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Stocks dropped late in the afternoon after being hit with disappointing economic data and Yahoo’s failure to beat the Street earnings estimate. The S&P 500 declined 13 points (-1.4%) to 988, with computer-related companies accounting for more than a quarter of the drop. The Nasdaq Composite slid 31 points (-1.8%) to 1715. Both had their biggest two-day declines since May 19-20. The DJIA lost 120 points (-1.3%) to 9036. The Nasdaq reached its highest closing price since April 2002 yesterday as investors expected those companies to benefit first as the economy rebounds. Yahoo's results raise concerns that optimism may be overdone. The S&P 500 has jumped 23 percent since touching its 2003 low on March 11, while the Nasdaq has climbed 35 percent. Investors will watch companies' results for signs of economic growth. General Electric Co., the second-largest company by market value, reports results tomorrow. U.S. companies expect the economy to rise at an annual rate of as much as 4 percent in the second half, according to a survey by the National Association for Business Economics. It gained 1.4 percent in the first quarter.

Strong Sectors: soft drink

Weak Sectors: internet, paper, insurance, tobacco, utility, semiconductor, aluminum, oil & gas, wireless, retail, drug, homebuilding, auto

Top Stories . . . The number of Americans filing first- time applications for state unemployment benefits unexpectedly rose last week, suggesting U.S. companies were still slashing payrolls to cut costs heading into the last half of the year.

U.S. 10-year Treasury notes rose for a third day in New York trading after a Labor Department report showed the world's largest economy still faces sluggish employment growth.

PepsiCo, the world's No. 2 soft- drink maker, said second-quarter earnings climbed 15 percent after sales were boosted by Gatorade and the introduction of a lower-fat line of Lay's potato chips and Cheetos cheese puffs.

Wal-Mart Stores, Limited Brands and Costco Wholesale said June sales rose amid tepid spending by U.S. shoppers because of concerns about employment and rainy weather on the East Coast.

SunTrust Banks, the first of the 10 largest U.S. banks to report second-quarter results, said earnings dropped 4 percent as falling interest rates squeezed profits from lending.

A U.S. Senate committee hit a snag in efforts to reach agreement on legislation creating a $108 billion trust fund to compensate asbestos-exposure victims and end lawsuits that have bankrupted more than 60 U.S. companies.

Quotes of Note . . . ``People have priced in better-than-expected earnings, and Yahoo is one that gets people worried about what they've been predicting,'' said Edgar Peters, who oversees $12 billion as chief investment officer at PanAgora Asset Management in Boston. ``The rally has gotten tired.''

Of Note . . . While the recent strength in equities has been impressive, investors should not be overly surprised since equities have typically rebounded sharply in the wake of past bubbles. There remains upside to the S&P 500 this year. However, the pace of the advance will likely slow in the coming quarters as the current overbought condition eases.

At the sector level, the greatest contributors to second-half earnings growth are expected to be financial and technology. Investors should be aware that the interest rate and capex outlooks are still very uncertain, and could have a dramatic impact on second-half 2003 estimates for both sectors, respectively.

Gurus . . . Bear Stearns investment strategist Francois Trahan believes the pace of the recent equity market advance will slow as he expects earnings growth in the second half of the year to decelerate, versus Wall Street expectations of an acceleration. He feels diminishing productivity and pricing power will weigh on earnings, and the interest rate and capital expenditure outlooks remain uncertain. "Accordingly, earnings-focused investors are likely to be disappointed as estimates continue to be shaved toward more realistic levels," Trahan said. He kept his year-end price target on the S&P 500 Index at 1,050, which is 5.7 percent above the current level of 993. The index had gained 11 percent in the first six months of the year.

Of Note . . . Bidding for lunch with the "Oracle of Omaha" aka Warren Buffett will end tomorrow night. The listed value for the item on eBay is "priceless," with the auction item already at over $60,000 with one full day of bidding remaining. Bidders are competing for an intimate lunch at a table of eight in NYC. In addition, bay area residents will also have a chance to win lunch for eight with Mr. Buffett in San Francisco by bidding during a Best of the Bay Area 2003 event. Buffett will donate the proceeds to Glide Foundation, the largest social service provider in San Francisco.

Greenspeak . . . Economists are not robots and can't make mechanical judgments about which is more valuable: economic growth or a pristine environment, Federal Reserve Chairman Alan Greenspan said Thursday. The Fed chairman said Congress, as the voice of the people, must weigh the competing "human values" of a strong economy and preserving the wilderness for future generations. Greenspan made the comments at a hearing devoted to the natural gas shortage in the United States, at which some senators suggested rolling back environmental restrictions on energy development on federal lands.

Eco Speak . . . U.S. unemployment lines are getting even longer. The average number of jobless workers filing for initial state unemployment benefits over the past four weeks rose by 1,000 to 426,750 in the week ending July 5. The number filing in the most recent week increased 5,000 to 439,000, the most in five weeks. The numbers are seasonally adjusted to account for variations such as factory retoolings. This is the 19th consecutive week initial jobless claims have been above the psychologically significant 400,000, which many economists consider the dividing line between overall job growth and job loss.

Financials . . . SunTrust Banks reported second-quarter net income of $330.4 million, down 4 percent from the same period in 2002. On a per-share basis, the company made $1.17 a share vs. the $1.18 that had been projected. Net charge-offs in the second quarter totaled $82.2 million, or 0.44 percent of average loans -- flat from the first quarter. The company said it believes this is "generally indicative of overall improving credit quality conditions." SunTrust chairman states, "There were no surprises in this quarter's results."

Energy . . . Merrill Lynch downgraded Mirant to "sell" from "neutral." Elizabeth Parrella believes the probability that the energy producer files for bankruptcy is increasing, as the likelihood of an out-of-court debt restructuring by the July 14 midnight deadline has declined to below 50 percent, "maybe well below." Parrella believes downside risk in the stock price is between "worthless" and $2. The company said late Wednesday that it had amended some of the terms of its offer to restructure bank debt as it pursues a prepackaged plan of reorganization.

Entergy guides above consensus as they now see EPS of $1.15 versus consensus of $1.07, however guidance includes "disproportionate income allocated to Entergy in accordance with the terms of the Entergy-Koch", so not clear if comparable to consensus. ETR reaffirms "operational" 2003 EPS of $3.75-3.95, consensus is $3.96.

Transports . . . Mesa Air target goes to $14 from $10.50 at Raymond James.

In light of Harley's upcoming earnings report, soon-to-be-unveiled new model year, and the amount of attention focused on the company's performance at retail, we recently took to the phones and spoke with over 40 dealers from all parts of the country. On the "negative" side, we heard that the used bike market is still soft, Buell and V-Rod sales continue to lag, and HDFS has extended and introduced financing specials for Buell and H-D motorcycles, respectively. On the "positive" side, most dealers see their demand as better than last year, are eager to increase their allocations for MY 2004, and do not think they are over-inventoried. Furthermore, we have high expectations for the MY 2004 offerings, which could spark additional demand at retail when they are shipped around October. Analysts are lowering target asset value range to $50-$52 from $60-$62 to reflect less aggressive top line growth assumptions (we encourage Harley to articulate future growth initiatives underpinning a more aggressive top line growth estimate). In addition, lower asset value accounts for the expensing of previously granted options, future grants, and the unfunded pension liability. While oong-term investment thesis remains unchanged, we think that negative momentum, coupled with the possibility of some disappointments next week, will continue to weigh on shares of HDI over the near-term. Maintain Outperform.

Food & Beverage . . . Pepsico reported second-quarter earnings of $1.01 billion, or 58 cents per share, up from its year-ago profit of $875 million, or 48 cents per share, and in line with the average estimate. Revenue at the soft drink maker swelled to $6.54 billion in the latest three months from $6.12 billion in the same period a year earlier. Pepsico said a reduction in costs related to its Quaker merger helped earnings in the latest quarter, as did 'excellent volume and revenue growth' at its Frito-Lay snack business. Total worldwide volume rose 5 percent in the quarter. The company added that it's on track to deliver earnings of $2.16 to $2.19 per share in 2003, including 3 cents per share in merger costs.

UBS upgraded Pepsico to Buy from Neutral and raised their target to $55 from $45. The firm's new target represents a 30% premium to the S&P 500 on their 2004 estimate, which they believe is justified by PEP's superior long-term sales, earnings, and free cash flow growth prospects.

Restaurants . . . Panera Bread downgraded at Stifel Nicolaus based on valuation. PNRA shares have appreciated about 38% since the company reported 1st quarter earnings results in mid-May, and roughly 55% since they upgraded the stock in early-February.

Checkers reported 2nd quarter (Jun) earnings of $0.32 per share, $0.04 better than the consensus of $0.28. Revenues rose 7.7% year/year to $45.9 million versus the $46.6 million consensus.

Apparel . . . Skechers was upped to Buy at Wedbush Morgan based primarily on stock's compelling valuation; believes that the market is currently pricing in too pessimistic a scenario for Skechers, and believes the risk/reward tradeoff is very favorable; views current weakness in business and stock price is a buying opportunity. Firm's price target is $10.00.

Retail . . . Wal-Mart said total sales for the month of June rose 11 percent over the same period a year ago to $24.6 billion, with Wal-Mart division sales rising 9.5 percent to $16.7 billion and Sam's Club sales increasing 8 percent to $3.1 billion. Wal-Mart reported a 2.7% rise in June comps. This figure falls slightly below consensus of 2.9%. Same-store sales rose 2.4 percent for Wal-Mart stores and 4.1 percent for Sam's Club stores. Wal-Mart expects to hit high end of July same-store sales forecast.

Hot Topic target raised to $35 at Sanders Morris Harris. The firm is saying solid comp trends continue to reveal the strength of the company and strong momentum in key areas of its business should fuel healthy top line growth.

Wet Seal says loss "could be between $0.35 and $0.45 per share", consensus is a loss of $0.08. WTSLA June comp store sales down 21.5%, consensus called for 15% decline.

Claire's Stores reported 4% increase in June comps. This figure falls below the Lazard est. of +5%. "We believe we are on track to meet the five to six percent increase in consolidated same store sales projected for the second quarter."

American Eagle Outfitters reported June consolidated same-store sales fell 5.7 percent. Total sales for the five weeks ended July 5 rose 5.3 percent to $128.2 million from $121.7 million in the same period a year earlier. Looking ahead, the company forecast earnings of 10 to 12 cents per share for the second quarter, ahead of Wall Street's consensus estimate for a profit of 9 cents per share. It sees a decline in the mid-to-low single digits in same-store sales for July.

Costco Wholesale reported total June sales of $4.3 billion, an increase of 11 percent over the same period a year ago. Comparable-store sales for the month rose 7 percent, amid a 5 percent increase in U.S. stores and an 18 percent rise in international.

Barnes & Noble reported June same-store sales increased 10.5 percent. Excluding the contribution of the new Harry Potter book, same-store sales would have logged a gain of 4.9 percent for the period. The company's B. Dalton Bookseller stores, which comprise 5 percent of total sales, posted a same-store sales increase of 9.7 percent in June, but removing Harry Potter from the equation results in a drop of 5 percent.

Nordstrom said total June sales increased 6.4 percent over the same period a year ago to $616 million. Comparable-store sales for the month rose 1.9 percent, helped by gains in sales of shoes, men's apparel, cosmetics, women's active wear and women's designer apparel.

Target reported that June comparable-store sales increased 0.8 percent while net retail sales increased 7.9 percent to $4.135 billion. The retailer said the "significance" of June's contribution to its second-quarter earnings would cause it to post earnings-per-share of 39 cents to 40 cents. Thomson First Call currently expects second-quarter earnings of 40 cents a share.

Gap reported June same-store sales jumped 10 percent versus consensus of 7.8%. Total sales for the five weeks ended July 5 surged 13 percent to $1.5 billion from $1.3 billion in the same period a year earlier. The San Francisco-based casual apparel retailer said the total sales figure met its expectations as "all brands began to clear summer inventory in preparation for the arrival of fall merchandise."

Kohl's lowered its fiscal second-quarter earnings outlook to 30 to 32 cents a share, below the average analyst estimate of 39 cents a share, as a result of "very aggressive" pricing during the quarter to clear seasonal merchandise. Separately, the company said total June sales increased 11 percent over the same period a year ago to $828.7 million, while same-store sales for the month declined 2.4 percent. KSS reports June comp store sales decreased 2.4%, Lazard was looking for a decrease of 2.0%.

Abercrombie & Fitch reported June same-store sales fell 5 percent. Total sales for the five weeks ended July 5 rose 10 percent to $129.5 million from $117.7 million in the same period a year earlier.

Sears said total June sales declined 1.2 percent from the same period a year ago to $2.66 billion, while comparable-store sales dipped 1.8 percent. The broadline retailer said the results were in line with its expectations. The company added that lawn and garden sales continued to perform strongly and apparel trends improved due to a stronger promotional stance.

bebe stores issued upside preannouncement for 4th quarter (June), sees EPS of $0.11-0.13 versus consensus of $0.09, reports June same store sales up 3.3%, consensus called for decline of 0.4%.

Shoe Carnival guided below consensus for 2nd quarter (Jul), sees EPS of $0.10-0.13 versus consensus of $0.26, June comp store sales down 5.4%, company cites "sales results below expectations".

Aeropostale was cut to Neutral at Fulcrum based on valuation, as the stock has exceed their $25 target.

Jones Apparel was upped to Buy from Hold at Prudential based on view that company's multiple is too cheap (11x 2004 estimate) and that earnings are depressed. Firm's price target moves to $37 from $28.

Mothers Work reported third quarter EPS will "meet or exceed the high end" of $1.35-1.45, estimate $1.45. Reports comp store sales for June decreased 0.6%.

Pacific Sunwear cut to Hold from Buy at Prudential based on valuation.

Fred's reaffirmed 2nd quarter guidance, June comps increase 4.6%.

Michaels Stores guided inline with consensus for 2nd quarter (Jul), sees EPS of $0.32-0.36 versus consensus of $0.33. June comp store sales up 2%, Lazard was looking for an 8% gain.

Sharper Image sees 2nd quarter earnings of $0.02-$0.03 versus previous guidance of $0.01 (consensus $0.01). SHRP also reports a June comp sales increase of 15%.

Healthcare . . . AdvancePCS inks agreement to distribute Xolair.

Prof Detailing guides up for 2003 as it sees EPS of $0.75-0.80 vs. consensus of $0.47. The company cited "strength of new business awarded to its contract sales unit and anticipated continued strong performance from Lotensin(R) in its Pharmaceutical Products Group through year end 2003" for the upturn.

Drugs . . . Novartis announced its affiliate companies have come to an agreement with Glaxo-SmithKline over lawsuits related to its claimed Augmentin trade secrets. Under the agreement terms, GSK will be the recipient of a single-digit percentage of the royalties of generic versions of Augmentin sold through NVS for the four-year period beginning in July 2002 and ending June 2006.

Abbott Labs reported $0.52 per share, in line with the consensus of $0.52. Revenues rose 9.5% year/year to $4.72 billion versus the $4.64 billion consensus. Company sees 3rd quarter EPS of $0.52-0.54 versus consensus of $0.55, reaffirmed 2003 EPS view of $2.20-2.25 versus consensus of $2.21.

Wyeth was raised to Buy from Neutral at Bank of America. The firm is saying over the last few months the co has shown real signs of operational improvement and they believe its gross margin guidance of 72-74% is too conservative; firm now believes risks regarding manufacturing issues, product liabilities, supply constraints, and bad HRT news are limited and they can focus again on long-term prospects. Price target is $56.

Biotech . . . AVE and Vertex Pharma announced that Aventis has started its enrollment into the Phase IIb clinical trial of pralnacasan, which is a anti-cytokine therapy for rheumatoid arthritis. The two companies are collaborating on the development and commercialization of the pralnacasan product.

Myriad Genetics and Mayo Clinic collaborate on Alzheimer's drugs based upon several drug candidates that have been discovered at Mayo Clinic. Myriad has received worldwide exclusive therapeutic rights to the drug candidates and to further drug discoveries that result from collaboration on compounds that lower the beta amyloid peptide, Abeta42. Myriad has also licensed a broad patent application from Mayo Clinic that relates to compounds that lower Abeta42.

Geron reported the publication of research results that advance the breadth of applications for human embryonic stem cells (hESCs) in Regenerative Medicine. The published study demonstrates that hESCs, when exposed in vitro to specific factors that stimulate bone formation, differentiate into cells that express molecular markers of bone-forming cells such as osteocalcin, parathyroid hormone receptor, and collagen 1.

Genentech target raised to $93 from $83 at Merrill Lynch.

Genentech reported diluted non-GAAP EPS of $0.31, beating estimates and consensus estimate of $0.26. This resulted largely from better than expected Pulmozyme and Herceptin sales. (Herceptin sales included an unexpected $10 million payment from Roche for ex-US manufacturing of Herceptin.) Rituxan sales of $328 million were in line with recently reduced estimate of $329 million. Contract revenue were also higher than expected, reflecting Roche's recent announcement to opt-in for ex-US rights to Avastin. Genentech also benefited from biotech stock gains in the quarter estimated at $20 million. Operating expenses as a percentage of product sales were in line with expectations. Analysts have revised Herceptin estimates for 3rd quarter 2003 from $100 million to $105 million and have not made any changes to our 4th quarter 2003 estimate of $111.6 million. Full year Herceptin estimate is $409.4 million. Rituxan estimate remains unchanged at $1.33 billion for 2003. EPS estimates for 3rd quarter 2003 and 4th quarter 2003 also remain unchanged. With respect to Avastin, Genentech expects to complete its regulatory application by the end of September and to receive FDA approval by the end of 1st quarter 2004. The recently announced Phase III data of Avastin in colorectal cancer presented at ASCO will provide the basis for the BLA. Important events expected later this year for Genentech include the results from the Avastin support trial and Tarceva in the first line setting for NSCLC (Roche and Genentech-sponsored trials) as well as regulatory action for Raptiva.

Hotel & Leisure . . . Hilton Hotels was upgraded at Raymond James to Strong Buy from Outperform based on the stock's attractive relative valuation as well as signs that industry fundamentals have begun to turn more favorable. The firm raised target to $17 from $15.

International Speedway reported 2nd quarter EPS of $0.27, excluding one-time charges, consistent with company guidance and a penny better than consensus. The one-time non-cash charge of $0.03 per share was related to a track reconfiguration project at Homestead-Miami Speedway. Revenue and EBITDA were more or less in-line with our expectations at $119.6 million and $41.1 million for the quarter, respectively. Poor weather at key events early in the quarter, including the "NASCAR Triple Header Weekend at Darlington", was offset in part by an increase in corporate spending. Some of the second quarter's difficulties have continued into the fiscal third quarter. Despite increased television ratings at Daytona's Pepsi 400, the company highlighted softer than expected attendance-related revenues at the track. As a result, ISCA lowered its 3rd quarter and full-year 2003 guidance. Despite the earnings revision, analysts are maintaining our estimates (save for flow through from the 2nd quarter results), as projections had previously been on the conservative side of guidance. However, it should be noted that 3rd quarter and full-year consensus estimates are likely to pull back as they currently exceed the company's new guidance. Shares are trading at 19.8x and 17.5x 2003 and 2004 EPS estimates, respectively. On an EBITDA basis, the shares are trading at 9.3x and 8.0x, respectively. At current levels the shares are fully-priced.

Media . . . Yahoo! Was cut to Neutral at First Albany on valuation. The downgrade from Buy is based on valuation and a tepid upward guidance revision for FY03.

Yahoo! reported second-quarter results that beat top-line estimates but missed above-consensus bottom-line estimate. Revenues came in at $321 million (versus our $313 million estimate), while EPS was $0.08 (matching consensus, but a penny below our $0.09 estimate). Significantly, management raised its revenue and operating cash flow guidance for the remainder of the year.

On the plus side, CEO Terry Semel noted that the 2nd quarter increase in core advertising revenues (approximately 12% Year over Year) was due to a more substantial base of customers, as opposed solely to market- share gains, suggesting that the online advertising market may finally be showing signs of life. However, on the negative side, growth in premium service subscribers remains unimpressive, and continue to question the ultimate growth rate for the uptake on these offerings. The majority of the 600,000 net subscriber adds came from SBC, which provides the connectivity, and controls the customer relationship. If YHOO is serious about competing for premium services customers, it will ultimately have to spend significant sums to build or secure proprietary content. While YHOO reported strong results and raised guidance for the back half of the year, the current valuation leaves investors exposed to limited upside potential, and significant downside risk. The company currently trades at an EV/OIBDA (operating income before depreciation and amortization, formerly called EBITDA by the company) multiple of 43x 2003 OIBDA estimate, and 32x 2004 OIBDA estimate, compared to average EV/EBITDA multiples of 12x and 10x, respectively, for traditional media companies.

YHOO’s Marketing Services segment revenues totaled $219 million in the quarter (versus estimate of $213 million), a 45% increase from the year-ago period. The company noted that the increase in Marketing Services revenue was a result of two factors. First, “rapid secular growth” in its Sponsored Search business, which was due to a greater number of queries, higher click-through rates, and a significantly higher price-per-click. The second contributor to this quarter’s outperformance was improved advertising revenue, with strength across a broad range of product verticals, including automobiles, telecommunications, retail, entertainment, and pharmaceuticals. Management revealed that marketing services, excluding sponsored search, grew at the high end of its full-year growth target of 8%-12%, despite tough comparisons in the international segment from last year’s World Cup. Significantly, CEO Terry Semel noted that the second-quarter increase in advertising revenues was due to a more substantial base of customers, as opposed solely to market-share gains, suggesting that online advertising may finally be showing some signs of life. Remind investors that marketing services, excluding sponsored search grew slightly above 12% in the first quarter. For full-year 2003, we anticipate a 37% year-over-year increase in Marketing Services segment revenue, with gains coming from sponsored search significantly higher than from traditional online advertising.

Second-quarter gross margin came in at 85.4%, up 60 basis points from 84.8% in the first quarter, and up 390 bps from 81.5% in the year-ago quarter. OIBDA (formerly called EBITDA by the company) margin came in at 30.3% in the quarter, versus 29.7% in 1Q’03, and 16.0% in the year-ago period, revealing the leverage in YHOO’s model. The company disclosed that its OIBDA margin was 33% in the U.S., and 13% internationally (compared to 32% and 16%, respectively in the first quarter). Anticipate company-wide OIBDA margins of 31.8% in full-year 2003 (compared to 21.6% in 2002).

Fees segment revenues (which includes SBC Yahoo!, Yahoo! Personals and Yahoo! Mail) came in at $70 million in the quarter, up 10% sequentially from $64 million in 1st quarter 2003, and up 43% from the year-ago period. Listings segment revenues (which includes HotJobs and other classifieds revenue) improved to $32 million in the quarter, up 10% from $29 million in 1Q’03, and up 29% from $25 million in the year ago period. Estimate that HotJobs contributed approximately $21.5 million to second-quarter listings revenues, suggesting that listings segment revenues excluding HotJobs grew an estimated $2-3 million year-over-year. (estimate that HotJobs contributed an additional $3.5 million in fees revenues, for a total of $25 million of revenue during the second quarter. HotJobs revenues are down 26% from their pre-acquisition peak of $34 million in 1st quarter 2001.) Together, these “non-Marketing Services” revenues accounted for 32% of YHOO’s 2nd quarter 2003 companywide revenues, down from 33% in 1st quarter 2003, and 33% in the year-ago quarter.

Management noted that, at the end of the second quarter, Yahoo! had approximately 3.5 million premium service customers in the U.S., versus 2.9 million at the end of the first quarter, and approximately 1.0 million one year ago. For the most part, these customers are paying for premium services such as SBC/Yahoo! Access, Yahoo! Personals, Yahoo! Mail, as well as Yahoo! Games, equating to approximately $4.00-$5.00 in revenue per month, per unique user. Management stated that during the second quarter, approximately 90,000 customer additions were related to the migration of SBC’s DSL customers over to the SBC/Yahoo! Service, compared to approximately 235,000 in the 1st quarter 2003. The majority of the remaining customer additions (510,000 in 2nd quarter 2003 and 465,000 in 1st quarter 2003) also came from the SBC relationship.

Telecom . . . AT&T Wireless stated that it is evaluating its billing contracts as part of a companywide review of costs, "a move that could hurt Convergys," which according to Reuters depended on AWE for 20% of its revenues last quarter.

Vodafone was cut to Underweight by JP Morgan Europe as it appears unattractive on the basis of its trading multiples relative to its wireless and wireline sectors. Firm believes the co offers the least upside to its fair value in the wireless sector with exposure to stock-and sector-specific risks. While its March 04 guidance looks achievable, firm believes growing competition and upcoming termination rate cuts could potentially augur downside risk to the firm's estimates and consensus.

GRIC Comms cut to Sell from Hold at Kaufman Brothers as the firm believes that GRIC is ahead of fundamentals. Price target $3.00.

IT Services . . . Loudeye announced its strategic expansion into the wireless digital music distribution market in N. America, Europe and Japan, with the signing of service contracts with four leading providers of wireless content to subscribers of several major wireless carriers.

Network Equipment . . . Friedman Billings Ramsey upgraded Lucent to Outperform from Market Perform based on their view that the company's second largest customer, AT&T, could be boosting capital spending in 2004. AT&T could be considering a network upgrade in 2004 that could add an incremental $250-$500 million in expenditures per year, and firm thinks LU could be a major beneficiary of this spending; raises target to $3 from $2.

Andrew Corp upgraded at Piper Jaffray to Outperform from Market Perform. The firm is saying ANDW (post the Allen acquisition) has an attractive valuation at current levels; firm believes that even in a market of stagnant growth in 2004, ANDW will be able to grow EPS qtr over qtr throughout the year, and should end market conditions in 2004-05 improve earlier than expected, this would represent upside to their preliminary estimates. Raises target to $15 from $12.

Semiconductor Equipment . . . Needham initiated Mykolis with a Buy rating and $18 target; firm says materials company's tend to have higher valuations than equipment co's in the current environment, which occurs because of the more stable growth and less risk of materials rev streams; as such, firm believes that MYK is mispriced since it is trading at lower multiples than both the semi materials co's and semi subsystems company's that it competes against.

Semiconductors . . . Micron Technology saw its rating raised by UBS to a "buy" rating from a "neutral" and lifted its 12-month price target to $18 from $12. UBS cited three factor as reason for the upward action on Micron: the likelihood of continued strong pricing in the second half; the probability of better supply-demand dynamics during the rest of 2003 and through much of 2004; and the potential for margin and earnings upside.

Broadcom was reiterated Hold at Legg Mason following announcement last night that company has discovered another problem with one of its Grand Champion chipsets from its ServerWorks division. While Broadcom does not officially expect any specific material financial impact from this issue, Legg Mason believes there could be broader implications. With two significant Grand Champion issues in four months, firm believes that customers will at least have to make a more concerted consideration of diversifying its supplier base.

Toshiba and Elpida introducing XDR DRAM is seen as favorable for Rambus.

Vitesse Semi target raised to $8 at Wedbush Morgan from $5.50 reflecting greater confidence in better end-markets for company's storage, enterprise and service provider businesses. The firm noted that recent surveys of IT spending indications have indicated a more positive tone for the second half of 2003 and 2004. Additionally, Seagate has signaled a strong demand for enterprise hard disk drives.

Rambus announced that the Court of Chancery of the State of Delaware has issued a stipulated order dismissing without prejudice the amended complaint in a consolidated derivative case against Rambus. The dismissed derivative case arose from allegations concerning Rambus' 1991 - 1995 attendance at a standard setting body called JEDEC. The plaintiffs in this case agreed to stipulate to dismissal without prejudice following rulings favoring Rambus from the Court of Appeals for the Federal Circuit.

Texas Instruments sold 24.7 million shares of its stake in Micron, which provides the co with pre-tax gain in accordance with GAAP of $106 million with the sale. This transaction will be recorded in other income in Texas Instruments 3rd quarter results. In addition, the company will also recognize a reserved tax benefit of $162 million in 3rd quarter, which is attributed to the realization of a tax loss carryback due to the sale.

Boxmakers . . . Bill Shope at J.P. Morgan said his outlook on PC demand continues to be cautious following Dell Computer chief operating officer Kevin Rollins' comments that demand was not improving and business conditions are still difficult. Dell shares are slipping 27 cents to $32.90 in pre-open trading. "Mr. Rollins was very explicit in his view that there are no signs of any end user demand recovery," Shope said.

Synaptics was cut to Hold at WR Hambrecht due to valuation getting ahead of fundamentals and maintains $10 price target. The analyst maintains a positive view on the company's prospects but cites concerns over its 97% revenue exposure to the notebook markets. By having such exposure to a market with projected growth of 15-20% for 2003 and an aggressive pricing environment, the co may see pressure on its average selling prices.

Software . . . Jason Maynard at Merrill Lynch said Oracle feels business may have bottomed, and is bullish about the future. "Although we like the business long term, we believe the stock is fairly valued at current levels," Maynard said. Oracle chief executive Larry Ellison added that the company was "likely to be successful" in its $6.3 billion hostile takeover bid for PeopleSoft, but did not give any hint about strategy, including whether Oracle is prepared to up its bid.

The Wall Street Journal's "Heard on the Street" column suggests Microsoft's decision to restate all of its earnings is rather "unusual". This is due to its decision to replace stock options with stock grants as its favored method of equity based employee pay. The co has decided to voluntarily restate all of its prior years financial results to reflect stock options compensation as an expense on the income statement. Most companies loathe the possibility of having to take such actions, however, MSFT is doing so to ensure its year-over-year earnings are presented on an "apples-to-apples" basis. However, an even further benefit could be lowering past years earnings to make it easier to show year-over-year earnings growth in future periods.

Half-year Xbox figures "disastrous" in Japan. An article in spong.com, which is an online Internet computer games database, reports half year Xbox sales were "disastrous" for MSFT. According to the article, Xbox managed to garner only 1.6% of the hardware sales in this significant territory for the last six months.


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