Industry Recognition QUALCOMM's Vice Chairman Dr. Andrew Viterbi was appointed by President Clinton to the Advisory Committee on High Performance Computing and Communications, Information and Technology and the Next Generation Internet. The Advisory Committee will provide expertise to the White House, as the Clinton Administration develops policy affecting high performance computing, communications and networking. Highlights of Financial Performance Communication systems revenues were $508 million for the second quarter, an increase of $404 million over the second quarter of fiscal 1996. This growth in revenues was due to the significant increase in sales of CDMA handsets and ASICs, and the recognition of revenue related to QUALCOMM's infrastructure equipment installed in major markets of Sprint PCS's growing nationwide CDMA network as of March 30, 1997. Infrastructure equipment revenues in the second quarter included a large portion of the equipment installed in Sprint PCS's network since August, 1996. Infrastructure equipment revenues in subsequent quarters are likely to be subject to fluctuations based on the timing of shipments for current contracts and the successful negotiation and completion of future contracts. Communication systems gross profit was 18 percent in the second quarter of fiscal 1997 compared to 24 percent for the same period last year. The lower gross profit was due to significantly increased sales volumes of CDMA subscriber and ASICs products which have lower gross profit margins than OmniTRACS revenues. Gross profit was also affected by the start-up costs relating to CDMA infrastructure equipment sales and aggressive expansion of production capacity for CDMA subscriber equipment. Contract service revenues increased to $49 million, a 74 percent increase over the fiscal 1996 second quarter revenue of $28 million. The increase is primarily attributable to the development agreement with Globalstar which has continued to ramp-up since its inception in fiscal 1994. License, royalty and development fees were $29 million, or 5 percent of total revenues for the second quarter of fiscal 1997 compared to $17 million or 11 percent of total revenues for the year ago period. Revenues from royalties associated with the sale of CDMA equipment by licensees for the current quarter nearly doubled compared to second quarter of fiscal 1996. The Company expects to continue to experience quarterly fluctuations in license, royalty and development fees due to the variability in the amount and timing of CDMA license fees and royalties. Research and development (R&D) expenditures during the second quarter were $53 million, or 9 percent of revenues, compared to $35 million or 24 percent of total revenues for the second quarter of fiscal 1996. For the first six months of fiscal 1997, R&D expenses were $99 million, or 10 percent of total revenues, vs. $68 million, or 23 percent in the same period of 1996. QUALCOMM continued to add to its engineering resources during the second quarter of fiscal 1997, and the R&D increase of $7 million, or 15 percent from the first quarter of fiscal 1997 was a result of this growth as well as increased material and equipment purchases. Purchases of material and equipment for R&D will vary from quarter to quarter, but overall R&D expenditures in absolute dollars are expected to continue to increase in future quarters. Selling and marketing expenses increased over the year ago quarter from $17 million to $31 million, but declined as a percent of sales from 11 percent to 5 percent. For the first six months of fiscal 1997, selling and marketing expenses were $58 million, or 6 percent of total revenues, vs. $32 million, or 11 percent for the same period in 1996. The dollar increase is related to the increased CDMA marketing activity both domestically and internationally. General and administrative (G&A) expenses were $22 million or 4 percent of revenues for the second quarter of fiscal 1997, compared with $8 million or 6 percent of revenue in the same period last year. For the first six months of fiscal 1997, G&A expenses were $38 million, or 4 percent of total revenues, vs. $20 million, or 7 percent for the same period in 1996. The increase was driven primarily by additional personnel and associated overhead costs necessary to support the overall growth in the Company's operations and increased legal fees associated with patent infringement litigation. Although the Company is experiencing rapid growth, it continues to emphasize control of operating expenses and reduction of expenses as a percentage of revenue. Other operating expense of $9 million for the second quarter of fiscal 1997 relates to one-time write-offs for the sale and disposal of certain inventories, assets, and purchased business software which have not contributed significant revenues to the Company's operations. QUALCOMM recognized nearly $10 million pre-tax during the second fiscal quarter in conjunction with a market value adjustment in the value of equity trading securities. The unrealized gain will be adjusted each quarter to reflect the market price until the shares are subsequently sold. Interest expense increased to $3 million in the second quarter of fiscal 1997, compared to $1 million in the second quarter of fiscal 1996 as a result of increased bank borrowings to support the working capital needs of QPE. Distributions accrued on convertible preferred securities of $4 million for the second quarter of fiscal 1997 relate to the private placement of $660,000,000 of 5-3/4% Trust Convertible Preferred Securities by QUALCOMM in March 1997. The Securities are convertible into common stock of QUALCOMM at a conversion price of $72.6563 per share of common stock. The net proceeds from the private placement will be used for working and fixed capital requirements related to the expansion of operations, financing of customers of QUALCOMM's CDMA infrastructure equipment, and investments in joint ventures and/or other companies and assets to support the growth of each business division. Litigation Update The Company has been engaged in patent infringement and other litigation with companies including Ericsson and Motorola. The Ericsson lawsuits include Ericsson's claims of patent infringement against the Company in Marshall, Texas, Ericsson's claims of patent infringement against QPE in Dallas, Texas, the Company's claims of patent infringement against Ericsson in San Diego, and the Company's unfair competition and related claims against Ericsson which the San Diego court recently ruled should be heard in connection with the Marshall, Texas case. The Company is also seeking to intervene in an action filed by OKI America, Inc. against Ericsson in San Jose, California. OKI's lawsuit seeks a judicial declaration that OKI's IS-95 CDMA products do not infringe any of Ericsson's patents. Procedural motions are pending, and no trial dates have been set except in the Dallas case which is set for June 7, 1999. The Company and Motorola have filed related lawsuits against each other pertaining to the Company's Q phone. All of these cases have been consolidated before a single judge in San Diego. The San Diego court has issued a temporary restraining order prohibiting Motorola from communicating to the Company's customers and suppliers that the Company unlawfully relied on Motorola's intellectual property in designing and producing the Q phone. The San Diego court subsequently issued a temporary restraining order against the Company's manufacture, sale, offering for sale, and distribution of the Q phone. Both parties' motions for preliminary injunction are set for hearing on April 23, 1997. (more)