement, including its MFL provision. By notice in March 2003, ITC notified Samsung
that such Samsung obligations had been defined by the relevant licensing terms of ITC’s license
agreements with Ericsson and Sony Ericsson as a result of the MFL provision in the Nokia license
agreement. In November 2003, Samsung initiated a binding arbitration against InterDigital
Communications Corporation (InterDigital) and ITC (collectively with InterDigital, the Company).
The arbitration has been filed with the ICC. Samsung is seeking to have an ICC arbitration panel
determine that Samsung’s obligations under the 1996 Samsung License Agreement are not defined
by our license agreements with Ericsson and Sony Ericsson or, in the alternative, to determine
the amount of the appropriate royalty due. Samsung also has requested a consolidation of its arbi-
tration matter with the pending ICC arbitration involving Nokia Corporation and the Company and
for the arbitration panel to make a determination that Samsung is entitled to seek access to doc-
uments previously sealed by the Federal Court related to the now-settled Ericsson litigation. The
Company has responded to and contested Samsung’s claims and any request for access to the
sealed documents. The Company believes that consolidation of the arbitration proceedings is not
permitted without the consent of the parties. ITC also has counterclaimed for an arbitration deci-
sion requiring that Samsung pay us royalties on equivalent terms and conditions as those set forth
in the Ericsson and Sony Ericsson patent license agreements for the period January 1, 2002 to
December 31, 2006, and determining the amount of the royalty and payment terms. We also seek
a declaration that the parties’ rights and obligations are governed by the 1996 Samsung License
Agreement, and that the Nokia patent license agreement dictates only Samsung’s royalty obli-
gations and most favored rights for those products licensed under the 1996 Samsung License
Agreement. Samsung has replied to ITC’s answer and counterclaim, maintaining Samsung’s posi-
tion (as set forth in its arbitration demand) and arguing that it has succeeded to all of Nokia’s
license rights. In the alternative, Samsung asserts that its royalty obligations should be governed
by the MFL clause in the 1996 Samsung License Agreement. We expect an arbitration panel will
be selected in the near future.

Lucent
In March 2004, Tantivy Communications, Inc., one of our wholly-owned subsidiaries, filed a law-
suit in the United States District Court for the Eastern District of Texas against Lucent, a lead-
ing manufacturer of cdma2000 equipment, for infringement of seven United States patents. The
complaint seeks damages for past infringement and an injunction against future infringement
as well as interest, costs, and attorney’s fees. Lucent has not yet responded to the complaint.

Federal
In November 2003, Federal Insurance Company (Federal), the insurance carrier for the settled
litigation involving Ericsson Inc., delivered to us a demand for arbitration under the Pennsylvania
Uniform Arbitration Act. Federal claims, based on their determination of expected value to the Company

pg. 31

resulting from our settlement involving Ericsson Inc., that an insurance reimbursement agree-
ment requires us to reimburse Federal approximately $28 million for attorneys’ fees and expenses
it claims were paid by it. On November 4, 2003 the Company filed an action in United States
District Court for the Eastern District of Pennsylvania seeking a declaratory judgment that the
reimbursement agreement is void and unenforceable, seeking reimbursement of attorneys’ fees
and expenses which have not been reimbursed by Federal and which were paid directly by the
Company in connection with the Ericsson Inc. litigation, and seeking damages for Federal’s bad
faith and breach of its obligations under the insurance policy. In the alternative, in the event the
reimbursement agreement is found to be valid and enforceable, the Company is seeking a declara-
tory judgment that Federal is entitled to reimbursement based only on certain portions of
amounts received by the Company from Ericsson Inc. pursuant to the settlement of the litiga-
tion involving Ericsson Inc. Federal has requested the Court to dismiss the action and/or to have
the matter referred to arbitration. We have opposed such requests. The Court has held a hear-
ing on Federal’s requests, and a decision on such requests is pending. Prior to Federal’s demand
for arbitration, we had accrued a contingent liability of $3.4 million related to the insurance reim-
bursement agreement. If this matter results in us paying Federal substantially more than the amount
accrued, it could have a material impact on our financial results.

Other
We have filed patent applications in the United States and in numerous foreign countries. In the
ordinary course of business, we currently are, and expect from time to time to be, subject to chal-
lenges with respect to the validity of our patents and with respect to our patent applications. We
intend to continue to vigorously defend the validity of our patents and defend against any such
challenges. However, if certain key patents are revoked or patent applications are denied, our
patent licensing opportunities could be materially and adversely affected.

In addition to disputes associated with enforcement and licensing activities regarding our
intellectual property, including the litigation described above, we are a party to other disputes
and legal actions not related to our intellectual property but also arising in the ordinary course
of our business. Based upon information presently available to us, we believe that the ultimate
outcome of these other disputes and legal actions will not materially affect us.

Financial Position, Liquidity and Capital Requirements

In 2003, we generated net cash of $59.6 million from operating activities. In 2002, we used net
cash of $2.2 million in operating activities. The positive operating cash flow in 2003 arose prin-
cipally from net receipts of approximately $129.5 million from patent licensing agreements. This
included $7.0 million from Ericsson and approximately $34.9 million from Sony Ericsson under
the above-noted patent license agreements, $48.4 million from NEC Corporation of Japan (NEC)
associated with 2G and 3G patent license agreements, $29.3 million from Sharp related to our
2G and 3G patent license agreements and $9.9 million from other licensees related to their respec-
tive patent license agreements. These receipts were partially offset by cash operating expenses
of $74.0 million (operating expenses less depreciation of fixed assets, amortization of intangible
assets and non-cash compensation) and changes in working capital during 2003. The use of cash
in 2002 was due, in large part, to outflows related to cash operating expenses of $66.6 million,
which outflows were largely offset by the net receipts of approximately $50.4 million from patent
license agreements and approximately $10.7 million from our WTDD technology development agree-
ment with Nokia. Our net receipts from patent license agreements in 2002 included $29.5 million
from NEC associated with the 2G and 3G patent license agreements, $17.9 million from Sharp
associated with their 2G patent license agreement, and $3.0 million from other licensees.

Net cash flows used in investing activities increased to $45.3 million in 2003 from $4.8 million
in 2002. We purchased $20.3 million of short-term marketable securities, net of sales, in 2003.

pg. 32

In 2002, we sold $7.2 million of short-term marketable securities, net of purchases. This change
resulted from the higher level of cash receipts from patent licensing in 2003. The pace of invest-
ments in capital assets decreased from $6.5 million in 2002 to $3.9 million in 2003 due in large
part to our decision in mid 2003 to defer investment in field trial demonstration products for our
WTDD technology development program. Investment costs associated with patents increased
$3.7 million to $9.2 million in 2003 compared to 2002, reflecting higher 3G patenting activity
levels during 2003. In July, 2003, we acquired substantially all of the tangible and intangible assets
of Windshift for approximately $11.9 million, including acquisition-related costs, as described above.
In 2004, we expect patent investments to remain at or near 2003 levels and investments in
capital assets to return to pre-2003 levels as we invest in smart antenna and FDD technology
product development.

Net cash used in financing activities in 2003 was $15.7 million compared to net cash pro-
vided by financing activities of $11.4 million in 2002. The use of cash in 2003 primarily resulted
from the repurchase of 2.0 million shares of our common stock for a total of $34.7 million. This
repurchase was partially offset by $19.2 million of proceeds from option and warrant exercises
and from the Company’s employee stock purchase plan.

As of December 31, 2003 we had $105.9 million of cash, cash equivalents and short-term
investments, compared to $87.6 million as of December 31, 2002. Our working capital (adjusted
to exclude cash, cash equivalents, short-term investments, current maturities of debt and cur-
rent deferred revenue) decreased to $29.0 million at December 31, 2003 from $41.6 million at
December 31, 2002. This decrease was primarily due to the collection of $39.8 million of accounts
receivable in 2003 under our 2G agreement with NEC offset partially by increases in accounts
receivable from Ericsson and Sony Ericsson associated with their respective 2003 agreements. During
2004, we are due cash from Ericsson of $17.5 million and Sony Ericsson of $11.6 million under
their respective license agreements.

Consistent with our strategy to focus our resources on the development and commercial-
ization of technology products, we expect to see modest growth in operating cash needs related
to sustaining current staffing levels and continued investments in enabling capital assets in 2004.
We are capable of supporting these and other operating cash requirements for the near future
through cash and short-term investments on hand, as well as other internally generated funds
such as patent license royalty payments. At present, we do not anticipate the need to seek addi-
tional financing through either bank facilities or the sale of debt or equity securities.

At December 31, 2003 we did not have any significant purchase obligations outside the course
of our ordinary business. Following is a summary of our consolidated debt and lease obligations
at December 31, 2003 (in thousands):

Obligation

Total

1-3 Years

4-5 Years

Thereafter

Debt
$ 1,970
Operating leases
6,278
Total debt and operating lease obligations $ 8,248

$ 560
6,084
$ 6,644

$ 432
194
$ 626

$ 978
–
$ 978

As of December 31, 2003, we had NOL carryforwards of approximately $123 million for which
no deferred tax asset has been recorded. We expect that we will continue to pay source withholding
taxes to non-U.S. countries related to royalties, local and state income taxes, and U.S. alterna-
tive minimum taxes (“AMT”) when applicable. We do not expect to pay federal income taxes (other
than AMT) until these NOLs are fully utilized.

pg. 33

Property and equipment are currently being utilized in our on-going business activities, and we
believe that no write-downs are required at this time due to either lack of use or technological
obsolescence. With respect to patent assets, we believe that the fair value of our patents is at least
equal to the carrying value reflected on the Company’s balance sheet at December 31, 2003.

Results of Operations

2003 Compared With 2002

Revenues
Revenues in 2003 increased 30% to $114.6 million from $87.9 million in 2002. Patent license
royalty revenue in 2003 was $113.5 million compared to $83.4 million in 2002. Specialized engi-
neering service revenue was $1.1 million in 2003 compared to $4.5 million in 2002.

Revenues in 2003 included $20.3 million and $0.3 million of royalties from Sony Ericsson
and other licensees, respectively, related to sales from periods prior to the effective dates of their
respective agreements. Revenues in 2002 included nearly $8.0 million of royalty revenue asso-
ciated with NEC’s pre-2002 3G sales, and the recognition of $16.5 million of deferred revenue
associated with non-refundable and non-transferable patent license prepayments previously
received from Kyocera Corporation (Kyocera) and Denso Corporation (Denso) that had discon-
tinued sales of covered products.

Recurring patent license royalty revenue increased 58% to $92.9 million from $58.9 million
in 2002. Royalties from NEC (36%), Sharp (31%) and Sony Ericsson (14%) collectively contributed
to 81% of our recurring patent license royalty revenue in 2003. The increase in recurring patent
license royalty revenue from 2002 to 2003 is due to $18.7 million of recurring royalties from our
2003 patent license agreements with Ericsson and Sony Ericsson and increases in recurring
royalties from NEC, Sharp and other licensees of $10.6 million, $2.4 million and $2.3 million,
respectively. Royalties from NEC increased due to NEC ’s higher sales of infrastructure and hand-
sets into the emerging 3G market. Royalties from Sharp reflected increased demand for their 2.5G
handsets both in Japan and Europe.

In fourth quarter 2003, we completed the final delivery of our services required under our
WTDD technology development agreement with Nokia, collected the final $1.0 million payment
due under this agreement and recognized $1.0 million in related service revenue. In 2002, we
recognized $4.5 million of revenue for services performed under this agreement.

Operating Expenses
Development expenses decreased less than 1% in 2003 to $45.9 million from $46.1 million in
2002. The decrease was primarily due to an accrued loss of $1.2 million recorded in 2002 related
to our WTDD agreement with Nokia offset, in part, by an increase of approximately $0.5 million
and $0.4 million, respectively, in costs associated with engineering tools and research and
development materials.

Sales and marketing expenses of $4.9 million in 2003 increased 15% from $4.3 million in
2002. This increase was primarily attributable to approximately equal increases in costs related
to trade shows and market research activities. In 2003, we participated in an additional trade
show and also increased our market research efforts to support strategic planning activities.

General and administrative expenses in 2003 increased 19% to $18.2 million from
$15.2 million in 2002. Increases in public entity costs, including a $1.5 million increase in
our directors’ and officers’ liability insurance premiums, were the primary contributors to this
increase. We also incurred approximately $0.9 million of costs in second half 2003 related to
an update of our strategic plan.

Patents administration and licensing expenses increased 22% in 2003 to $16.0 million from
$13.1 million in 2002 due largely to a $1.1 million increase in amortization, resulting from an
increase in the number of patents and related prosecution costs over the past couple years, a

pg. 34

$0.8 million increase in legal fees and a $0.8 million increase in commission expense related
to higher patent licensing royalty revenue.

Other Income, Interest Income and Interest Expense
We recognized $14.0 million from the settlement of our litigation with Ericsson, net of an estimated
$3.4 million associated with a claim under an insurance reimbursement agreement, as other income
in 2003. The $3.4 million represents a loss contingency associated with our insurance reimburse-
ment agreement with Federal.

Interest income of $1.8 million in 2003 decreased 20% from $2.3 million in 2002 primarily

due to lower yields available in 2003 compared to 2002.

Income Taxes
The income tax provision in both 2003 and 2002 consisted primarily of withholding taxes associ-
ated with patent licensing royalties, principally from Japan. Our tax expense decreased $1.4 million
in 2003 to $7.3 million from $8.7 million in 2002, due primarily to a decrease in the level of
royalty revenue subject to non-US withholding tax.

2002 Compared With 2001
In January 2002, we entered into a worldwide, royalty-bearing license agreement (3G Agreement)
with NEC for sales of wireless products compliant with all 3G and narrowband CDMA standards. We
also concurrently reached an amicable settlement of a Second Generation (2G) patent licensing dis-
pute (2G Dispute) with NEC in connection with a 1995 2G patent license agreement (2G Agreement).
In connection with the 3G Agreement, we received a non-refundable advance royalty of
$19.5 million in April 2002 and recognized revenue of approximately $18.3 million related to
that advance royalty in 2002. In connection with the settlement of the 2G Dispute, we received
$13.25 million in April 2002, as the first of four equal nonrefundable installments totaling
$53 million. The remaining installments were received in 2003. In connection with the $53 million
settlement, we are recognizing revenue on a straight-line basis from the January 2002 agreement
date until February 2006, which is the expected period of use by NEC. In 2002, we recognized
approximately $12.3 million of revenue related to this settlement. At December 31, 2002, our
balance sheet included $39.8 million in accounts receivable due under the 1995 Agreement.
Our deferred revenue balance contained approximately $40.7 million related to these receivables
and the $13.25 million in cash previously collected under this agreement.

Revenues
Revenues in 2002 increased to $87.9 million from $52.6 million in 2001. The increase was due
to a significant increase in patent licensing royalty revenues that more than offset an expected
decline in revenues from specialized engineering services.

2002 patent licensing royalty revenues increased 170% to $83.3 million from $30.8 million in
2001. The increase in 2002 was due largely to (i) $30.6 million of revenue from NEC related to sales
of covered products under the 3G Agreement (nearly $8.0 million of which was attributable to the
pre-2002 build-out of 3G systems in Japan by NEC) and the settlement of the 2G Dispute, (ii) an
increase of over $10.0 million in royalties from Sharp and (iii) the recognition of $16.5 million of
deferred revenue associated with nonrefundable and non-transferable patent license prepayments
previously received from Kyocera and Denso that have discontinued sales of covered GSM products.
These increases were partially offset by decreased royalties from Samsung and other licensees.

In 2002, specialized engineering services revenues associated with the final stages of the
WTDD technology development work for Nokia were $4.5 million compared to peak development
related revenues of $21.8 million in 2001. In 2002 and second half 2001, revenues related to
the WTDD technology development work were calculated and recorded based on our proportional
performance of services under the contract. The final $1.0 million payment associated with this

pg. 35

contract was withheld until final delivery of the remaining technology required under the agreement
had been made. The final delivery occurred in second half 2003 and we recognized the final
$1.0 million of specialized engineering services revenue associated with the agreement at that time.

Operating Expenses
Development expenses increased 4% to $46.1 million in 2002 from $44.5 million in 2001.
This increase was due primarily to increased staff and related support costs primarily devoted
to 3G WCDMA technology platform and product development and a provision for an estimated
loss of $1.2 million associated with the WTDD development work for Nokia.

Sales and marketing expenses of $4.3 million in 2002 decreased 9% compared to $4.7 million

in 2001, mainly due to lower tradeshow costs.

General and administrative expenses for 2002 increased 2% to $15.2 million from
$14.9 million in 2001, primarily as a result of increased directors’ and officers’ liability insurance
premiums offset by lower outside legal costs in 2002.

Patents administration and licensing expenses increased 46% to $13.1 million in 2002 com-
pared to $9.0 million in 2001. Approximately $2.0 million of the increase over 2001 resulted from
higher commissions related to higher patent licensing royalty revenues. The remainder of the increase
versus 2001 was essentially attributable to higher costs associated with patent enforcement, ongo-
ing patent maintenance activities and higher patent cost and acquired license rights amortization.

Other Income and Expense
Interest income for 2002 decreased to $2.3 million from $4.9 million in 2001 due to lower invest-
ment yields in 2002 compared to 2001.

Income Taxes
The income tax provision in both 2002 and 2001 consisted primarily of withholding taxes associ-
ated with patent licensing royalties, principally from Japan.

Expected Trends
In 2004, we expect to benefit from the continued solid performance of our key licensees and to
expand our licensee base. As such, we expect to build upon the solid base of quarterly recur-
ring royalty revenues experienced in the last three quarters of 2003.

Dependent upon market timing, we may also recognize a small level of technology product-
related revenue associated with our jointly developed FDD protocol stacks, as products containing
this embedded solution are delivered into the emerging 3G markets by Infineon. In addition, we
expect that our operating expenses will be higher in 2004 due to the impact of inflation-adjusted
expenses, increased directors’ and officers’ liability insurance premiums, patent prosecution and
licensing costs (including legal costs related to arbitration and litigation activities), Sarbanes-
Oxley compliance and increased marketing and business development costs.

Our first quarter 2004 revenues are likely to be comprised of royalties from our current base
of licensees. Also, we expect that first quarter 2004 expenses could increase 5% - 10% over fourth
quarter 2003 levels.

Quantitative and Qualitative Disclosures About Market Risk

Cash Equivalents and Investments
We do not use derivative financial instruments in our investment portfolio. We place our invest-
ments in instruments that meet high credit quality standards, as specified in our investment policy
guidelines. This policy also limits the amount of credit exposure to any one issue, issuer, and
type of instrument. We do not expect any material loss with respect to our investment portfolio.

pg. 36

The following table provides information about our cash and investment portfolio
as of December 31, 2003. For investment securities, the table presents principal cash flows
and related weighted average contractual interest rates by expected maturity dates. All investment
securities are held as available for sale.

(in thousands)

Cash and demand deposits
Average interest rate
Cash equivalents
Average interest rate
Short-term investments
Average interest rate
Total portfolio
Average interest rate

$ 6,877

0.00%

$ 14,000

1.05%

$ 85,050

2.38%

$ 105,927

2.05%

Long-Term Debt
The table below sets forth information about our long-term debt obligation, by expected
maturity dates.

Expected Maturity Date

(In thousands)

December 31,

2004

2005

2006

2007

2008

Beyond

2009
and

Total
Fair
Value

Debt Obligation $ 193
Interest Rate

8.22%

$ 176

$ 191

$ 207

$ 225

$ 978

$ 1,970

8.28%

8.27%

pg. 37

Report of Management

Management is responsible for the consolidated financial statements and the other financial
information contained in this Annual Report. The financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America consid-
ered appropriate in the circumstances to present fairly the company’s financial position, results
of operations and cash flows. The financial statements include some amounts that are based
on management’s best estimates and judgments.

To provide reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition and accounting records are reliable for preparing financial statements,
management maintains a system of accounting and other internal controls. Even an effective
system of internal controls, no matter how well designed, has inherent limitations, including the
possibility of human error and the circumvention or overriding of controls, and therefore can
provide only reasonable assurance with respect to financial statement preparation and safeguarding
of assets. The system of accounting and other internal controls is continually assessed, modified
and improved, where appropriate and cost effective, in response to both changes in business
conditions and operations and recommendations made by the independent accountants.

The Audit Committee of the Board of Directors, which is composed of independent directors,
meets periodically with management and the independent accountants to review the manner in
which these groups are performing their responsibilities and to carry out the Audit Committee’s
oversight role with respect to corporate accounting, financial reporting practices and integrity of
financial reports, as well as legal and regulatory compliance therewith. Both management and
the independent accountants periodically meet privately with the Audit Committee and have access
to its individual members.

The consolidated balance sheets as of December 31, 2003 and 2002 and the consolidated
statements of operations, shareholders’ equity and cash flows for each of the two years in the
period ended December 31, 2003, have been audited by the company’s independent accountants,
PricewaterhouseCoopers LLP, in accordance with auditing standards generally accepted in the
United States. Their report is presented herein.

The consolidated statements of operations, shareholders’ equity and cash flows for the year
ended December 31, 2001, have been audited by the company’s former independent accountants,
Arthur Anderson LLP, in accordance with auditing standards generally accepted in the United
States. Their report is presented herein.

Howard E. Goldberg
President and Chief Executive Officer

Richard J. Fagan
Chief Financial Officer

King of Prussia, Pennsylvania
March 15, 2004

pg. 38

Report of Independent Auditors

To Board of Directors and Shareholders of InterDigital Communications Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated state-
ment of operations, cash flow and shareholders’ equity present fairly, in all material respects, the
financial position of InterDigital Communications Corporation and its subsidiaries at
December 31, 2003 and 2002, and the results of their operations and their cash flows for each
of the two years in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the respon-
sibility of the Company’s management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. The financial
statements and financial statement schedule of InterDigital Communications Corporation and its
subsidiaries as of December 31, 2001 and for the year ended December 31, 2001, were audited
by other independent accountants who have ceased operations. Those independent accountants
expressed an unqualified opinion on those financial statements and financial statement schedule in
their report dated February 14, 2002.

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
March 12, 2004

pg. 39

Report of Independent Public Accountants

THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP (ANDERSEN). THIS
REPORT HAS NOT BEEN REISSUED BY ANDERSEN.

To InterDigital Communications Corporation:

We have audited the accompanying consolidated balance sheets of InterDigital Communications
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders’ equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial statements and
the schedule referred to below are the responsibility of the Company’s management. Our respon-
sibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of InterDigital Communications Corporation and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

As explained in Note 2 to the consolidated financial statements, effective January 1, 2000,

the Company changed its method of recognizing revenue.

Our audit was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in the index of financial statements is presented for pur-
poses of complying with the Securities and Exchange Commission’s rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly states in all material aspects
the financial data required to be set forth therein in relation to the basic financial statements taken
as a whole.

Arthur Andersen LLP

Philadelphia, Pennsylvania
February 14, 2002

THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000 ARE NOT
REQUIRED TO BE PRESENTED IN THE 2003 ANNUAL REPORT.

pg. 40

Consolidated Balance Sheets

Decemeber 31,

(in thousands, except per share data)

Assets
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Prepaid and other current assets

Total current assets
Property and Equipment, Net
Patents, Net
Other Non-Current Assets

Total Assets

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt
Accounts payable
Accrued compensation and related expenses
Deferred revenue
Foreign and domestic taxes payable
Other accrued expenses

Total current liabilities
Long-Term Debt
Long-Term Deferred Revenue
Other-Long-Term Liabilities

Total Liabilities

Commitments and Contingencies (Notes 7 and 8)
Shareholders’ Equity:
Preferred Stock, $.10 par value, 14,399 shares authorized - $2.50 Convertible
Preferred, 53 and 54 shares issued and outstanding, liquidation value of
$1,319 and 1,350

Common Stock, $.01 par value, 100,000 shares authorized,
54,989 shares and 54,767 shares issued and outstanding

Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive (loss) income
Unearned compensation

Treasury stock, 3,500 and 1,500 shares of common held at cost

Total shareholders’ equity

Total Liabilities and Shareholders’ Equity

The accompanying notes are an integral part of these statements.

2003

2002

$ 20,877
85,050
37,839
8,628

152,394
12,137
32,246
8,388

$ 22,337
65,229
53,486
7,627

148,679
14,091
15,016
13,392

52,771

42,499

$ 205,165

$ 191,178

$ 193
6,435
7,569
22,381
1,259
2,232

40,069
1,777
64,214
1,620

$ 189
5,412
5,886
17,087
5,434
2,826

36,834
1,970
73,583
–

107,680

112,387

585
305,262
(164,613)
(270)
(722)

140,247
42,762

563
285,869
(198,945)
210
(838)

86,864
8,073

97,485

78,791

$ 205,165

$ 191,178

pg. 41

Consolidated Statements of Operations

For the Year Ended December 31,

(In thousands, except per share data)

Revenues:
Licensing and alliance
Operating Expenses:
Sales and marketing
General and administrative
Patents administration and licensing
Development

Income (loss) from operations
Other Income (Expense):
Other income
Interest income
Interest and financing expenses

Income (loss) before income taxes
Income Tax Provision

Net income (loss)
Preferred Stock Dividends

2003

2002

2001

$ 114,574

$ 87,895

$ 52,562

4,919
18,183
15,995
45,936

4,286
15,227
13,074
46,068

4,698
14,898
8,959
44,500

85,033

78,655

73,055

29,541

9,240

(20,493)

10,580
1,828
(215)

41,734
(7,269)

–

2,276

(257)

–
4,885

(258)

11,259
(8,748)

(15,866)
(3,418)

34,465

(133)

2,511
(136)

(19,284)
(137)

Net income (loss) applicable to common shareholders $ 34,332

$ 2,375

$ (19,421)

Net Income (Loss) Per Common Share – Basic

$ 0.62

$ 0.04

$ (0.36)

Weighted Average Number of Common Shares

Outstanding – Basic

55,271

52,981

53,446

Net Income (Loss) Per Common Share – Diluted

$ 0.58

$ 0.04

$ (0.36)

Weighted Average Number of Common Shares

Outstanding – Diluted

59,691

56,099

53,446

The accompanying notes are an integral part of these statements.

pg. 42

Consolidated Statements of Shareholders’ Equity

(in thousands, except per share data)

$2.50
Convertible
Preferred
Stock

5
–

–

Common
Stock

538

–

Income

Balance, December 31, 2000
Net loss
Net unrealized gain on

short-term investments

Total Comprehensive Loss

Exercise of Common
Stock options
Exercise of Common
Stock warrants

Dividend of Common Stock
and cash to $2.50
Preferred shareholders

Sale of Common Stock
under Employee
Stock Purchase Plan

Issuance of Restricted
Common Stock

Amortization of

unearned compensation

Additional

Accumulated
Other
Paid-In Accumulated Comprehensive
Deficit
Capital

Unearned
Income (Loss) Compensation

267,936
–

(181,899)
(19,284)

–
–

–

221

1,249

335

–

(137)

802

1,095

–

(4,597)

–

(930)

2,963

Total
Total
Treasury Shareholder’s Comprehensive
(Loss)
Equity

Stock

(8,073)
–

73,910
(19,284)

$ (19,284)

–

221

$ (19,063)

–

1,251

336

(93)

803

167

2,963

Balance, December 31, 2001

544 271,461

(201,320)

221

(2,564) (8,073) 60,274

Net income
Net unrealized loss on

short-term investments
Total Comprehensive Income
Exercise of Common Stock

options

–

2,511

–

– 2,511

$ 2,511

–

(11)

–

(11)

(11)
$ 2,500

–

5,865

–

– 5,872

Exercise of Common Stock

–

4,731

–

– 4,740

warrants

Dividend of Common Stock

and cash to $2.50
Preferred shareholders

Sale of Common Stock

under Employee Stock
Purchase Plan

Issuance of Common Stock

options to a non-employee
Issuance of Restricted

Common Stock

Tax benefit from exercise

–

(136)

–

(92)

–

1,253

–

– 1,255

–

1,044

–

(635)

– 410

of stock options –

– 1,434

–

1,434

Amortization of unearned

compensation

Balance, December 31, 2002
Net income
Net unrealized loss on

short-term investments
Total Comprehensive Income
Exercise of Common Stock

–

5
–

–

2,361

–

2,361

563 285,869

(198,945)
– 34,465

–

210

(838) (8,073)

–

78,791
– 34,465

$ 34,465

–

(480)

–

(480)

(480)
$ 33,985

options

–

19 17,490

–

– 17,509

Exercise of Common Stock

warrants

Dividend of Common Stock
and cash to $2.50
Preferred shareholders
Sale of Common Stock
under Employee Stock
Purchase Plan

Issuance of Restricted

Common Stock

Reduction of tax benefit
from exercise of stock
options

Amortization of unearned

compensation
Repurchase of
Common Stock

–

(133)

–

(77)

1,716

–

– 1,718

1,228

–

(840)

– 389

–

(1,116)

–

(1,116)

–

956

– 956

Balance, December 31, 2003

$ 5

$ 585 $ 305,262 $ (164,613)

The accompanying notes are an integral part of these statements

–

–
$ (270)

–

(34,689)
$ (722) $ (42,762) $ 97,485

(34,689)

pg. 43

Consolidated Statements of Cash Flows

For the Year Ended December 31,

2003

2002

2001

(in thousands)
Cash Flows From Operating Activities:
Net income (loss) before preferred stock dividends
Adjustments to reconcile net income (loss) to

net cash provided (used) by operating activities:

Depreciation and amortization
Deferred revenue recognized
Increase in deferred revenue
Non-cash compensation
Decrease (increase) in deferred charges
Other
Decrease (increase) in assets:
Receivables
Other current assets
Increase (decrease) in liabilities:
Accounts payable
Accrued compensation
Other accrued expenses

$ 34,465

$ 2,511

$ (19,284)

9,735

(61,563)
57,488
1,345
3,401

9,268
(54,738)
72,500
2,771
(805)

325

6,375
(9,877)
30,611
2,963
(4,240)
(49)

15,647

(39,007)

(839)

(1,030)

2,449
743

1,023
1,683
(3,149)

550
(99)

5,800

(70)
2,243
(2,297)

Net cash provided (used) by operating activities

59,561

(2,226)

9,567

Cash Flows From Investing Activities:
Purchases of short-term investments
Sales of short-term investments
Purchases of property and equipment
Patent costs
Acquisition of assets
Increase in notes receivable

(144,445)
124,144
(3,926)
(9,209)
(10,430)
(1,446)

(124,466)
131,697
(6,519)
(5,475)

–
–

(107,857)
112,251
(7,616)
(2,974)
–
–

Net cash used by investing activities

(45,312)

(4,763)

(6,196)

Cash Flows From Financing Activities:
Net proceeds from exercise of stock options and
warrants and employee stock purchase plan
Payments on long-term debt, including capital

lease obligations

Dividends on preferred stock
Repurchase of common stock

19,246

11,904

2,606

(189)

(77)
(34,689)

(378)

(92)
–

(335)
(93)
–

Net cash (used) provided by financing activities

(15,709)

11,434

2,178

Net (Decrease) Increase In Cash and Cash Equivalents

(1,460)

4,445

5,549

Cash and Cash Equivalents, Beginning of Period

22,337

17,892

12,343

Cash and Cash Equivalents, End of Period

$ 20,877

$ 22,337

$ 17,892

Supplemental Cash Flow Information:
Issuance of restricted common stock

389

$ 410 $ 167

Accrued purchase of patent rights
Cancellation of note receivable related to acquisition of assets

–

1,446

$ 450
–

–
–

Leased asset additions and related obligation

–

$ 195 $ 117

Interest paid

$ 187

$ 229 $ 201

Income taxes paid, including foreign withholding taxes

$ 9,537

$ 5,592

$ 5,485

Non-cash dividends on preferred stock

56 $

44 $

The accompanying notes are an integral part of these statements.

pg. 44

Notes to Consolidated Financial Statements – December 31, 2003

Note 1. Background

InterDigital Communications Corporation (collectively with its subsidiaries referred to as
InterDigital, the Company, we, us and our) designs and develops advanced wireless technology
solutions. We are developing technologies that may be utilized to extend the life of the current
generation of products, may be applicable to multiple generational standards such as 2G, 2.5G
and 3G cellular standards as well as WLAN standards, and may have applicability across multiple
air interfaces. In conjunction with our technology development, we have assembled an exten-
sive body of technical know-how, related intangible products and a broad patent portfolio. We
offer our solutions for license or sale to semiconductor companies and producers of wireless equip-
ment and components.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation
The consolidated financial statements include the accounts of InterDigital and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Short-Term Investments
We consider all highly liquid investments purchased with initial maturities of three months or less
to be cash equivalents. Management determines the appropriate classification of our investments
at the time of acquisition and reevaluates such determination at each balance sheet date. At
December 31, 2003 and 2002, all of our short-term investments were classified as available-for-
sale and carried at amortized cost, which approximates market value. We determine the cost of
securities by specific identification and report unrealized gains and losses on our available for
sale securities as a separate component of equity, net of any related tax effect. Net unrealized (losses)
gains on short-term investments were $(0.3) million and $0.2 million at December 31, 2003
and 2002, respectively. Realized gains and losses for 2003, 2002 and 2001 were as follows
(in thousands):

Year

2003
2002
2001

Gains

Losses

Net

$ 64
$ 12
$ 390

$ (322)
$ (144)
$ (32)

$ (258)
$ (132)
$ 358

pg. 45

Cash and cash equivalents consist of the following (in thousands):

December 31,

Money market funds and demand accounts
Repurchase agreements

2003

2002

$ 20,868
9
$ 20,877

$ 22,160
177
$ 22,337

The repurchase agreements are fully collateralized by United States Government securities
and are stated at cost, which approximates fair market value. Short-term investments consist of
the following (in thousands):

December 31,

US Government agency instruments
Corporate bonds

2003

2002

$ 53,804
31,246
$ 85,050

$ 37,131
28,098
$ 65,229

At December 31, 2003 and 2002, $73.2 million and $54.6 million, respectively, of our
short-term investments had contractual maturities within one year. The remaining portions of our
short-term investments had contractual maturities within two to five years.

Other Assets
Other assets consist primarily of prepaid foreign withholding taxes and prepaid commissions.
We often pay foreign withholding taxes and commissions at the beginning of our patent license
relationships in connection with the collection of related up-front payments. We capitalize our
prepayment of foreign withholding tax and prepaid commissions and recognize them in the same
period as the related revenue.

Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of property and equipment
are provided using the straight-line method. The estimated useful lives for computer equipment,
machinery and equipment, and furniture and fixtures are generally three to five years. Leasehold
improvements are being amortized over the lesser of their estimated useful lives or their respective
lease terms, which are generally five to ten years. Buildings are being depreciated over twenty-
five years. Expenditures for major improvements and betterments are capitalized while minor repairs
and maintenance are charged to expense as incurred.

Internal-Use Software Costs
Under the provisions of the American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained
for Internal-Use,” we capitalize costs associated with software for internal-use. Capitalization begins
when the preliminary project stage is complete and ceases when the project is substantially com-
plete and ready for its intended purpose. Amortization expense of these costs was $0.5 million
in 2003 and $0.6 million in each of 2002 and 2001. Accumulated amortization related to these
costs was $1.9 million and $1.4 million at December 31, 2003 and 2002, respectively.

pg. 46

assign an estimated useful life of 10 years to patents relating to technology developed directly
by the Company. The estimated useful lives of acquired patents and patent rights, however, will
be based on analysis related to each acquisition and may differ from the estimated useful lives
of patents obtained directly by the Company. We assess the potential impairment to all capital-
ized net patent costs when there is evidence that events or changes in circumstances indicate
that the carrying amount of these patents may not be recovered. Amortization expense was
$3.3 million, $2.2 million and $1.8 million in 2003, 2002 and 2001, respectively. Accumulated
amortization was $17.1 million and $13.8 million at December 31, 2003 and 2002, respectively.
The estimated aggregate amortization expense for patents and patent rights as of

December 31, 2003 is as follows (in thousands):

2004
2005
2006
2007
2008

$ 3,897
3,851
3,555
2,973
2,855

Revenue Recognition
We derive revenue principally from patent licensing and service agreements. The timing of rev-
enue recognition and the amount of revenue actually recognized from each source depends upon
a variety of factors, including the specific terms of each agreement and the nature of the deliv-
erables and obligations. Such agreements are often complex and multi-faceted. These agreements
can include, without limitation, elements related to the settlement of past patent infringement
liabilities, up-front and non-refundable license fees for the use of patents and/or know-how, patent
and/or know-how licensing royalties on covered products sold by licensees, cross licensing terms
between us and other parties, the compensation structure and ownership of intellectual prop-
erty rights associated with contractual technology development arrangements, and advanced pay-
ments and fees for service arrangements. Due to the combined nature of some agreements and
the inherent difficulty in establishing reliable, verifiable and objectively determinable evidence
of the fair value of the separate elements of these agreements, the total revenue resulting from
such agreements may sometimes be recognized over the combined performance period. In other
circumstances, such as those agreements involving consideration for past and expected future
patent royalty obligations, the determining factors necessary to allocate revenue across past, cur-
rent, and future years may be difficult to establish. In such instances, the appropriate recording
of revenue between periods may require the use of judgment, after consideration of the partic-
ular facts and circumstances. Generally, we will not recognize revenue related to payments that
are due greater than twelve months from the balance sheet date. In all cases, revenue is only
recognized after all of the following criteria are met: (1) written agreements have been executed;
(2) delivery of technology or intellectual property rights has occurred or services have been ren-
dered; (3) fees are fixed and determinable; and (4) collectibility of fees is reasonably assured.

Patent License Agreements
Upon signing a patent license agreement, we provide the licensee with permission to use our patented
inventions in specific applications. We have no material future obligations associated with such
licenses, other than, in some instances, to provide such licensees with notification of future license
agreements pursuant to most favored licensee rights. Under our patent license agreements,
we typically receive one or a combination of the following forms of payment as consideration for
permitting our licensees to use our patented inventions in their applications and products:

Consideration for Prior Sales: Consideration related to a licensee’s product sales from prior
periods. Such consideration may result from a negotiated agreement with a licensee that

pg. 47

utilized our patented inventions prior to signing a patent license agreement with us or from
the resolution of a disagreement or arbitration with a licensee over the specific terms of an
existing license agreement. In each of these cases, we record the consideration as revenue.
We may also receive consideration from the settlement of patent infringement litigation where
there was no prior patent license agreement. We record the consideration related to such
litigation as other income.

Paid-up Amounts: Up-front, non-refundable royalty payments that fulfill the licensee’s
obligations to us, under a patent license agreement, for the lifetime of the agreement.

Prepayments: Up-front, non-refundable royalty prepayments towards a licensee’s future
obligations to us related to its expected product sales in future periods. Our licensees’ obli-
gations to pay royalties extend beyond the exhaustion of their prepayment balance. Once a
licensee exhausts its prepayment balance, we may provide them with the opportunity to make
another Prepayment toward future sales or it will be required to make Current Royalty Payments.

Current Royalty Payments: Royalty payments covering a licensee’s obligations to us related
to its covered product sales in the current contractual reporting period.

We recognize revenues related to Consideration for Prior Sales when we have obtained a signed
agreement, identified a fixed and determinable price and determined that collectibility is reason-
ably assured. We recognize revenues related to Paid-up Amounts on a straight-line basis over the
effective term of the license. We utilize the straight-line method because we have no future
obligations under these licenses and we can not reliably predict in which periods, within the term
of a license, the licensee will benefit from the use of our patented inventions. We recognize
revenues related to Prepayments as each licensee exhausts its prepayment balance through its
sales of covered products. We generally recognize revenue related to Current Royalty Payments
in the period in which the sales of each licensee’s products occurred.

Licensees that either owe us Current Royalty Payments or have prepayment balances provide
us with quarterly or semi-annual royalty reports that summarize their sales of covered products
and their related royalty obligations to us. We typically receive these royalty reports subsequent
to the period in which our licensees’ underlying sales occurred, but prior to the issuance of our
financial statements for that period. In such cases, we recognize the related revenue in the period
the sales occurred. When we do not receive the royalty reports prior to the issuance of our financial
statements, we accrue the related royalty revenue if reasonable estimates of such amounts can
be made. These estimates are based on the historical royalty data of the licensees involved,
currently available third party forecasts of royalty related product sales in the applicable market
and, if available, information provided by the licensee. When our licensees formally report
royalties for which we accrued revenues based on estimates, or when they report updates to prior
royalty reports, we adjust revenue in the period in which the final reports are received. In cases
where we receive objective, verifiable evidence that a licensee has discontinued sales of covered
products, we recognize any remaining deferred revenue balance related to unexhausted
Prepayments in the period that we receive such evidence.

pg. 48

better reflects the pattern in which the revenue has been earned or the obligations have been
fulfilled. When recognizing revenue based on our proportional performance, we measure the
progress of our performance based on the relationship between incurred contract costs and total
estimated contract costs. Our most significant costs have been labor hours and we believe these
costs provide a measure of the progress of our services. The effect of changes to total estimated
contract costs is recognized in the period such changes are determined. Estimated losses, if any,
are recorded when the loss first becomes apparent.

Development
All engineering development expenditures are charged to expense in the period incurred.

Stock-Based Compensation
We account for stock-based employee compensation using the intrinsic value method and provide
pro forma disclosures related to our stock-based compensation under the provisions of Statement
No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment
of FASB Statement No. 123.” Equity instruments issued to non-employees for services are
accounted for at fair value and are marked to market until service is complete.

At December 31, 2003, the Company had three stock-based employee compensation plans,
which are described more fully in Note 11. The Company accounts for these plans under the recog-
nition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans have an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based
employee compensation (in thousands, except per share data):

For the Year Ended December 31,

2003

2002

2001

Net income (loss) applicable to Common

Shareholders – as reported

$ 34,332

$ 2,375

$ (19,421)

Add: Stock-based employee compensation expense

included in reported net income (loss)

1,345

2,771

3,130

Deduct: Total stock-based employee compensation

expense determined under fair value based method
for all awards (a)

Net income (loss) applicable to Common

Shareholders – pro forma

Net income (loss) per share - as reported – basic
Net income (loss) per share - as reported – diluted
Net income (loss) per share - pro forma – basic
Net income (loss) per share - pro forma – diluted

(13,472)

(21,764)

(30,817)

$ 22,205
0.62
0.58
0.40
0.37

$ (16,618) $ (47,108)

0.04
0.04
(0.31)
(0.31)

(0.36)
(0.36)
(0.88)
(0.88)

(a) No tax benefit has been recognized for the stock-based employee compensation expense since the Company is in an

NOL carryforward position and the realization of such benefit cannot be assured.

pg. 49

The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for grants in 2003,
2002 and 2001; no dividend yield; expected volatility of 104% for 2003, 72% for 2002 and 97% for
2001, risk-free interest rates of 2.9%, 3.83% and 4.59% for 2003, 2002 and 2001, respectively,
and an expected option life of 4.65 years for 2003, 4.32 years for 2002 and 4.21 years for 2001.
The weighted-average fair value at the date of grant for options granted during 2003, 2002 and 2001
is estimated as $15.99, $8.51 and $8.16, respectively.

Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments that potentially subject us to concentration of credit risk consist primarily
of cash equivalents, short-term investments, and accounts receivable. We place our cash equiv-
alents and short-term investments only in highly rated financial instruments and in United States
Government instruments.

Our accounts receivable are derived principally from patent license agreements and engineering
services. At December 31, 2003, three customers represented 46%, 31% and 14%, respectively, of
our accounts receivable balance. At December 31, 2002, two customers collectively represented
95% of our accounts receivable balance. We perform ongoing credit evaluations of our customers
who generally include large multi-national wireless telecommunications equipment manufacturers.
We believe that the book value of our financial instruments, which include cash and cash equiva-
lents, short-term investments and debt, approximate their fair values.

Impairment of Long-Lived Assets
Pursuant to Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” we evaluate long-lived assets and intangible
assets for impairment when factors indicate that the carrying amount of an asset may not be recov-
erable. When factors indicate that such assets should be evaluated for possible impairment, we
review the realizability of our long-lived assets by analyzing the projected undiscounted cash flows
in measuring whether the asset is recoverable. No such adjustments were needed in 2003, 2002
or 2001.

Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred
tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which those temporary dif-
ferences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the Consolidated Statement of Operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts
of deferred tax assets if it is more likely than not that such assets will not be realized.

Net Income (Loss) Per Common Share
Basic earnings per share (EPS) are calculated by dividing income available to common sharehold-
ers by the weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if options, warrants or other securities with features
that could result in the issuance of Common Stock were exercised or converted to Common Stock.

pg. 50

The following tables reconcile the numerator and the denominator of the basic and diluted net
income (loss) per share computation (in thousands, except for per share data):

For the Year Ended December 31, 2003

Income

(Numerator)

(Denominator)

Per-Share
Amount

Income per Share – Basic:
Income available to common shareholders
Dilutive effect of options, warrants and

$ 34,332

55,271

$ 0.62

convertible preferred stock

–

4,420

0.04

Income per Share – Diluted:
Income available to common shareholders +
dilutive effects of options, warrants and

convertible preferred stock

$ 34,332

59,691

$ 0.58

For the Year Ended December 31, 2002

Income

(Numerator)

(Denominator)

Per-Share
Amount

Income per Share – Basic:
Income available to common shareholders
Dilutive effect of options, warrants and

convertible preferred stock

Income per Share – Diluted:
Income available to common shareholders +
dilutive effects of options, warrants and
convertible preferred stock

For the Year Ended December 31, 2001
Loss per Share - Basic:
Loss available to common shareholders
Dilutive effect of options, warrants and

convertible preferred stock

Loss per Share - Diluted:
Loss available to common shareholders +
dilutive effects of options, warrants and
convertible preferred stock

$ 2,375

52,981

$ 0.04

–

3,118

–

$ 2,375

56,099

$ 0.04

Income

(Numerator)

(Denominator)

Per-Share
Amount

$ (19,421) 53,446

$ (0.36)

–

$ (19,421) 53,446

$ (0.36)

For the years ended December 31, 2003 and 2002, options and warrants to purchase approx-
imately 1.1 million and 3.6 million shares, respectively, of Common Stock were excluded from
the computation of diluted EPS because the exercise prices of the options were greater than the
weighted average market price of our common stock during the respective periods and, there-
fore, their effect would have been anti-dilutive. For the year ended December 31, 2001, the effects
of all options, warrants, and convertible preferred stock to purchase approximately 12.1 shares
of Common Stock were excluded from the computation of diluted earnings per share (EPS) as a
result of a net loss reported in the period.

pg. 51

Reclassification
Certain prior period amounts have been reclassified to conform to the current year presentation.

Note 3. Geographic/Customer Concentration

We have one operating segment. Substantially all of our revenue is derived from a limited number
of customers based outside of the United States (primarily Japan and Europe). These revenues
are paid in U.S. dollars and are not subject to any substantial foreign exchange transaction risk.
During 2003, 2002, and 2001, revenue from our Japan-based licensees comprised 64%, 94%,
and 50% of total revenues, respectively. Revenue from a customer based in Finland, represented
1%, 5%, and 42% of total revenues in 2003, 2002 and 2001, respectively.

During 2003, 2002, and 2001, the following customers accounted for 10% or more of revenues:

Sony Ericsson
NEC
Sharp
Denso
Nokia

Note 4. Significant Agreements

2003

2002

2001

29%
29%
25%
–%
1%

–
35%
30%
11%
5%

–
–
30%
2%
42%

Ericsson
In March 2003, we entered into a worldwide license agreement with Telefonaktiebolaget LM Ericsson
and Ericsson Inc. (together, Ericsson) for sales of terminal and infrastructure products compliant
with 2G GSM/TDMA and 2.5G GSM/GPRS/TDMA standards. Concurrent with this agreement, we
resolved a patent infringement lawsuit with Ericsson Inc. that was scheduled for trial in May 2003.
We are due to receive total payments of approximately $14.0 million from Ericsson related to
their sales of infrastructure and terminal products through December 31, 2002. In 2003, we received
$7.0 million from Ericsson and we expect to receive the remaining payments in first quarter 2004.
We recognized the $14.0 million from Ericsson, net of an estimated $3.4 million associated with
a claim under an insurance reimbursement agreement with Federal Insurance Company (Federal),
as other income in first quarter 2003, as the payments from Ericsson represent the settlement of
litigation. The $3.4 million represents a loss contingency and is more fully discussed in Note 8.
Ericsson is obligated to pay us an annual license fee of $6.0 million per year for sales of
covered infrastructure products for each of the years 2003 through 2006. The first payment of
$6.0 million was received in February 2004 and the remaining payments are due in quarterly
installments of $1.5 million beginning in May 2004. We are recognizing the related revenue on
a straight-line basis from first quarter 2003 through fourth quarter 2006.

We are due to receive total payments of approximately $20.3 million from Sony Ericsson
related to their sales of terminal products through December 31, 2002. In 2003, we received
$8.7 million from Sony Ericsson and we expect to receive the remaining payments in first quarter
2004. Although we reached our agreement with Sony Ericsson at the same time as our resolution
of a patent infringement lawsuit with one of its principals, Ericsson Inc., we never engaged in
litigation with Sony Ericsson. As such, our agreement with Sony Ericsson represents a new patent

pg. 52

license and not a settlement of litigation. We recognized the $20.3 million from Sony Ericsson
as revenue in first quarter 2003.

For the period January 1, 2003 through December 31, 2006, Sony Ericsson is obligated to
pay us a royalty on each licensed product sold. Through December 31, 2003, we received approx-
imately $26.2 million of advance royalty payments based on Sony Ericsson’s projections of sales
of covered products for 2003 and 2004. Once this initial prepayment is exhausted, Sony
Ericsson will have the option to make additional advance royalty payments or pay royalties on
an ongoing basis. In return for making advanced royalty payments, Sony Ericsson has and will
receive prepayment discounts and credits as opposed to the undiscounted base royalty rate. We
record advance royalty payments as deferred revenue and subsequently recognize the revenue
in the periods in which our licensees exhaust such advance royalty payments through the sale
of covered products. As of December 31, 2003, Sony Ericsson has exhausted approximately
$12.7 million of their advance royalty payments through sales of covered products.

Nokia and Samsung Arbitrations
We believe the license agreements with Ericsson and Sony Ericsson establish the financial terms
necessary to define the royalty obligations of Nokia Corporation (Nokia) and Samsung Electronics
Co. Ltd. (Samsung) on sales of 2G GSM/TDMA and 2.5G GSM/GPRS/TDMA products under their
existing patent license agreements with us. Under the most favored licensee (MFL) provisions
applicable to their respective patent license agreements, we believe both companies are obligated
to pay royalties to us on sales of covered products from January 1, 2002 by reference to the terms
of the Ericsson (for infrastructure products) and Sony Ericsson (for terminal unit products) license
agreements. The MFL provisions include terms for a period of review, negotiation, and dispute
resolution with regard to the determination of the royalty obligations of both Nokia and Samsung.
Nokia and Samsung each dispute our position. We are currently in separate arbitration proceedings
regarding these disputes as more fully discussed in Note 8.

NEC
In 2002, we entered into a worldwide royalty-bearing license agreement (3G Agreement) with NEC
Corporation (NEC) for sales of wireless products compliant with all 3G and narrowband CDMA
standards. We also concurrently reached an amicable settlement of a Second Generation (2G) patent
licensing dispute (2G Dispute) with NEC in connection with a 1995 2G patent license agreement
(2G Agreement).

In connection with the 3G Agreement, we received a non-refundable advance royalty of
$19.5 million in April 2002. We recognized revenue of approximately $18.3 million related to
that advance in 2002 and the balance in the first quarter of 2003. NEC has not made an addi-
tional prepayment under their 3G agreement and therefore submits quarterly royalty payments
based on its current period sales of licensed products. In connection with the settlement of the
2G Dispute, we received $13.25 million in April 2002, as the first of four equal nonrefundable
installments totaling $53 million. We received the remaining three installments in 2003. In
connection with the $53 million settlement, we are recognizing revenue on a straight-line basis
from the January 2002 agreement date through February 2006, which is the expected period of
use by NEC. In 2003 and 2002, we recognized approximately $12.9 million and $12.3 million
of revenue, respectively, related to this settlement. At December 31, 2003 and 2002, our deferred
revenue balance contained approximately $27.8 million and $40.7 million related to cash
previously collected under these agreements.

pg. 53

Matsushita
In 2001, we entered into a worldwide royalty-bearing license agreement with Matsushita
Communications Industrial Co., Ltd. (Matsushita) of Japan under our patent portfolio for Matsushita
to manufacture, sell, and distribute 3G products. We received a non-refundable advance royalty
payment of $19.5 million related to this agreement. The agreement with Matsushita provides for
royalty payments for products when the make, sell or use of the Matsushita 3G product infringes
one or more claims of the licensed patents. As of December 31, 2003, Matsushita manufacturing
and sales activities for 3G products have currently occurred in Japan and, in its royalty reports
to the Company, Matsushita has not included any royalties owed. We have not recognized any
revenue to date.

Sharp
We are party to a non-exclusive, worldwide, generally nontransferable, royalty-bearing, convenience-
based patent license agreement with Sharp Corporation of Japan (Sharp) covering sales of terminal
devices compliant with TDMA-based PDC and PHS standards (Sharp PDC/PHS Agreement). In
second quarter 2003, we extended the term of the Sharp PDC/PHS Agreement until April 2008.
Under the extension, Sharp made a $17.5 million up-front payment consisting of a renewal fee
of $2.0 million and a royalty prepayment of $15.5 million. Once the royalty prepayment is
exhausted, Sharp will be obligated to make additional royalty payments, at updated rates, on sales
of licensed products sold through early 2008. The remaining portion of the upfront payment will
be amortized on a straight-line basis over the five-year term of the extension.

We are also party to a separate non-exclusive, worldwide, convenience-based, generally non-
transferable, royalty-bearing patent license agreement with Sharp (Sharp NCDMA/GSM/3G
Agreement) covering sales of GSM narrowband CDMA and 3G products that expires upon the
last to expire of the patents licensed under the agreement. In 2003, we recorded revenues of
$28.5 million from Sharp, of which approximately $19.5 million is attributable to the Sharp
PDC/PHS Agreement and approximately $9.0 million is attributable to the NCDMA/GSM/3G
Agreement. In 2002 we recorded revenues of $23.5 million and $2.7 million, respectively, from
our PDC/PHS and GSM agreements with Sharp. In 2001 we recorded $15.6 million from our PDC/PHS
agreement with Sharp. In addition, under an amendment to the Sharp NCDMA/GSM/3G Agreement,
Sharp is obligated to make an upfront payment of approximately $17.8 million in second quarter
2004 as an advance against future royalty obligations.

Acquisition
In July 2003, we entered into an Asset Purchase Agreement (the Asset Purchase Agreement) with
Windshift Holdings, Inc., formerly known as Tantivy Communications, Inc. (Windshift), pursuant
to which we acquired substantially all the assets of Windshift. Included in the acquisition were
patents, patent applications, know-how, and state-of-the-art laboratory facilities related to
cdma2000, smart antenna, wireless LAN and other wireless communications technologies. The
acquisition included patents and patent applications to which we had previously acquired rights
under a patent license agreement with Windshift. We acquired these assets to strengthen our
existing cdma2000 patent portfolio and competitive position in that marketplace, to broaden our
offering to potential licensees and technology partners and to eliminate contingent payment
obligations we had to Windshift in connection with the license we entered into with them in 2002
regarding the cdma2000-related patents.

The purchase price for the acquisition was $11.5 million, consisting of approximately
$10.0 million in cash and cancellation of approximately $1.5 million in outstanding indebtedness
owed to us by Windshift. In addition, under the terms of the Asset Purchase Agreement, Windshift
will be entitled to receive, for a period of approximately five years, 1% and 4%, respectively, of amounts
we receive from the licensing or sale of smart antenna and 802.11 intellectual property acquired from

pg. 54

Windshift (“the Earn-out”). In addition to the purchase price, we incurred approximately
$0.4 million of acquisition related costs.

We accounted for this asset acquisition under FAS 141 “Business Combinations.” The following
table summarizes the estimated fair values of the assets acquired. Additional payments to Windshift
under the Earn-out may result in the recognition of goodwill, which would be subject to impairment
testing in accordance with SFAS 142 “Goodwill and Other Intangible Assets.”

(In thousands)

Property and Equipment
Patents
Total assets acquired

552
11,324
$ 11,876

As indicated in the table above, the majority of the purchase price has been allocated to
patents with the remainder allocated to fixed assets. We have estimated the useful life of the
acquired patents to be 15 years. We have estimated the useful lives of the acquired fixed assets
to be between 3 and 10 years.

In connection with our acquisition, we opened an engineering design center in Melbourne,
Florida and hired 10 individuals that were formerly employed by Windshift. Beginning July 31, 2003,
we have included the results of the Melbourne design center, amortization of the acquired patents,
and depreciation of the acquired fixed assets in our results of operations.

The following unaudited pro forma combined results of operations is provided for illustrative
purposes only and assumes this acquisition of assets occurred as of the beginning of each of
the periods presented. The unaudited pro forma combined financial results do not purport to be
indicative of the results of operations for future periods or the results that actually would have
been realized had the entities been a single entity during these periods.

Year Ended December 31,

(In thousands except per share data)

Pro forma revenue
Pro forma net income
Diluted net income per share, as reported
Diluted net income per share, pro forma

2003

2002

$ 114,574
$ 31,651
0.58
$
0.56
$

$ 88,220
$ (8,290)
$ 0.04
$ (0.16)

Nokia Development Agreement
In February 1999, we entered into a multi-year arrangement with Nokia for development of new
technology for 3G wireless telecommunications products. Under the multi-year arrangement, we
provided specialized engineering services and technology and know-how development and we retain
ownership rights of all of the technology we developed thereunder. In third quarter 2001, Nokia
and the Company amended the agreement by refining the pace and scope of the development
arrangement and Nokia committed to increase funding to a maximum of approximately $58 million,
up from the original estimate of $40 million. Under the amendment, we became responsible
for costs not covered by the maximum funding amount. This modification was treated as a new
contract for accounting purposes and as a result, we reported revenue for the remainder of the
program based on our proportional performance of service. Prior to the change, revenue had been
reported on a time and materials basis and we had billed Nokia approximately $46 million under
the contract, leaving approximately $12 million of revenue to be recognized based on our pro-
portional performance under the contract. During 2002, we accrued a loss of $1.2 million on
the modified contract based on our estimates of cost to complete the contract. In 2003, we
received the final $1.0 million payment associated with this contract upon our final delivery of
the remaining technology required under the agreement. For the years ended December 31, 2003,

pg. 55

2002 and 2001, we recognized specialized engineering service revenue related to this develop-
ment arrangement of $1.0 million, $4.6 million and $21.8 million, respectively.

Note 5. Property and Equipment

December 31,

(In thousands)

Land
Building and improvements
Machinery and equipment
Computer equipment and software
Furniture and fixtures
Leasehold improvements

Less: Accumulated depreciation

2003

2002

$ 695
5,941
10,544
25,832
3,829
2,301
49,142
(37,005)

$ 695
5,608
10,080
22,730
3,702
1,849
44,664
(30,573)

$ 12,137

$ 14,091

Depreciation expense was $6.4 million, $7.0 million and $5.0 million in 2003, 2002 and

2001, respectively.

Note 6. Long-Term Debt Obligations

December 31,

(In thousands)

Mortgage debt
Capitalized leases
Total long-term debt obligations
Less: Current portion

2003

2002

$ 1,939
31
1,970

$ 2,088
71
2,159

(193)

(189)

$ 1,777

$ 1,970

During 1996, we purchased our King of Prussia, Pennsylvania facility for $3.7 million, includ-
ing cash of $0.9 million and a 16-year mortgage of $2.8 million with interest payable at a rate
of 8.28% per annum.

Capitalized lease obligations are payable in monthly installments at an average rate of 4.6%,
through 2004. The net book value of equipment under capitalized lease obligations was less than
$0.1 million at December 31, 2003 and $0.1 million at December 31, 2002.

Maturities of principal of the long-term debt obligations as of December 31, 2003 are as

follows (in thousands):

2004
2005
2006
2007
2008
Thereafter

pg. 56

$ 193
176
191
207
225
978
$ 1,970

Note 7. Commitments and Contingencies

Leases
We have entered into various operating lease agreements. Total rent expense primarily for office
space, was $2.6 million, $2.4 million and $2.4 million in 2003, 2002 and 2001, respectively.
Minimum future rental payments for operating leases as of December 31, 2003 are as follows
(in thousands):

2004
2005
2006
2007
2008
Thereafter

$ 2,537
2,046
1,501
194
–
–

Note 8. Litigation and Legal Proceedings

Nokia
In July 2003, Nokia requested binding arbitration regarding Nokia’s royalty payment obligations
for its worldwide sales of 2G GSM/TDMA and 2.5G GSM/GPRS/EDGE/TDMA products under the
existing patent license agreement with InterDigital Technology Corporation (ITC), a wholly-owned
subsidiary of InterDigital Communications Corporation. Pursuant to the dispute resolution
provisions of the patent license agreement, the arbitration has been filed in the International Court
of Arbitration of the International Chamber of Commerce (ICC).

The binding arbitration relates to ITC’s claim that the patent license agreements ITC signed
with Ericsson and Sony Ericsson in March 2003 defined the financial terms under which Nokia
would be required to pay royalties on its worldwide sales of 2G GSM/TDMA and 2.5G
GSM/GPRS/EDGE/TDMA Products commencing January 1, 2002. Nokia is seeking a determina-
tion that their obligation under our existing patent license agreement is not defined by our license
agreements with Ericsson and Sony Ericsson or has been discharged. Alternatively, Nokia is seek-
ing access to various documents related to previous litigations, negotiations, and arbitrations with
other parties. Nokia also is seeking a ruling that no royalty rate for its sales after January 1, 2002
can be determined by the panel until certain contractual conditions precedent have been satisfied.
Nokia has additionally claimed that, in any event, the panel cannot award money damages.

ITC filed an Answer to Nokia’s Request for Arbitration arguing that the patent license agree-
ments signed with Ericsson and Sony Ericsson in March 2003 defined the financial terms under
which Nokia would be required to pay royalties on its worldwide sales of 2G GSM/TDMA and 2.5G
GSM/GPRS/EDGE/TDMA Products commencing January 1, 2002, that Nokia’s duty to pay these
royalties has not been discharged, and that the documents sought by Nokia are not relevant to
the royalty determination. ITC also counterclaimed for an arbitration decision requiring that Nokia
pay us royalties on equivalent terms and conditions as those set forth in the Ericsson and Sony
Ericsson patent license agreements for the period January 1, 2002 to December 31, 2006, and
determining the amount of the royalty and payment terms. During fourth quarter 2003, Nokia
filed a Reply contesting our claims and including additional claims and defenses relating to the
enforceability, validity, and infringement of certain of ITC’s patents. Subsequently Nokia with-
drew from the arbitration its claims pertaining to invalidity and non-infringement of those same
ITC patents but maintains that the validity and infringement of those patents is a factor the arbi-
tration panel should consider in the arbitration. We do not believe that the issues of patent validity
or infringement are relevant to the arbitrable royalty dispute and intend to vigorously contest Nokia’s
position. The arbitration panel has informed the parties that January 2005 is the month during
which the panel will conduct the arbitration evidentiary hearing, and, absent a resolution of this

pg. 57

matter or unexpected changes in the arbitration schedule approved by the arbitration panel, we
expect a decision to be rendered thereafter.

Separately, Nokia has filed a motion to intervene in the now-settled Ericsson litigation in
the United States District Court for the Northern District of Texas and to gain access to docu-
ments previously sealed by the Court in the settled litigation. We filed a response opposing the
request to intervene and opposing the request for access to the documents. While the Court granted
Nokia’s motion to intervene in the Ericsson litigation, the Court has deferred a ruling on Nokia’s request
to gain access to sealed documents pending a determination by the arbitration panel in the Nokia
arbitration proceeding as to whether any sealed document is relevant to such arbitration proceeding.
Nokia subsequently filed a motion to reinstate certain decisions that were vacated in the now-
settled Ericsson litigation. We have opposed Nokia’s motion to reinstate the decisions and a court
decision is pending.

Samsung
In 2002, during an arbitration proceeding, Samsung elected under its 1996 patent license agree-
ment with ITC (1996 Samsung License Agreement) to have Samsung’s royalty obligations com-
mencing January 1, 2002 for 2G GSM/TDMA and 2.5G GSM/GPRS/EDGE/TDMA wireless
communications products to be determined in accordance with the terms of the Nokia patent license
agreement, including its MFL provision. By notice in March 2003, ITC notified Samsung that such
Samsung obligations had been defined by the relevant licensing terms of ITC’s license agreements
with Ericsson and Sony Ericsson as a result of the MFL provision in the Nokia license agreement.
In November 2003 Samsung initiated a binding arbitration against InterDigital Communications
Corporation (InterDigital) and ITC (collectively with InterDigital, the Company). The arbitration has
been filed with the ICC. Samsung is seeking to have an ICC arbitration panel determine that
Samsung’s obligations under the 1996 Samsung License Agreement are not defined by our license
agreements with Ericsson and Sony Ericsson or, in the alternative, to determine the amount of
the appropriate royalty due. Samsung also has requested a consolidation of its arbitration matter
with the pending ICC arbitration involving Nokia Corporation and the Company and for the
arbitration panel to make a determination that Samsung is entitled to seek access to documents
previously sealed by the Federal Court related to the now-settled Ericsson litigation. The Company
has responded to and contested Samsung’s claims and any request for access to the sealed
documents. The Company believes that consolidation of the arbitration proceedings is not per-
mitted without the consent of the parties. ITC also has counterclaimed for an arbitration decision
requiring that Samsung pay us royalties on equivalent terms and conditions as those set forth in
the Ericsson and Sony Ericsson patent license agreements for the period January 1, 2002 to
December 31, 2006, and determining the amount of the royalty and payment terms. We also seek
a declaration that the parties’ rights and obligations are governed by the 1996 Samsung License
Agreement, and that the Nokia patent license agreement dictates only Samsung’s royalty obliga-
tions and most favored rights for those products licensed under the 1996 Samsung License
Agreement. Samsung has replied to ITC’s answer and counterclaim, maintaining Samsung’s
position (as set forth in its arbitration demand) and arguing that it has succeeded to all of Nokia’s
license rights. In the alternative, Samsung asserts that its royalty obligations should be governed
by the MFL clause in the 1996 Samsung License Agreement. We expect an arbitration panel will
be selected in the near future.

Lucent
In March 2004, Tantivy Communications, Inc., one of our wholly-owned subsidiaries, filed a
lawsuit in the United States District Court for the Eastern District of Texas against Lucent
Technologies, Inc. (Lucent), a leading manufacturer of cdma2000 equipment, for infringement
of seven United States patents. The complaint seeks damages for past infringement and an

pg. 58

injunction against future infringement as well as interest, costs, and attorneys’ fees. Lucent has
not yet responded to the complaint.

Federal
In November 2003, Federal, the insurance carrier for the settled litigation involving Ericsson Inc.,
delivered to us a demand for arbitration under the Pennsylvania Uniform Arbitration Act. Federal
claims, based on their determination of expected value to the Company resulting from our set-
tlement involving Ericsson Inc., that an insurance reimbursement agreement requires us to reim-
burse Federal approximately $28 million for attorneys’ fees and expenses it claims were paid by
it. On November 4, 2003, the Company filed an action in United States District Court for the Eastern
District of Pennsylvania seeking a declaratory judgment that the reimbursement agreement is void
and unenforceable, seeking reimbursement of attorneys’ fees and expenses which have not been
reimbursed by Federal and which were paid directly by the Company in connection with the Ericsson
Inc. litigation, and seeking damages for Federal’s bad faith and breach of its obligations under
the insurance policy. In the alternative, in the event the reimbursement agreement is found to
be valid and enforceable, the Company is seeking a declaratory judgment that Federal is entitled
to reimbursement based only on certain portions of amounts received by the Company from Ericsson
Inc. pursuant to the settlement of the litigation involving Ericsson Inc. Federal has requested the
Court to dismiss the action and/or to have the matter referred to arbitration. We have opposed
such requests. The Court has held a hearing on Federal’s requests, and a decision on such requests
is pending. Prior to Federal’s demand for arbitration, we had accrued a contingent liability of
$3.4 million related to the insurance reimbursement agreement. If this matter results in us pay-
ing Federal substantially more than the amount accrued, it could have a material impact on our
financial results.

Other
We have filed patent applications in the United States and in numerous foreign countries. In the
ordinary course of business, we currently are, and expect from time to time to be, subject to chal-
lenges with respect to the validity of our patents and with respect to our patent applications.
We intend to continue to vigorously defend the validity of our patents and defend against any such
challenges. However, if certain key patents are revoked or patent applications are denied, our patent
licensing opportunities could be materially and adversely affected.

Note 9. Related Party Transactions

In 2003, we engaged a consulting firm and paid approximately $0.7 million for their services.
One of our outside directors is Chairman of the Advisory Board to the consulting firm. Our board
member did not receive any direct compensation or commissions related to the engagement.
We paid $27,000 to a consultant for services in 2003 prior to his appointment to our Board

of Directors in December, 2003.

Note 10. Preferred Stock

The holders of the $2.50 Convertible Preferred Stock are entitled to receive, when and as declared
by our Board of Directors, cumulative annual dividends of $2.50 per share payable in cash or Common
Stock at the Company’s election (subject to a cash election right of the holder), if legally available.

pg. 59

Such dividends are payable semi-annually on June 1 and December 1. In the event we fail to pay
two consecutive semi-annual dividends within the required time period, penalties, such as adjusted
conversion rates, may be imposed. The $2.50 Convertible Preferred Stock is convertible into Common
Stock at any time prior to redemption at a conversion rate of 2.08 shares of Common Stock for each
share of preferred. In 2003, 2002 and 2001, InterDigital declared and paid dividends on the $2.50
Preferred Convertible Stock of $133,000, $136,000 and $137,000, respectively. These dividends
were paid with both cash of $77,000, $92,000 and $93,000 and shares of the Company’s
Common Stock of 2,593, 3,113 and 3,260 in 2003, 2002 and 2001, respectively.

Upon any liquidations, dissolution or winding up of the Company, the holders of the $2.50
Convertible Preferred Stock will be entitled to receive, from the Company’s assets available for
distribution to shareholders, $25 per share plus all dividends accrued, before any distribution
is made to shareholders of common stock. After such payments, the holders of the $2.50
Convertible Preferred Stock would not be entitled to any other payments. The redemption price
for each share of the $2.50 Convertible Preferred Stock is $25 per share. The $2.50 Convertible
Preferred Stock is redeemable at our option.

The holders of the $2.50 Convertible Preferred Stock do not have any voting rights except
on those amendments to the Company’s Articles of Incorporation which would adversely affect
their rights, create any class or series of stock ranking senior to or not at parity with the $2.50
Convertible Preferred Stock, as to either dividend or liquidation rights, or increase the authorized
number of shares of any senior stock. In addition, if two or more consecutive semi-annual dividends
on the $2.50 Convertible Preferred Stock are not paid by the Company, the holders of the $2.50
Convertible Preferred Stock, separately voting as a class, will be entitled to elect one additional
director of the Company.

Note 11. Common Stock Compensation Plans

Stock Compensation Plans
We have stock-based compensation plans under which, depending on the plan, directors,
employees, consultants and advisors can receive stock options, stock appreciation rights,
restricted stock awards and other stock unit awards.

Common Stock Option Plans
We have granted options under two incentive stock option plans, three non-qualified stock option
plans and two plans which provide for grants of both incentive and non-qualified stock options
(Pre-existing Plans) to non-employee directors, officers and employees of the Company and other
specified groups, depending on the plan. No further grants are allowed under the Pre-existing
Plans. In 2000, the shareholders approved the 2000 Stock Award and Incentive Plan (2000 Plan)
that allows for the granting of incentive and non-qualified options, as well as other securities.
The 2000 Plan authorizes the offer and sale of up to approximately 7.4 million shares of com-
mon stock. The Board of Directors or the Compensation Committee of the Board determines the
number of options to be granted. Under the terms of the 2000 Plan, the option price cannot be
less than 100% of fair market value of the Common Stock at the date of grant.

In 2002, the Board of Directors approved the 2002 Stock Award and Incentive Plan (2002 Plan)
that allows for the granting of incentive and non-qualified options, as well as other securities to Company
employees who are not subject to the reporting requirements of Section 16 of the Securities Act of
1934 or an “affiliate” for purposes of Rule 144 of the Securities Act of 1933. The 2002 Plan author-
izes the offer and sale of up to 1.5 million shares of common stock. The Board of Directors or the
Compensation Committee of the Board determines the number of options to be granted.

Under the terms of the 2002 Plan, the option price cannot be less than 100% of fair mar-
ket value of the Common Stock at the date of grant. In addition, unless otherwise modified, no
awards may be granted under the 2002 Plan after the close of business on March 21, 2012.

pg. 60

Under all of these plans, options are generally exercisable for a period of 10 years from
the date of grant and may vest on the grant date, another specified date or over a period of time.
However, under plans that provide for both incentive and non-qualified stock options, grants most
commonly vest in six semi-annual installments.

Information with respect to stock options under the above plans is summarized as follows

(in thousands, except per share amounts):

Available
For Grant

Outstanding Options

Number

Price Range

5,800
5,919
(5,109) 5,109
(280)
(184)

280

–

$ 0.01-39.00
$ 5.38-15.10
$ 5.38-39.00
$ 6.80-15.38

971

$ 0.01-39.00
10,564
$ 6.32-19.10
(1,056) 1,056
$ 0.01-39.00
(463)
(695) $ 0.01-17.13

463

–

1,500

1,878

$ 0.01-39.00
10,462
$13.20-25.85
999
(151) $ 6.50-39.00
(1,952) $ 0.01-19.10

(999)
151
–

Weighted
Average
Exercise
Price

$ 12.90
$ 10.47
$ 17.30
$ 11.61

$ 11.67
$ 12.46
$ 13.80
$ 8.45

$ 11.86
$ 19.05
$ 19.34
$ 8.97

Balance at December 31, 2000
Granted
Canceled
Exercised

Balance at December 31, 2001
Granted
Canceled
Exercised
2002 Plan Authorization

Balance at December 31, 2002
Granted
Canceled
Exercised

Balance at December 31, 2003

1,030

9,358

$ 0.01-39.00

$ 13.11

pg. 61

The following table summarizes information regarding the stock options outstanding

at December 31, 2003 (in thousands, except for per share amounts):

Range of
Exercise Prices

Number
Outstanding

Weighted
Average
Remaining
Contractual Life

Weighted
Average
Exercise Price

Number
Exercisable

$ 0.01 - 5.44
$ 5.50 - 8.81
$ 8.83 - 9.60
$ 9.63 - 11.13
$11.15 - 12.40
$12.43 - 15.88
$15.90 - 19.77
$19.81 - 33.50
$34.13 - 34.13
$39.00 - 39.00
$ 0.01 - 39.00

1,454
1,223
1,459
1,058
993
946
1,102
528
13
582
9,358

4.56
7.94
8.01
7.62
12.32
8.15
8.43
7.56
6.18
6.04
7.79

$ 5.16
7.21
9.56
10.50
12.02
14.25
17.88
24.75
34.13
39.00
$ 13.11

1,454
1,149
1,105
939
746
615
592
391
13
582
7,586

Weighted
Average
Exercise
Price

$ 5.16
7.17
9.57
10.54
12.04
13.79
17.52
25.17
34.13
39.00
$ 12.79

Common Stock Warrants
As of December 31, 2003 and 2002, we had warrants outstanding to purchase 192,000 and
222,000 shares of Common Stock at exercise prices ranging from $2.50 to $7.63 per share, with
a weighted average exercise price of $6.22 per share. As of December 31, 2003, all of these war-
rants were currently exercisable. Unless exercised, 112,000 warrants will expire in 2004 and the
remaining warrants will expire in 2006. The exercise price and number of shares of Common Stock
to be obtained upon exercise of these warrants are subject to adjustment under conditions spec-
ified in the respective agreements.

Restricted Stock
Under our 1999 Restricted Stock Plan, as amended, we can issue up to 3,500,000 shares of
restricted common stock and restricted stock units to directors, employees, consultants and advisors.
The restrictions on issued shares lapse over periods generally ranging from 1 to 5 years from the
date of the grant. As of December 31, 2003 and 2002, we had 1,006,491 and 915,064 shares
of restricted stock and restricted stock units, respectively, issued under the plan. The related com-
pensation expense will be, or has been, amortized over vesting periods that are generally from
one to five years. The balance of unearned compensation at December 31, 2003 and 2002 was
$0.7 million and $0.8 million, respectively.

Note 12. Shareholder Rights Plan

In December 1996, our Board of Directors declared a distribution under its Shareholder Rights
Plan (Rights Plan) of one Right (as described below) for each outstanding common share of the
Company to shareholders of record as of the close of business on January 3, 1997. In addition,
any new common shares issued after January 3, 1997 will receive one Right for each common
share. The Rights Plan was amended in a number of respects with the latest amendment in March
2000. As amended, each Right entitles shareholders to buy one-thousandth of a share of Series B
Junior Participating Preferred Stock at a purchase price of $250 per share, subject to adjustment.
Ordinarily, the Rights will not be exercisable until 10 business days after any of the following events
(each, a Triggering Event): (i) a non-exempt person or group owns or acquires 10% or more of
the Company’s outstanding Common Stock, or (ii) a non-exempt person or group publicly commences

pg. 62

an offer for 10% or more of the Company’s outstanding Common Stock, or (iii) a non-exempt
person or group publicly announces an intention to acquire control over the Company and pro-
poses in a proxy or consent solicitation to elect such a number of directors, who if elected, would
represent a majority of the directors when compared with the Independent Directors (as defined
in the Rights Plan) on the Board. If the Company’s Board of Directors has consented to the occur-
rence of a particular Triggering Event, then the occurrence of such Triggering Event will not give
rise to the exercisability of the Rights. In general, upon the occurrence of a Triggering Event
without Board approval, each holder of a Right will have the right to receive, upon exercise, Units
of Preferred Stock (or, in certain circumstances, Company Common Stock, cash, property, or other
securities of the Company) having a value equal to twice the exercise price of the Right, or if
the Company is acquired in a merger or other business combination, each holder of a Right will
have the right to receive stock of the acquiring person with a value equal to twice the exercise price
of the Right.

Note 13. Taxes

Income tax expense/(benefit) consists of the following components for 2003, 2002, and 2001:

Year Ended December 31,

(In thousands)

2003

2002

2001

Current
Federal
State
Alternative Minimum Tax Receivable (AMT)
Foreign

Deferred
Federal
State
Foreign
Increase/(decrease) in valuation allowance

$ (755)

$ 1,834

–
(793)

–
–

7,383
5,835

8,348
10,182

$ 200
–
–
3,218
3,418

3,418

(410)

(165)
(4,095)

–

(1,574)
1,434

2,826
(1,434)

(6,621)
(3,363)
–
9,984
–

Total

$ 7,269

$ 8,748

$ 3,418

pg. 63

The deferred tax assets and liabilities are comprised of the following at December 31, 2003

and 2002:

(In thousands)

Depreciation
Patent amortization
Other employee benefits
Other accrued liabilities
Other
Restricted stock compensation
Deferred revenue
AMT credit carryforward
R&E credits
Net operating losses
Less: valuation allowance
Net deferred tax asset

2003

2002

$ 1,143
2,093
561
72
1,279
786
28,922
1,711
2,657
42,119
(81,343)
–

$ 1,141
1,762
564
542
34
417
28,966
1,434
2,657
46,834
(82,917)

$ 1,434

The following is a reconciliation of income taxes at the federal statutory rate with income taxes

recorded by the Company for the years ended December 31, 2003, 2002 and 2001:

(In thousands)

2003

2002

2001

Tax at U.S. Statutory Rate
Foreign withholding tax, with no US foreign tax credit
State tax provision
Change in federal and state valuation allowance
AMT refund receivable
Other
Total tax provision

$ 14,190
4,861

$ 3,828
5,502

(410)

–

(9,814)

(1,269)

(793)
(765)

$ 7,269

–

687
$ 8,748

$ (5,394)
2,124
–
6,621
–
67
$ 3,418

At December 31, 2003, the Company had a federal net operating loss carryforward of
approximately $123 million, which will expire, if unused, in the years 2005 through 2021. At
December 31, 2003 and 2002, we have provided a full valuation allowance on all deferred
tax assets. Our assessment did not take into consideration the potential realization of any gain
contingencies and it is possible that the full valuation allowance, or a portion of it, could be
reversed in 2004. In 2003 we increased the valuation allowance by $8.2 million related to the
exercise of non-qualified stock options. At December 31, 2003, approximately $96 million of
benefits associated with the exercise of non-qualified stock options are included in the net
operating loss carryforward. However, these benefits have been deferred because the Company
is in a net operating loss position. Such benefits will be credited to additional paid-in capital
in the year in which the benefits are realized.

Under the Internal Revenue Code Section 382, the utilization of a corporation’s net oper-
ating loss carryforwards is limited following a change in ownership (as defined by the Internal
Revenue Code) of greater than 50% within a three-year period. If it is determined that prior equity
transactions limit the Company’s net operating loss carryforwards, the annual limitation will be
determined by multiplying the market value on the date of ownership by the federal long-term
tax-exempt rate. Any amount exceeding the annual limitation may be carried forward to future
years for the balance of the net operating loss carryforward period.

pg. 64

A more-than-50% cumulative change in ownership occurred in 1992. As a result of such
change, approximately $26 million of the Company’s NOL carryforwards were limited as of
December 31, 2003. If the Company experiences an additional more-than-50% cumulative own-
ership change, the full amount of the NOL carryforward may become subject to annual limita-
tion under Section 382. There can be no assurance that the Company will realize the benefit of
any carryforward.

Note 14. Selected Quarterly Results (Unaudited)

The table below presents quarterly data for the years ended December 31, 2003 and 2002:

Selected Quarterly Results

First

Second

Third

Fourth

Full Year

(in thousands, except per share amounts, unaudited)

2003
Revenues
Net income applicable to

$ 37,324

$ 25,777

$ 26,790

$ 24,683

$ 114,574

common shareholders $ 26,693

$ 3,125

$ 3,431

$ 1,083

$ 34,332

Net income per common

share – diluted

$ 0.45

$ 0.05

0.06

$ 0.02

$ 0.58

2002
Revenues $ 20,949
Net income (loss)

$ 25,149

$ 14,706

$ 27,091

$ 87,895

applicable to common
shareholders

Net income (loss) per
common share – diluted

$ 16

$ 2,444

$ (5,833) $ 5,748

$ 2,375

$ 0.00

$ 0.04

$ (0.11) $ 0.10

$ 0.04

pg. 65

Market for Company’s Common Equity and Related Stockholder Matters

The following table sets forth the range of the high and low sales prices of InterDigital’s Common
Stock as reported by The Nasdaq Stock Market.

2002
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

2003
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

Low

$ 12.40
13.64
9.51
19.10

$ 8.29
8.58
6.32
8.83

High

Low

$ 24.14
28.85
26.25
21.13

$ 11.50
18.21
13.90
15.00

As of March 7, 2004, there were approximately 1,796 holders of record of our Common Stock.
We have not paid cash dividends on our Common Stock since inception. It is anticipated that,
in the foreseeable future, no cash dividends will be paid on our Common Stock and any cash other-
wise available for such dividends will be reinvested in our business. The payment of cash dividends
will depend on our earnings, the prior dividend requirements on our remaining series of Preferred
Stock and other Preferred Stock which may be issued in the future, our capital requirements and
other factors considered relevant by our Board of Directors.

Risk Factors

This Annual Report contains forward-looking statements reflecting, among other things, the
Company’s beliefs and expectations as to: (i) the deployment, pace, and growth of the 3G market
and the wireless data services market; (ii) our current strategic objectives to (a) strengthen the
attractiveness and market relevance of our technology and intellectual property, (b) broaden our
licensing program and find new ways to leverage our licensing capabilities, (c) establish new business
relationships, (d) manage our costs and maintain the strength of our balance sheet, (e) continue
to invest in new technologies; (iii) our plans to expand our HSDPA solution and seek potential
customers for our smart antenna technology in WLAN and mobile cellular applications; (iv) the
capabilities of our technology solutions; (v) our future revenues, cash flow, short-term investment
position, operating expenses, and capital expenditures, and the sources and timing thereof, and

pg. 66

our near term operating requirements and lack of need to seek additional financing; (vi) our abil-
ity to monetize our investment in technology development primarily through patent licensing or
sale of all or a portion of our technologies; (vii) our ability to enter into new customer, partner and
licensing relationships, secure patent protection for our inventions; (viii) our beliefs as to the royalty
obligations of Nokia and Samsung under their respective patent license agreements with us and
the timing of the respective arbitration proceedings; and (ix) our ability to collect royalties under
existing license agreements and settlement agreements and derive revenues from our patents.
Forward-looking statements are subject to risks and uncertainties.

In addition to those factors identified in this Annual Report, the following factors, among
others, could cause actual outcomes to differ materially from those expressed in such forward-
looking statements: (i) Our technologies may not be widely deployed. (ii) We may experience tech-
nical, financial or other difficulties or delays related to the development of our technologies and
products; moreover, our technologies have not been fully tested in commercial use and may not
perform as expected. (iii) The 3G market and the market for smart antenna solutions may fail to
materialize at the pace or size we expect. For example, the potential exists for 3G market
preemption or reduction in scope by the success of current or future 2.5G solutions and of WLAN.
(iv) Investments designed to keep pace with technology and product market targets, and other
strategic investments, could adversely impact near-term operating results. (v) We may not be able
to enter into additional or expanded strategic partnerships or license agreements, either at all or
on acceptable terms. (vi) The strength of our patent portfolio could be weakened through patents
being declared invalid, our claims being narrowed, changes to the standards, and adverse court
decisions. (vii) Our 2G licensing revenue is expected to be impacted negatively over time by the
decline of the 2G market coupled with the expiration of certain of our TDMA patents starting in
2006. (viii) Licensees, individually and collectively, are increasingly demanding that the royalty
rates for 3G patents be lower than historic royalty rates, and in some cases, that the aggregate
royalty rates for their 3G products be capped at a maximum amount. (ix) We face substantial
competition from companies with greater resources. (x) Failure to anticipate or keep pace with
changes in industry standards, technological developments, and varying customer requirements.
(xi) A failure of one of our three primary licensees to meet their payment obligations or negative
economic conditions in Japan could adversely impact our revenues and cash flow. (xii) If any of
our products are found to infringe the intellectual property rights of a third party, we could be
required to redesign such products, take a license from such third party, and/or pay damages to
the third party. (xiii) A negative resolution to Nokia and Samsung arbitrations could (a) reduce
or eliminate amounts that we believe Nokia and/or Samsung owe and/or are required to pay in
the future, and (b) impact negotiating leverage in patent licensing activities. (xiv) Challenges to
existing license agreements and failure to extend expiring license agreements or enter new license
agreements will impact revenues and cash flow. (xv) Challenges to the validity of our patents may
result in certain of our patent claims declared invalid or substantially narrowed which could result
in the loss of patent licensing revenue from existing licensees and substantially impair our ability
to secure new patent licenses. (xvi) The cost of defending our intellectual property has been and
may continue to be significant. (xvii) Certain of our licenses contain provisions that could cause
the licensee’s obligation to pay royalties to be reduced or suspended for an indefinite period, with
or without the accrual of the royalty obligation. (xviii) Our ability to attract and retain qualified
personnel required for our strategic objectives could be affected by any adverse decisions in any
litigation or arbitration and by our ability to offer competitive cash and equity compensation and
work environment conditions.

pg. 67

Executive Management
Howard E. Goldberg
President, Chief Executive Officer and Director

Dr. Alain C. Briançon
Chief Technology Officer

Richard J. Fagan
Chief Financial Officer

Gary D. Isaacs
Senior Human Resources Officer

Brian G. Kiernan
Chief Strategic Standards Officer

Mark A. Lemmo
Senior Business Development Officer

William J. Merritt
General Patent Counsel and President of
InterDigital Technology Corporation

William C. Miller
Senior Programs and Engineering Officer

Lawrence F. Shay
General Counsel and Corporate Secretary

Charles “Rip” Tilden
Chief Operating Officer

Officers and Directors

Board of Directors
Harry G. Campagna
Chairman of the Board,
InterDigital
President and Chief Executive Officer,
Qualitex Co.

D. Ridgely Bolgiano
Chief Scientist,
InterDigital

Steven T. Clontz
President and Chief Executive Officer,
StarHub Pte. Ltd.

Howard E. Goldberg
President and Chief Executive Officer,
InterDigital

Ed Kamins
Chief Information Officer and
Senior Vice President,
Avnet, Inc.

Robert S. Roath
Chief Financial Officer (retired),
RJR Nabisco, Inc.

Robert W. Shaner
President (retired),
Cingular Wireless LLC

Alan P. Zabarsky
Founder and CEO,
Technology Consulting Associates, Inc.
Corporate Vice President (retired),
Motorola

pg. 68

R3_7007 ID_AR03_cover 04/21/04 6:47 PM Page 2

For every wireless barrier, there is a breakthrough. Today, when the “send”
button is pushed on a digital wireless device, InterDigital’s technology
makes the connection possible.

Innovations that can give equipment producers a competitive advantage

in this fast moving, ever-changing industry.

That’s our job. We’re InterDigital Communications Corporation, an

industry pioneer.

Corporate Information

Annual Meeting of Shareholders
Thursday, June 3, 2004
2:00 p.m. EDT
Sheraton Park Ridge Hotel
King of Prussia, Pennsylvania USA

Common Stock Information
The primary market for InterDigital’s
common stock is the Nasdaq National
Market. InterDigital trades under the
ticker symbol “IDCC.”

Independent Auditors
PricewaterhouseCoopers
Philadelphia, Pennsylvania USA

Investor Relations
Janet Meenehan Point
Senior Director, Investor Relations
+1 610.878.7866
e-mail: janet.point@interdigital.com

Corporate Office and Development Facility
781 Third Avenue
King of Prussia, Pennsylvania 19406 USA
+1 610.878.7800

Development Facilities
Two Huntington Quadrangle, 4th Floor
Melville, New York 11747 USA

1450 South Babcock Street
Melbourne, Florida 32901 USA

InterDigital Canada Ltée
1000 Sherbrooke Street West
10th Floor
Montreal, Quebec, Canada
H3A 3G4

Web Site
http://www.interdigital.com

Trademarks
InterDigital holds a number of trademarks
worldwide, including InterDigital,® Wireless
technologies to move your ideas.®

InterDigital_10-K_2003 / pg. 2
InterDigital_10-K_2003 / pg. 2
pg. 2

R3_7007 ID_AR03_cover 04/21/04 6:43 PM Page 1

Wireless technologies to move your ideas®

InterDigital Communications Corporation
781 Third Avenue
King of Prussia, PA 19406 USA
www.interdigital.com

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InterDigital Communications Corporation Annual Report 2003