InterDigital Inc (IDCC)

[Gamco]

Fourteen Compelling Reasons for Owning IDCC Stock (revised June 10, ’02)


1. IDCC has “essential” and “commercially important” patents in all six modes of the 3G standards including DECT, EDGE (IS-136), CDMA2000, WCDMA-FDD, WCDMA-TDD, and TD-SCDMA. Any company that makes a 3G compliant phone/device will owe royalty to IDCC. This fact has been reiterated in quarterly conference calls, the latest annual report, and recent statements by the CEO.

2. InterDigital also has essential IPR in additional wireless standards, other than 3G, including 2G (GSM, TDMA, TETRA, PDC/PHS, CDMAOne/IS-95), 2.5G (GPRS, EDGE, CDMA2000 1X), 802.16, and possibly 802.11.

3. IDCC is very actively involved in various worldwide organizations, such as, the UMTS Forum, the GSM Association, the TD-SCDMA Forum, and the TDD Coalition, which promote and inform the wireless industry. These organizations are composed of the leading equipment manufacturers, chip producers, telecom operators, software developers, wireless IPR owners, and other interested suppliers and parties. This active involvement further enhances IDCC’s growing reputation as a leading company within, and a major supplier of enabling technologies to the wireless industry.

4. The WTDD mode, used in conjunction with FDD, is most likely to be the dominant 3G technology according to most industry experts and wireless companies. The benefits of WTDD include superior asymmetrical data-handling capabilities, spectrum efficiencies of 20% - 35% that will significantly allow for more system users, and more/richer 3G applications at lower incremental costs. IDCC owns substantial essential IPR in WCDMA and has partnered with Nokia and Infineon to further develop this technology.

5. The Phase 2 part of the Nokia partnership began on Jan. 1, 2002. Phase 2 will involve ongoing/recurring royalties payments to IDCC on all handsets/devices and infrastructure sold by Nokia, the world’s leading wireless phone manufacturer (over 35% market share), and also a leader in wireless infrastructure equipment. Two more partnerships with prominent equipment manufacturers are expected to be signed this year according to the business plan.

6. Unprecedented 10 year chip agreement with Infineon, a world leader in wireless chips. At least one more chip agreement is expected to be signed this year according to the business plan.

7. More 3G contracts should be following Matsushita with their $19.5 million advance royalty, Sharp with their $11 million advance, and NEC with their $19.5 million royalty advance fairly soon.

8. Ericy litigation is encouragingly progressing toward a favorable resolution. Very significant dollars involved in this litigation.

9. NEC settled the arbitration dispute over past royalties for $53 million, and in addition to the settlement amount, signed a new 3G contract with a royalty advance of $19.5 million. Many other 2G infringers should be licensing with IDCC fairly soon. The triggers for signing these other companies will be the NEC settlement, an Ericy resolution, and/or the need for 3G licenses.

10. Royalty arbitration with Samsung that could involve in excess of $100 million in disputed royalties.

11. Well over $100 million in cash (over $2 per share), virtually no debt, and significantly increased the engineering staff (100% increase in 2000 and another 50% increase in 2001), while also paying for other substantial 3G ramp-up expenses and litigation costs. This substantial ramp-up for 3G and patent defense has been remarkably accomplished while increasing, rather than decreasing, the cash balance.

12. Recurring royalties from our 26 existing licensees are improving dramatically. The accounting change that spreads prepaid royalty over the appropriate years as the royalties are earned is helping to smooth-out and make these royalties easier to project. The first quarter of 2002 marked the first quarter in which IDCC recorded earned revenue from some of the 3G prepaid advance royalties, in addition to having a significant increase in 2G recurring royalties.

13. Two new analysts initiated coverage of IDCC in 2001 with probably others to follow. Additionally IDCC is getting more press in the mass media, including Bill Nagovitz’s recommendation on CNBC and in Worth and John Rubino’s article in theStreet.com. More press should come as these other events unfold.

14. IDCC is strategically positioned within an explosive industry, which is projected to generate astronomical future revenues, and offers superior value over its competitors.





Fourteen Compelling Reasons for Owning IDCC Stock (detail)

1. IDCC has “essential” and “commercially important” patents in all six modes of the 3G standards including DECT, EDGE (IS-136), CDMA2000, WCDMA-FDD, WCDMA-TDD, and TD-SCDMA. Any company that makes a 3G compliant phone/device will owe royalty to IDCC. This fact has been reiterated in quarterly conference calls, the latest annual report, and recent statements by the CEO.


InterDigital Communications (IDCC) is a wireless company, which has over 4,100 issued and pending worldwide patents in both TDMA/GSM and CDMA. InterDigital has been instrumental in developing the 3G wireless standards for the ITU and the 3GPP. In fact, InterDigital is the only company that is publicly claiming both “essential” and "commercially important" patents in ALL five modes of the 3G standards.

IDCC officials have been saying that they have “essential” and “commercially important” patents in ALL 3G modes since November 1999 when Howard Goldberg, attorney and current CEO first made this claim in an official press release. IDCC officials have repeatedly made this claim in the 10-Q quarterly reports and 10-K Annual Report filed with the SEC, and in Conference Calls. The following are some quotes from official press releases, SEC filings, and Conference Calls:

November 18, 1999
ITU'S IMT-2000 STANDARD REPRESENTS SIGNIFICANT OPPORTUNITY FOR INTERDIGITAL;
InterDigital Believes it Holds Essential Technology
King of Prussia, PA, November 18, 1999 . . . InterDigital Communications Corporation (ASE: IDC) believes that the ITU's IMT-2000 standard opens up the market for InterDigital to become a key player in the implementation of the standard worldwide.
Howard Goldberg, Interim President, said, "The development of 3G wireless technologies is the mainstay of our business and is where much of our expertise has been directed. We believe that we have technology, patents and patents pending that will be essential to the implementation of all modes of the standard. We are extremely well positioned as a developer of creative and valuable technology content for 3G wireless products."

June 1 2000
Our work in the standards bodies is a critical element of our strategy, As we indicated in November, we have determined that we have technology, patents and patents pending that will be essential to the implementation of all modes of the 3G standard. We plan to add resources to our standards team as we continue to enhance our presence in the standards bodies worldwide.

June 6 2000
Already we have made significant contributions to the 3G standard and as a consequence have IP (Intellectual Property) embedded in the recently adopted 3G standard.

The five specifications under the 3G standard include three forms of CDMA technology: Time Division Duplex (TDD) and Frequency Division Duplex (FDD) - forms of wideband CDMA, and FDD Multi-carrier CDMA (referred to as cdma2000). The standard also includes two forms of TDMA technology: Digital Enhanced Cordless Telephone (DECT), and UWC-136 (EDGE), an evolved form of the U.S. TIA/EIA-136 digital cellular standard.
(Note: Qualcomm can only claim essential patents in the three CDMA modes. QCOM has developed virtually no TDMA patents, and cannot claim any essential patents in the two TDMA modes.)

Oct 11 2000
As an active participant in the standards process, InterDigital has contributed IPR (Intellectual Property Rights) to the 3G standard and has essential and commercially desirable patents in all modes of the 3G air interface standard. InterDigital is developing both FDD (Frequency Division Duplex) and TDD (Time Division Duplex) W-CDMA technologies compliant to the 3G standard.

From IDCC's latest Annual Report:

..."Based on the standards as adopted, we believe we have a number of patents essential to the implementation of ALL the technology modes incorporated in the current 3G standards. We also expect that many of our patents or patents issuable from existing applications will be commercially important in the actual product implementations"


Howard Goldberg, CEO of InterDigital and an attorney, was quoted in an April article from the Philadelphia Business Journal as follows: “Anyone implementing 3G would be utilizing our inventions.” At the latest annual stockholder meeting in June, Mr. Goldberg responded to a question about Qualcomm’s claims to the WCDMA market by stating, “we’re essential also and we’ll receive royalty payments on 100% of all WCDMA 3G phones, which are expected to comprise 75% to 80% of the 3G market. Mr. Goldberg also reiterated at this same meeting that IDCC has the “engine and transmission” that will drive 3G.

A question and answer from a conversation that I had with IDCC’s Investor Relations (IR) on Nov. 15 ‘01:

Q. Rip mentioned that we have made 450 contributions to standards with 275 being accepted. Are the other 175 contributions pending acceptance? What does a contribution to standard equate to, for example can one patent have more than one contribution? Are contributions all equal, or are some contributions more valuable than others?

A. Some of the other 175 contributions are pending the next official updated standard release from the ITU/3GPP, before they are officially accepted. Some of the other 175 contributions were not accepted, due to an alternative patent claim from another company being the one officially accepted into the standard. Can not say how many are pending versus how many were not accepted into the final standard. A contribution to standard does not equate one for one to patents or patent claims. One patent can contain several claims, and one patent claim could possibly make several different "contributions" to standards. Can't really say that one accepted contribution is more valuable than another accepted contribution, because all accepted contributions to standards are important.

(Note: By the end of 2001, IDCC had made over 500 contributions with over 300 being accepted into the 3G standards).

Q. Ericy has stated that they have 100 essential patents for 3G. How many essential 3G patents does IDCC have?

A. IDCC declared 140 "essential patents" by specific patent number to ETSI for the UMTS (WCDMA) standards, and also declared 150 "essential patents" for the GSM standard back during the spring. These essential patents that are declared to ETSI have to be officially issued patents; they can not include any pending patents. The contributions to the ITU/3GPP can include both officially issued and also pending patents. The declarations to the ITU/3GPP did not have to include the specific patent numbers, but the declarations to ETSI did have to state the specific patent numbers. Janet mentioned that the specific patent numbers that IDCC declared to ETSI might now be on their website at ETSI.org.


IDCC also has substantial IPR even in a TDD standard option, TD-SCDMA, advocated by the Chinese. Very recently IDCC was elected as a member at large of the TDS-CDMA forum, and then immediately selected into the highest echelon of this organization as a Council Member. The following excerpts are from an IDCC press release dated 01/17/02:

The TD-SCDMA Forum, organized in September 2000 by the China Mobile Communications Association, was created to promote the development and advancement of TD-SCDMA technology and applications within China and throughout the world. The Forum, with more than 300 members, provides a platform for worldwide exchange to communicate ideas or developments that impact TD-SCDMA technology.
Our selection as a Council Member reflects industry recognition of InterDigital's strong position as a pioneer of Time Division Duplex (TDD) technology. With almost 500 contributions to Third Generation (3G) standards to date, InterDigital is one of the wireless industry's leaders in defining the TDD standard for the 3G wireless market….The 3G WCDMA standard incorporates both TD-SCDMA and WTDD, along with FDD technology. The two forms of TDD technology have strengths in different deployment scenarios for different market needs.….TD-SCDMA complements and fits the evolution of GSM networks….InterDigital, with its strong TDD technology focus, is well positioned to deliver TDD solutions worldwide. At least 75% of the core TDD technology we are developing can be employed in either TD-SCDMA or WTDD applications. Much of this core TDD technology is incorporated into contributions accepted by worldwide standards organizations.

A question and answer from a conversation that I had with IDCC’s Investor Relations (IR) on August 10, ‘01:

Q: Howard spent a good deal of time in the earnings release talking about Siemens and TD-SCDMA. Am I correct in saying that HG was implying that we had essential IPR in any flavor of TDD, and thus we will benefit from the advancement of any form of TDD in the marketplace? Is Siemens a likely candidate for an “equipment manufacturer partnership” with us, similar to the current Nokia partnership, as projected in the Business Plan?

A: There is a lot of overlap between the high chip rate WCDMA-TDD and the low chip rate TD-SCDMA. We have been focusing our attentions and developmental efforts on the high chip rate. IDCC still believes that WCDMA will be the most dominant form of 3G, and that high chip rate TDD best integrates with FDD in the WCDMA arena. If Siemens were to push for an early deployment of TDS-CDMA in China, then that would open up some additional opportunities for us in that area. We view TD-SCDMA as a distinct additional opportunity for us and not as threat to us. IDCC will benefit from the deployment of TDD, no matter which version.

We have maintained a very good relationship with Siemens for a long time. They pretty much funded most of our work in B-CDMA, which turned into WCDMA-FDD once mobility was added. IDCC and Siemens have the most IPR in the high data rate TDD, and we work closely together in the standards bodies. However, Janet could not say which specific companies might be good candidates for the equipment manufacturer partnerships (the Business Plan projects two before the end of next year). She did say that the equipment partnerships would be with large, prominent companies.

From a conversation with IR on Oct. 26, ’01:

Q. Can Siemens produce standard-compliant TD-SCDMA, WTDD, or GPRS products without having to upgrade their existing license with us?

A. Siemens can produce a GPRS product without having to update their paid-up license, but we do not believe that they can produce a WTDD product without an updated license. Janet was not sure about a TD-SCDMA product. IDCC is currently doing a “patent scrub” for TD-SCDMA whereby our engineers do a very detailed analysis of a standard and exactly how our IPR fits therein. Our current GSM licenses also cover GPRS. We do not license separately for GPRS, because it is not an air interface standard. GSM is the air interface standard, GPRS is just a software upgrade to the network.

From a question and answer with IR on Dec. 14, ‘01:

Q. You mentioned that the patent scrub was completed for TDS-CDMA and that we do have essential patents in this area? How does our essential IPR for TDS-CDMA compare to our essential IPR in WCDMA? Is our desired royalty for TDS-CDMA also in our 1% to 3% range?

A. We have "a lot of IPR in the TDS-CDMA" standard. We are exploring both licensing opportunities and engineering service work/relationships in this area. The desired range of 1% to 3% is a fair range for a company that holds a good bit of essential IPR in a given standard.

(Note: in a later official release on 1/17/02, IDCC stated that at least 75% of its WTDD IPR also applied to TD-SCDMA.)

From a conversation with IR on March 15, 2002:

6. In light of the upcoming latest release of the 3G standards, is IDCC still claiming essential and important patents in each and every mode of the 3G standards, and that our air interface patents will be an integral part of the engine and transmission that will drive all 3G systems? Will Release 5 of the 3G standards this month impact our royalty rates or royalty frameworks?

Yes we still believe that our IPR intersects ALL modes of the 3G standards. The technology standards are evolutionary, rather than revolutionary, with each release refining, upgrading, and adding to the previous versions. IPR that is essential in the previous versions almost always remains essential in the updated versions also. Janet mentioned that the GSM standard was still evolving after many years. The technology evolves but not necessarily the licensing of the IPR. (I took this to mean that once a company contracts for a royalty rate for a given standard, then that the royalty rate remains fixed for that licensee for that particular standard)



Who else says that IDCC has what they claim in 3G? Irwin Jacobs of Qualcomm included InterDigital as one of the specific WCDMA contributors that would impact their IPR claims:

(www.mobilelifestreams.com/contents.asp?art=93). (this link may be temporarily down)
PA Consulting, a premier consulting firm from the United Kingdom, also specifically mentioned InterDigital as a major IPR owner of WCDMA patents:
(www.paconsulting.com/innovation/mag/articles/3gbts.asp).

Who else says that IDCC has what they claim in 3G? Answer: Nokia, Infineon, Matsushita, Sharp, and NEC thus far.



2. InterDigital also has essential IPR in additional wireless standards, other than 3G, including 2G (GSM, TDMA, TETRA, PDC/PHS, CDMAOne/IS-95), 2.5G (GPRS, EDGE, CDMA2000 1X), 802.16, and possibly 802.11.

As noted earlier, IDCC has declared over 150 specific patents as essential for the 2G GSM/TDMA standard to ETSI. The GSM/TDMA licenses also cover 2.5G GPRS. The Japanese licenses cover the 2G PDC/PHS standards, which are their variants of TDMA. Narrowband CDMA (IS-95, CDMA-One, CDMA2000) also contains IDCC IPR.

InterDigital is not only very active in the 3G standard bodies, but is also very active in other standard groups. IDCC’s IPR applies to the fixed arena as well as mobile. Brian Kiernan of InterDigital was the Vice-Chairman of the IEEE 802.16 fixed wireless standards group. He was elected in November of '00 and served as Vice-Chairman until March '02. IDCC also has representatives on various working groups and committees within the IEEE 802.11 unlicensed spectrum standards group, which includes wireless LANs and Bluetooth.

From a press release on Sept. 4, ‘01:

INTERDIGITAL ENTERS INTO WORLDWIDE PATENT LICENSE WITH SHARP;
Agreement Covers 2G, 2.5G and All Modes of 3G Products

King of Prussia, PA, September 4, 2001 . . . InterDigital Communications Corporation (Nasdaq: IDCC) today announced that its subsidiary, InterDigital Technology Corporation (ITC), has entered into a worldwide royalty-bearing patent license with Sharp Corporation. The agreement covers wireless handsets, modules and communications cards built to GSM, GPRS, IS-95 (including the CDMAOne and HDR technology specifications) and 3G standards, including both CDMA and TDMA based specifications. Under the agreement, ITC will receive a royalty on each licensed product sold by Sharp.

From a press release on April 4, 2001 announcing the new Matsushita contract:

“Matsushita signed a worldwide royalty-bearing TDMA patent license with ITC in 1994 and is now licensed under both ITC's CDMA and TDMA patents for equipment compliant with the following TDMA and CDMA-based standards: IS- 54/136, PDC, PHS, GSM, EDGE, IS-95, W-CDMA, and CDMA-2000, and all other IMT-2000 standards.”
EDGE is now being listed as a standard that IDCC has important IPR in as evidenced by the following statement from a Feb. 21, ‘02 press release:

“InterDigital has a strong portfolio of patented TDMA inventions, including GSM/GPRS/EDGE, and CDMA inventions, which it licenses worldwide.”)

From the question and answer section of the first quarter conference call on May 8, 02:

Q. Any significance to EDGE now being specifically included in our press releases since Cannes?

A. We have believed and stated that IDCC has essential IPR in all of the 2G and 3G standards, which would also include EDGE. We decided to place some additional emphasis upon EDGE due to the current interest being generated in this technology.

From a conversation with IR on Nov.15, ‘01:

Q. Is both EDGE and GPRS covered under existing GSM licenses, or would EDGE require a new license? What is IDCC's IPR position in EDGE compared to WCDMA? Will our royalty rate in both EDGE and GPRS be in the 1% to 3% desired range?

A. Don't know at this point whether EDGE will require a new license or not. EDGE is a different air interface standard from GSM, whereas GPRS was not. We have some TDMA/GSM patents that will apply to EDGE as well. Not sure if we have any additional patents that are only EDGE specific. Since we have not really focused attention on EDGE deployment yet, it is too early to state our IPR position in EDGE and what our desired royalty rate may be. (Our current GSM licenses also cover GPRS. We do not license separately for GPRS, because it is not an air interface standard. GSM is the air interface standard, GPRS is just a software upgrade to the network: from Oct.26 conversation)

Q. Rip mentioned that Japan may go dual mode PDC and FDD. Does dual mode mean more royalty for us than single mode? If Matsushita were to sell a dual mode PDC/FDD handset in Japan would we get royalty on the PDC part or not, due to Matsushita having the Japan Clause?

A. Any existing Japanese licensee (without the Japan Clause) would still pay us royalty on the PDC mode of a dual mode PDC/FDD handset, even if they do not have an updated 3G license yet. Matsushita would pay us royalty on the FDD mode of a dual mode PDC/FDD handset sold in Japan, but no royalty on the PDC mode. Matsushita and three other companies have the paid-up "Japan Clause" for 2G PDC/PHS sales within Japan.

Q. What is our IPR position in the 802.11 and 802.16 standards? Will we receive our desired 1% to 3% royalty rates from these standards also?

A. We have not focused on these standards from a licensing standpoint yet. A detailed "patent scrub" of these standards is on our to-do list. Therefore it is too early to state our IPR position in these standards and what our desired royalty rate may be. We did complete our "patent scrub" on the TD-SCDMA standard, and have determined that a number of our patents do in fact apply to TD-SCDMA also.

From a conversation with IR on Dec.14, ‘01:

Q. Have we started our “patent scrub” on the 802.16 standard since the IEEE recently approved the standards for this area? Has there been any follow-up correspondence since Oct. between IDCC’s Donald Boles and Dr. Marks, chairman of the IEEE standards committee, as to the specific declaration of our essential patents in the 802.16 standard?

A. Yes it has been started. She has not seen anything official yet to indicate if Boles has determined all the specific patents that we think are essential in the 802.16 standard and has filed the necessary paperwork.

Q. Have we started our patent scrub on the 802.11 standard? Can you say whether IDCC believes that we do have essential patents in this standard, even if we do not know the extent of the IPR yet?

A. It has been started, but can't say anything definitive yet.

From a conversation with IR on July 17, ‘01:

Q. Will Matsushita pay us royalty on CDMA 2000 products including 1X?

A. Yes that is in the Matsushita contract. We still have some more CDMA 2000 patents to be issued to us. Janet would not tell me how many CDMA 2000 patents we have pending. Although we are currently working on developing WCDMA, some of this development work overlaps with and applies to CDMA 2000. Thus, we are still applying for patents in the CDMA 2000 standard.

Q. Will other 3G contracts probably have the same/similar provisions for CDMA 2000 products as the Matsushita contract?

A. Yes we will try to negotiate toward including CDMA 2000 into future 3G contracts also. We do have “essential” patents already in CDMA 2000 and have additional patents pending

From a conversation with IR on Sept. 15, ‘01:

Q. The IS-95 standard was included in both the Matsushita and the Sharp 3G contracts. Was IS-95 included in any 2G contracts, and have we received recurring royalty from anyone on IS-95 products?

A. Yes and no. IS-95 was specifically mentioned in the Qualcomm and Siemens contracts for example. We have not received any recurring 2G royalty from anyone on IS-95, but some of the initial advance royalties from some companies did cover IS-95 products. Our 2G contracts mainly covered TDMA, therefore IS-95 was not a big issue. However our 3G contracts are definitely covering CDMA also, and therefore our 3G licensees want to make sure that all of our CDMA patents (even those in IS-95) are included in the 3G license. Although Sharp sold very little 2G CDMA narrowband products, they do anticipate selling more CDMA 2000 handsets, especially in the US market. We will receive royalty from Sharp, as well as from Matsushita, on CDMA 2000
products.

(Note: the new NEC agreement also requires recurring royalty payments from NEC on all narrowband CDMA products involving IS-95, CDMAOne, and CDMA2000 standards. During the first quarter of 2002, IDCC recorded $2 million of earned royalty from narrowband CDMA from NEC).





3. IDCC is very actively involved in various worldwide organizations, such as, the UMTS Forum, the GSM Association, the TD-SCDMA Forum, and the TDD Coalition, which promote and inform the wireless industry. These organizations are composed of the leading equipment manufacturers, chip producers, telecom operators, software developers, wireless IPR owners, and other interested suppliers and parties. This active involvement further enhances IDCC’s growing reputation as a leading company within, and a major supplier of enabling technologies to the wireless industry.


IDCC’s involvement in these various worldwide organizations is in addition to the active involvement in worldwide standards bodies. InterDigital is embedding their technology into all the standards, as well as, building a growing reputation as an enabler of this cutting-edge technology to the benefit of the entire industry. IDCC very recently hosted and was a major presenter at a General Assembly meeting of the UMTS Forum. From a press release dated 6/6/02:
"InterDigital today announced that it is hosting the General Assembly of the UMTS Forum and its members for a two day conference on 3G wireless services on June 6 and 7, 2002 in Philadelphia, Pennsylvania, USA…The UMTS Forum is an international organization with more than 236 member companies from the mobile operator, supplier, regulatory, consultant, IT and media/content communities in over 41 countries worldwide. The Forum's goal is to promote global success for 3G services delivered on all 3G technologies recognized by the International Telecommunication Union (ITU).
During the General Assembly, Dr. Alain Briancon, InterDigital's Chief Technology Officer, will report the initial findings of a UMTS task force focused on the deployment of Time Division Duplex (TDD) technology and Wireless Local Area Networks (WLANs) for 3G wireless data services. This UMTS task force will ultimately make recommendations to operators on deployment scenarios for TDD technology to cost effectively deliver wireless data services to consumers worldwide. Dr. Briancon also will report the results of a survey taken to gather and evaluate the attitudes of operators and service providers regarding the timing of the rollout of 3G wireless."
Interdigital was recently ratified as an associate member of the prestigious GSM Association. Only telecom operators can be ratified as full members into the GSM Association. Then IDCC was afforded the very high honor of being one of the few non-operator presenters at their annual meeting in Rome. From a press release dated 4/18/02:

“ROME, Apr 18, 2002 (BUSINESS WIRE) -- InterDigital Communications Corporation (Nasdaq:IDCC), a leading architect, designer and provider of advanced wireless technologies and product platforms, highlighted the advantages of Wideband Time Division Duplex (WTDD) technology for 3GSM(TM) networks, driven by its power to enhance the quality of service and the continuity of the user experience in the migration to 3G products and services.
The presentation was delivered to the 47th GSM(TM) Plenary meeting held this week in Rome and attended by over 500 members of the GSM Association, representing mobile network operators and suppliers worldwide. InterDigital also was ratified as an Associate Member of the GSM Association during the Plenary.
In his presentation, InterDigital's Chief Operating Officer Rip Tilden stated that WTDD technology, part of the 3GSM Wideband CDMA (WCDMA) standard, can significantly enhance the experience for 3G users as they access advanced data services, making the technology an important competitive offering for operators. He defined the continuity of user experience as the highest quality of service possible as users move smoothly among a wide range of advanced data services and among 3G networks globally utilizing a variety of devices.”

IDCC also has substantial IPR even in a TDD standard option, TD-SCDMA, advocated by the Chinese. Very recently IDCC was elected as a member at large of the TDS-CDMA forum, and then immediately selected into the highest echelon of this organization as a Council Member. The Chinese market is usually extremely difficult to enter, and those companies that do gain entrance usually have to invest heavily in China. IDCC has just entered into the middle of the developments in the largest wireless market in the world through invitation rather than investment. The following excerpts are from an IDCC press release dated 01/17/02:
“The TD-SCDMA Forum, organized in September 2000 by the China Mobile Communications Association, was created to promote the development and advancement of TD-SCDMA technology and applications within China and throughout the world. The Forum, with more than 300 members, provides a platform for worldwide exchange to communicate ideas or developments that impact TD-SCDMA technology.
In recognition of its leading position as a global developer of TDD technology and products, InterDigital will join other Forum Council members, including Alcatel China, China Mobile, China Telecom, China Unicom, CATT, CNC, CRTC, DaTang Group, Huawei Corporation, Jitong, Siemens, Motorola, Nortel, Qualcomm, UT Starcom and Zhongxing in promoting the development and application of TD-SCDMA technology.
Our selection as a Council Member reflects industry recognition of InterDigital's strong position as a pioneer of Time Division Duplex (TDD) technology. With almost 500 contributions to Third Generation (3G) standards to date, InterDigital is one of the wireless industry's leaders in defining the TDD standard for the 3G wireless market….The 3G WCDMA standard incorporates both TD-SCDMA and WTDD, along with FDD technology. The two forms of TDD technology have strengths in different deployment scenarios for different market needs.….TD-SCDMA complements and fits the evolution of GSM networks….InterDigital, with its strong TDD technology focus, is well positioned to deliver TDD solutions worldwide. At least 75% of the core TDD technology we are developing can be employed in either TD-SCDMA or WTDD applications. Much of this core TDD technology is incorporated into contributions accepted by worldwide standards organizations.”


Infineon and IDCC have developed an FDD chipset that utilizes much of InterDigital’s FDD IPR, and will be instrumental in the worldwide deployment of this technology. Nokia and IDCC have thoroughly tested WTDD, and will be instrumental in the successful worldwide deployment of this technology. Other companies have quickly recognized the many benefits of TDD technology based on the test results and have very recently established the TDD Coalition. Information about the TDD Coalition as follows:
“The TDD Coalition a new industry consortium whose purpose is to promote Time Division Duplexing (TDD) airlink technology and explain its benefits to operators, regulatory bodies, standard groups, the media, and the broadband industry in general. The coalition shares a common conviction that TDD is a spectrally efficient and cost-efficient airlink technology, which can offer tremendous benefits to broadband wireless operators and their customers.”
The coalition's 15- member organization include Aperto Networks, ArrayComm, BeamReach Networks, CALY Networks, Clearwire Technologies, Harris Corp., InterDigital, IPWireless, LinkAir, Malibu Networks, Navini Networks, Pointred Technologies,Radiant Networks, Raze Technologies, and Wavion. For more information about the TDD Coalition visit http://www.tddcoalition.org ."
A good article on TDD and the TDD Coalition as follows:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=79483
From a conversation with IR on Jan. 18 ’02:
Q. There have been several articles lately about the new available spectrum from the FCC and the promotional efforts of the TDD Coalition. How do we view these recent events and how involved are we with the TDD Coalition?

A. The TDD coalition is less than one year old and was formed mainly by companies in the fixed arena. Since our focus was on mobile, we were not a founding member. However some of the members are now migrating to mobile also. We were intrigued with this organization, and IDCC has now joined this coalition. Maybe the United States will get its spectrum act together. The developments in freeing more spectrum by the FCC in December were very positive. But it is still hard to say if the US will free up enough spectrum to encourage a rapid deployment of 3G in the near-term. Therefore we are still keeping our eyes on the 802.11 and 802.16 developments.

We also discussed the TDS-CDMA forum. I told her that I was extremely pleased that we were selected as a Council Member in this Chinese organization/marketing effort. She mentioned that TDS-CDMA would compete primarily against FDD, and was not so sure if it would gain much following outside of China. However, a good niche market in China could be very substantial indeed. She was not sure how many employees that IDCC was going to devote to the TDD Coalition or to the TDS-CDMA forum at this time

From a Q & A session during the first quarter Conference Call on May 8, '02:

Q. Had IDCC ever tried to join the GSM Association in the past, and if not, why now?

A. No we have not previously tried to join the GSM Association. This association recently has become very forward-looking, proactive, and energized in its position toward 3G. We now view this association as a perfect forum to help us implement our 3G program as a solution provider and value adder to 3G deployment. When the opportunity arose for membership, we joined. It has been a valuable experience thus far. IDCC was only one of only three non-operator companies who presented at the most recent 3GSM conference in Rome.





4. The WTDD mode, used in conjunction with FDD, is most likely to be the dominant 3G technology according to most industry experts and wireless companies. The benefits of WTDD include superior asymmetrical data-handling capabilities, spectrum efficiencies of 20% - 35% that will significantly allow for more system users, and more/richer 3G applications at lower incremental costs. IDCC owns substantial essential IPR in WCDMA and has partnered with Nokia and Infineon to further develop this technology.

Most people in the industry believe that WCDMA, which includes WTDD and FDD, will ultimately be the 3G technology of choice with an estimated 80% to 85% of the total 3G market. The anticipated migration path for the currently dominant 2G GSM standard is first to GPRS and then to either EDGE or directly into WCDMA. The 2G TDMA standard is anticipated to migrate to GPRS or EDGE and then into WCDMA. The TDMA-based Japanese standards of PDC/PHS will most likely migrate directly to WCDMA. Only the narrowband CDMA camp, which includes IS-95 and CDMAOne, with about 15% of the current 2G market is expected to migrate to a different mode, CDMA2000.

From an IDCC press release dated 11-28-01:
To enable fully rich applications, the 3G Wideband Code Division Multiple Access (WCDMA) standard provides for the deployment of both Frequency Division Duplex (FDD) and Wideband Time Division Duplex (WTDD) technologies.
InterDigital's Chief Technology Officer, Dr. Alain Briancon, explained how the asymmetric nature of WTDD technology, also known as High Chip Rate TDD, is the most cost effective solution for "always on" data applications for consumers and corporate users. "As 3G services are deployed, we, and many in the industry, believe that applications will shift from predominantly voice to data.”
We expect that as businesses become a more significant portion of the subscriber base with the introduction of 3G services, the trend toward data services will accelerate. These data and rich voice services are typically asymmetric or bursty in nature. WTDD technology's ability to accommodate such asymmetry in a spectrally efficient manner provides an important tool for the operator to maintain and improve the quality of service.
From an IDCC press release dated 10-18-01:
Dr. Briancon's presentation also highlighted both the efficiency and the multiple deployment scenarios of WTDD. For asymmetric applications, WTDD is 20%-35% more spectrally efficient in micro and pico cell deployments than a comparable FDD-only deployment, increasing significantly the number of users on the system.
Utilizing sophisticated simulation techniques, our detailed analysis of the performance of WTDD technology in a variety of deployments makes it clear that the technology is the efficient solution in micro and pico cells where asymmetric voice and data demands will be the most intense. WTDD technology is the ideal complement to FDD technology, which is most effective in macro and micro cell settings, Dr. Briancon said.

The technology supports voice and data functions, and is well suited for 'always on,' asymmetric Internet access, e-mail, data transfer, video streaming, and other rich applications. In addition, because the technology is robust and is designed to operate seamlessly with FDD, WTDD can be deployed and implemented in 3G networks at very low additional cost.

It will be particularly efficient handling a wide variety of multi-media traffic, including transmission of pictures, video streaming, making airline reservations on the go, Internet shopping and chat, music and many PDA applications.
As the volume of data traffic over 3G networks increases, InterDigital sees applications for WTDD not only at capacity hot spots such as shopping malls and airports, but also for enterprise systems, such as intranets and extranets, and integrated services in Virtual Private Networks. InterDigital believes that the topography of most offices makes WTDD technology an ideal solution for enterprise applications.
"We believe that the applications are almost limitless," Dr. Briancon concluded. "By focusing on full system deployment solutions with lower incremental costs per user, we open many doors. You can expect better and more frequent application implementation, constantly evolving network efficiency and an increasingly satisfying experience for the end user.”
Dr. Briancon described the WTDD Baseband Modem Chip for 3G terminals that InterDigital is developing. This is a fully standards-compliant baseband modem chip for multi-mode 3G terminals designed to interface seamlessly with FDD/GSM hardware and software to enhance terminals with WTDD capability. Our chip will be designed to enable wireless devices to support voice and data traffic up to two megabits per second.

“Our design is harmonized with FDD and is implemented with a low gate count, enabling use of the WTDD technology at a low incremental cost," he said. InterDigital's complete WTDD solution consists of the baseband modem, a software protocol stack and the RF reference design. It will be particularly effective in delivering advanced voice and data capability to smart phones, wireless personal digital assistants, laptop computers, and other innovative wireless terminals.


In order to successfully implement WCDMA 3G technology, additional radio spectrum has to be allocated and made available in each country. Many European and Asian countries have already allocated and auctioned additional spectrum for 3G, including specific spectrum for TDD deployment. Many thought that the United States would be far behind in the deployment of 3G technologies due to conflicting spectrum availability problems, which would not be cleared up for several more years. However, the FCC is very much aware of the importance of 3G, and is rapidly clearing-up spectrum availability problems now. The FCC just reallocated 48 MHz of spectrum on Dec. 12, and 27 MHz of spectrum on Dec. 28, from government use to commercial use. For the tremendous significance of these recent actions by the FCC, see the following link:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=79481
The FCC recently held a tutorial conference on TDD on Dec. 4, 2001 hosted by the TDD Coalition as follows:
http://www.fcc.gov/Bureaus/Engineering_Technology/Public_Notices/2001/da012754.txt

Infineon and IDCC have developed an FDD chipset that utilizes much of InterDigital’s FDD IPR, and will be instrumental in the worldwide deployment of this technology. Nokia and IDCC have thoroughly tested WTDD, and will be instrumental in the successful worldwide deployment of this technology. Other companies have quickly recognized the many benefits of TDD technology based on the test results and have very recently established the TDD Coalition.
A good article on TDD and the TDD Coalition as follows:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=79483
Some had thought that the spectrum problems and possible delays in allocating licensed spectrum might lead to some non-3G wireless technologies gaining an early foothold in the United States. Fixed, unlicensed spectrum technologies such as 802.11 (WI-FI) were being predicted to do very well in the US market. However, WTDD is being shown to be more cost effective than 802.11. WTDD has the added advantages of mobility/roaming, security, and full integration with other wireless and wired technologies, which the 802.11 standards lack. Couple the previous advantages with the benefits of using allocated licensed spectrum, rather than unlicensed spectrum with its host of potential problems, and even the US operators might become early adopters of WTDD. Even some carriers, like Craig Communications and Walker Wireless, who previously had plans to implement the 802.11 standards for concentrated hotspots are stating that they will implement WTDD instead. From a conversation with IR on Jan. 18 ’02:
Q. There have been several articles lately about the new available spectrum from the FCC and the promotional efforts of the TDD Coalition. How do we view these recent events and how involved are we with the TDD Coalition?

A. The TDD coalition is less than one year old and was formed mainly by companies in the fixed arena. Since our focus was on mobile, we were not a founding member. However some of the members are now migrating to mobile also. We were intrigued with this organization, and IDCC has now joined this coalition. Maybe the United States will get its spectrum act together. The developments in freeing more spectrum by the FCC in December were very positive. But it is still hard to say if the US will free up enough spectrum to encourage a rapid deployment of 3G in the near-term. Therefore we are still keeping our eyes on the 802.11 and 802.16 developments.


IDCC is a very substantial IPR owner of both essential and important WTDD and FDD technology. Conversations with IDCC’s Investor Relations as follows. From Dec.29 ’00:
Janet said that we probably have more essential and important patents contained in the WCDMA-TDD mode than in the other modes. I then asked if IDCC has determined how many essential and important patents that we have in each of the five 3G modes. She said yes they have determined the number in each mode internally, however this information has not been given externally to the public.

From Mar. 29, ‘01:

§ TDD is still the least developed of all the standards. We are still making many new contributions to the TDD standard.
§ The 3G3P will not release the new revised 3G standards in March as originally anticipated. Could delay into summer before revised standards are released. IDCC is very hopeful of additional patents in the revised standards, particularly TDD.

From May 9, ‘01:

§ Siemens is one of the few companies, besides us, that currently have essential TDD patents.

From Aug. 10, ‘01:

Infineon will be paying us a fixed $ fee per FDD chipset sold containing our protocol stacks. However, the fixed fee could be later adjusted for sales volumes and some other factors. We are receiving a fee at the chip level with Infineon to compensate us for our joint development work with Infineon in making the chip. Whoever Infineon sales the chipset to will also owe us royalty when the handset/device is sold. For example if Infineon sold an FDD chipset to Matsushita, then Matsushita will still owe us normal license royalty when they sold the 3G device containing the FDD chipset. And the normal royalty rate would not be reduced, even though they are using an Infineon/IDCC chip. We are not actually double-doing the royalty fee because the chipset has some different IPR characteristics than does the handset/device.

From Aug. 31, ‘01 conversation with Rip:
1. Will Nokia have any "exclusive use rights" on our TDD methods and software, such as for one year after TDD is commercially available?

No, Nokia does not have any exclusive use rights to TDD. IDCC will own the TDD technology that is being jointly developed with Nokia, and we will be able to license this technology to others without any restrictions.




5. The Phase 2 part of the Nokia partnership began on Jan. 1, 2002. Phase 2 will involve ongoing/recurring royalties payments to IDCC on all handsets/devices and infrastructure sold by Nokia, the world’s leading wireless phone manufacturer (over 35% market share), and also a leader in wireless infrastructure equipment. Two more partnerships with prominent equipment manufacturers are expected to be signed this year according to the business plan.


Nokia, the undisputed king in wireless phones and fast becoming the leader in network equipment, signed a multi-year partnership contract in Feb. 1999 with IDCC involving different phases. InterDigital is the only company Nokia has partnered with to help them develop their 3G systems and phones (Nokia’s complete WCDMA-TDD suite). Doesn't that say volumes about what IDCC has to offer in 3G?
During the phase 1 part of the contract, IDCC received an initial paid-up royalty of $31.5 million and received engineering service revenue of approximately $4 to $5 million each quarter during 2000. IDCC received over $21 million in engineering services revenue from Nokia during 2001. The initial projection for total revenues during phase 1 was $70 million, and at the end of the second quarter we had earned several million dollars more than the $70 million initial projected amount. The engineering service part of the Nokia contract was recently increased in the third quarter to a total of $58 million, making the total phase 1 revenues increase to almost $90 million.
The second part of the contract, phase 2, began on Jan. 1, 2002. During phase 2 we will receive significant ongoing/recurring royalty from Nokia, in addition to engineering service revenue. Nokia will pay ongoing/recurring royalty on all products containing IDCC IPR, whether 2G (TDMA, GSM, PDC/PHS, TETRA), 2.5G (GPRS, EDGE, CDMA2000 1X and 2X), or 3G (WCDMA-TDD and FDD, CDMA2000 3X, DECT, EDGE). These products would include handsets, PDAs, laptops, and basestations. Nokia will not pay royalty on TDD IPR that was jointly developed by Nokia/IDCC during the phase 1 project period and some other of IDCC’s TDD IPR. However, Nokia will pay royalty for any of the other modes contained within multi-mode TDD products.
Projections for this possible recurring royalty amount stagger the mind. Our royalty rates for 2G have been between 1% to 3%, which is virtually the same desired royalty rate range for 3G. Nokia and IDCC are still in the process of determining and finalizing the royalty rate for phase 2. Nokia sold 140 million wireless phones in the year 2001 and their average wholesale price per phone was $150. If we received recurring royalty at a minimum rate of 1%, then that would be $1.50 per phone * 140 million phones sold = $210 million of indicated royalty. Sharp paid us $4.00 recurring royalty per phone in 2000 ($18 million of royalty paid / 4.5 million phones sold by Sharp = $4.00 per phone). The above calculation does not even factor in royalties for infrastructure basestation sales. Nokia is also a leading supplier of network infrastructure equipment.
Dewitt Investors calculates possible Nokia royalties by taking a minimum royalty rate of 1% times Nokia’s annual sales. Nokia had $20,842 million, after a Euro conversion, in mobile phone sales in 2001 x 1% = $208 million of indicated handset royalty. Nokia also had $6,780 million, after a Euro conversion, of network infrastructure sales in 2001 x 1% =$68 million of indicated basestation royalty. (I'm not sure if Nokia Networks involves things other than basestations. IDCC would get royalty only on basestations) That would make a total indicated projected royalty of $276 million from Nokia, if P2 would have been in effect in 2001. When the Nokia phase 2 royalty rate is finalized, our recurring royalties will explode.
The following are excerpts from Hilliard Lyons analyst, Tom Carpenter’s updated report on IDCC dated April, 1 2002:
However, once Phase II began, Nokia would pay IDCC royalties for 2G and 3G wireless handsets and infrastructure equipment that it sold. According to the 10K, Phase II began January 1, 2002 and IDCC is now accruing royalty revenue from Nokia for handsets and infrastructure equipment NOK sells which contains IDCC's technology. Our understanding is that this covers all or almost every handset and equipment that NOK sells. Unfortunately, the royalty rate has not yet been finalized. As the rate can have a huge impact on IDCC's revenue and profitability, IDCC has conservatively elected not to accrue the revenue on its income statement until the rate is finalized.

Why isn't the rate finalized when there has been a deal in place since February 1999? That is the $64 million question. Our best guess is that IDCC and NOK would like to have a framework from another leading manufacturer, something that has not happened outside of the Japanese manufacturers, NEC and Matsushita. Perhaps the two parties also expected some resolution of the long-standing litigation between IDCC and Ericsson, and were planning to use it as a guide to the royalty rate.

We believe IDCC's targeted royalty rate for 2G was 1-3% and the target for 3G was slightly below that range. In the following table we perform a sensitivity analysis on what the NOK royalty rate could mean for IDCC. Compared to IDCC's 2001 revenue of $58 million, the inclusion of licensing revenue from Nokia significantly impacts IDCC's revenue and earnings stream. As the exact royalty rate is the great unknown and the impact so large, we choose to be conservative in our projections. Therefore we bold what we view is a reasonable, and hopefully conservative estimate. We estimate that if Nokia pays IDCC one half of one percent royalty on the handsets that it manufactures and NOK maintains its current 35%-37% market share then IDCC could generate between $110 and $117 million in handset royalty revenue from Nokia during 2002. Any infrastructure revenue would be icing on the cake.


Royalty Nokia’s market share
Rate 33% 35% 37% 40%
0.25% $52 $55 $58 $63
0.50% $104 $110 $117 $126
0.75% $156 $165 $175 $189
1.00% $208 $221 $233 $252
1.25% $260 $276 $291 $315
1.50% $312 $331 $350 $378

$ in millions

We maintain our BUY rating and $22 price target based a 10 year discounted cash flow
analysis and a 20x multiple of our $1.13 2003 EPS estimate. Our 2003 estimates have included expected Nokia licensing revenue for the past several months and we are comfortable with the estimate, although it could prove conservative. With the Nokia royalty rate still under negotiation, we do not believe it is yet prudent to revise our 2002 estimates. If IDCC collects revenue from Nokia for the entire year, we estimate IDCC could potentially earn $1.00 or more because expenses would stay fairly flat. Given IDCC's current share price of $9.59, one could argue that $1.00 of earnings is worth a higher multiple than 10x. However, the exact royalty rate and the timing of the cash flows from Nokia adds uncertainty to the equation.
From a conversation with IR on June 7, ‘01:
3. Has the recurring royalty rate for Nokia phase 2 been determined yet, and if not when? Does phase 2 involve 2G, 2.5G, 3G, or all? Will the royalty rate for 2G be the same as 3G?

No the royalty rate has not been determined yet and can not say when it will be. However, the date that phase 2 will begin has been set/determined. Phase 2 will involve the entire patent portfolio including 2G, 2.5G, and 3G. Nokia will pay royalty on everything except TDD patents developed during the phase 1 project period. The royalty rates can vary depending on the technology involved… Since the rate has not been determined, a range of applicable rates can not be stated yet. Hopefully it will be in the 1% to 3% desired range, but can't be certain yet.

From a conversation with IR on August 3, ‘01:
Our last area of discussion was the Nokia contract. I asked if the date that will begin phase 2, as stated in the contract, was a fixed date or a floating date contingent on some event. Rip said that the date is a fixed certain date. This specific date can only be changed by mutual consent to modify the contract. What is important is that Nokia has acknowledged in contract that they will pay royalty on all of our patents (except for the jointly developed TDD patents during phase 1). The only thing that is not certain at this time is the exact royalty rate that Nokia will pay.
From a conversation with IR on Oct. 26, ‘01:

Q. Can we be in phase 1 and phase 2 at the same time? Can phase 2 begin before phase 1 officially ends?

A. No we can not be in phase 1 and 2 at the same time. Phase 1 will end and immediately phase 2 will begin. Phase 1 and 2 are determined by a set date specified in the contract and not by products or events. Phase 1 involved the initial payment from Nokia and the beginning (but not the end) of the engineering development project. Phase 2 will involve the payment of recurring royalty from Nokia on virtually our entire patent portfolio. We can still be receiving some engineering project revenues from the additional funding during phase 2. We may also enter into a new engineering project with Nokia later on in phase 2.

From a conversation with IR on Nov. 15, ‘01:
Q. Will Nokia pay us royalty on 2G basestations as well as 3G basestations once phase 2 begins? Is any company paying us recurring royalty on 2G basestations now? Is our desired royalty rate for basestations in the same desired range of 1% to 3%?

A. Yes Nokia will pay us royalty on 2G and 3G basestation infrastructure, as well as 2G and 3G handsets. Do not think that any company is currently paying recurring royalty on 2G infrastructure, because the large 2G infrastructure equipment providers are either non-licensees (Nortel, Lucent, Ericy), not yet royalty-paying licensees (Nokia, Siemens), or a limited licensee (Alcatel for BCDMA). Janet would not say what our desired royalty rate for basestations would be, but Rip had indicated to me earlier that it should be somewhat comparable to handset royalty rates.

From a conversation with IR on Jan. 18, 2002:
Q. Has the phase 2 royalty rate been determined yet? Can the fixed date begin before the royalty rate is finalized?

A. We are addressing the P2 rate issue but it is still not finalized. These are very complex discussions with far reaching ramifications for a long period of time. There is a framework in place to help with the rate determination, but there are still areas that involve interpretation, negotiation, and agreement. Can’t really disclose if the fixed date can begin before the royalty rate is finalized.

From a conversation with IR on August 31, ‘01:
Q: Will Nokia have any "exclusive use rights" on our TDD methods and software, such as for one year after TDD is commercially available?

A: No, Nokia does not have any exclusive use rights to TDD. IDCC will own the TDD technology that is being jointly developed with Nokia, and we will be able to license this technology to others without any restrictions.

From a conversation with IR on Sept. 15, ‘01:

Q. Will we receive any royalty from Nokia on a “TDD-only” device once phase 2 begins?

A. We will definitely receive royalty from Nokia on multi-mode products that include TDD as one of the modes. Most everything that is TDD specific is contained/developed within the Nokia phase 1 agreement. We might receive some royalty from Nokia for some “system” patents that apply to TDD-only products, but not from TDD “specific” technology patents. Our TDD specific technology patents have been developed during Nokia phase 1 project period. Therefore, Nokia will probably pay us a lower royalty rate for TDD products than will other companies.

Q. How can TDD benefit us more than FDD, if Nokia who has 35% of the handset market will pay us a lower royalty rate on TDD products?

A. Have to look at some trade-off issues. There will be many other manufactures making TDD products besides Nokia. Many of these additional products will not be handsets. We will have a lot of IPR in TDD and will probably get more royalties from all these other companies and other products. Since we have done extensive development work in TDD, we should get more enabling revenues, such as engineering services. We should also get more product revenues in TDD, such as from customized chips and other products. Finally we should get more royalty from the TDD base stations and from the chips that go into those basestations. The FDD basestations will be much bigger and fewer. There will be many more and smaller TDD basestations.


The Business Plan also anticipates two more partnerships with prominent equipment manufacturers by the end of this year, similar to the Nokia partnership. A stated execution objective for 2002 in the latest Annual Report is to “expand the number and scope of our strategic relationships.” Therefore these anticipated partnerships should also involve joint development efforts involving engineering services revenues, in addition to licensing/royalty revenues.

From a conversation with IR on Aug. 10, ‘01:
Q. Is Siemens a likely candidate for an “equipment manufacturer partnership” with us, similar to the current Nokia partnership, as projected in the Business Plan?

A. We have maintained a very good relationship with Siemens for a long time. They pretty much funded most of our work in B-CDMA, which turned into WCDMA-FDD once mobility was added. IDCC and Siemens have the most IPR in the high data rate TDD, and we work closely together in the standards bodies. However, Janet could not say which specific companies might be good candidates for the equipment manufacturer partnerships (the Business Plan projects two before the end of next year). She did say that the equipment partnerships would be with large, prominent companies.

From a conversation with IR on Oct. 26, ‘01:
Q. What are all of our additional engineers going to work on now that the Nokia phase 1 project is winding down to validation testing rather than development? Do we anticipate any new engineering contract work from other companies in the near-term horizon to help us defray expenses?

A. Our licensing teams are discussing engineering services work with all those companies that we are in negotiations with. Engineering service work is definitely part of our creative solutions for non-licensees with past infringement issues. We might work out deals somewhat similar to Nokia, which would involve some initial payment for past infringement and also an engineering services contract.



6. Unprecedented 10 year chip agreement with Infineon, a world leader in wireless chips. At least one more chip agreement is expected to be signed this year according to the business plan.

Infineon is a German wireless chip company, which was spun-off from Siemens. Infineon sells more GSM baseband chips than any chip company in the world. They signed a 10 YEAR 3G agreement with IDCC. No other wireless IPR company that I am aware of has a 10-year agreement with a major chip company. The length of this contract is highly abnormal and unprecedented. Wireless technology changes so much and so rapidly that long-term contracts are unheard of in this industry.

This 10-year contract currently involves WCDMA-FDD, and may be expanded to include TDD later. However, InterDigital may choose another chip company for TDD chips. IDCC's formal Business Plan, which was articulated in a press release and is available on their website, projects two 3G chip agreements before the end of 2002. If a wireless chip leader like Infineon enters into a ten year IPR contract, doesn’t this also say volumes about IDCC’s place and importance in 3G?

Infineon will get its FDD protocol stacks exclusively from IDCC for Infineon branded FDD or dual mode GPRS/FDD chips; unless IDCC enters into a development project with another chip company for the FDD protocol stacks. InterDigital also receives access to Infineon’s vast technology library for possible custom/specialized chips branded with IDCC’s name, but manufactured by Infineon. IDCC projects very significant revenue from this contract in 2003, when 3G handsets should begin to be sold in mass, after the 3G network rollouts and thorough testing in 2002. IDCC will share in the revenue on each FDD or GPRS/FDD Infineon branded chip sold, they will receive revenue from marketing the jointly developed protocol software to non-Infineon customers, and will receive revenue from the sell of IDCC branded custom/specialized chips.
It appears that the FDD protocol software is now ready for deployment on any operating system and any hardware platform. From a very recent press release from 3GSM conference in Cannes:

CANNES, France, Feb 21, 2002 (BUSINESS WIRE) -- InterDigital Communications Corporation (Nasdaq: IDCC), today introduced its Frequency Division Duplex (FDD) technology software product for 3G mobile devices.
The new FDD Layer 2/3 software protocol stack is portable to multiple physical layer (Layer 1) implementations and can act as the communications engine for a wide range of 3G mobile devices. It integrates seamlessly with existing GSM/GPRS software and hardware, thus enabling the development and deployment of multi-mode 3G handsets while providing a stable migration path from the customer's existing GSM platform to 3G.
The FDD software product has been designed to reduce handset power consumption and memory utilization, two key 3G market requirements for handsets.
We are designing our FDD software product to be integrated with our Time Division Duplex (TDD) technology platform to ensure seamless operation in 3G products….This complete UMTS FDD software protocol stack can run on any real time operating system and hardware platform…. It is fully compliant with the 3GPP FDD Release 4 Standard.
From a conversation with IR on Jan. 18 ’02:

Q. In the original Infineon press release it is stated that IDCC and Infineon will market the software protocol stack to non-Infineon customers? Can you explain what this means and how we will earn revenue from this?

A. We and Infineon can jointly and separately market the chip products, including the protocol stack software. I asked if this marketing effort would be to other chip companies that we would target selling the software to. Janet said no that it probably be equipment manufacturers who might purchase only the protocol stack and not the chip, due to a previous chip arrangement/relationship with another chip company. However she could not discuss the intricacies of how this would actually work, or the specifics of how we would earn revenues from this.

From a conversation with IR on August 10, ‘01:
Infineon will be paying us a fixed $ fee per FDD chipset sold containing our protocol stacks. However, the fixed fee could be later adjusted for sales volumes and some other factors. We are receiving a fee at the chip level with Infineon to compensate us for our joint development work with Infineon in making the chip. Whoever Infineon sales the chipset to will also owe us royalty when the handset/device is sold. For example if Infineon sold an FDD chipset to Matsushita, then Matsushita will still owe us normal license royalty when they sold the 3G device containing the FDD chipset. And the normal royalty rate would not be reduced, even though they are using an Infineon/IDCC chip. We are not actually double-doing the royalty fee because the chipset has some different IPR characteristics than does the handset/device.

From a conversation with IR on Nov. 15, ‘01:

Q. Are we negotiating with Infineon for the TDD chip? If we use a different chipmaker for TDD, who would make the dual mode FDD/TDD chip? Will Infineon be selling GPRS/FDD chips in 2002? Do you still anticipate that our licensees will still pay normal royalty rates on the sell of end products, even if they buy Infineon chips on which we will be receiving revenue?

A. Yes we are negotiating with Infineon for TDD. Janet was not quite sure what would happen on a dual mode FDD/TDD chip, if we use different chip companies. We have not gotten to that point yet. Possibly we could sell the FDD protocol stack to another company, which would use that stack in a dual mode chip, with Infineon's approval. She did say again that IDCC anticipates earning revenue of both the sell of the chip by Infineon, and our normal royalty rate when a licensee sells the end product. If Infineon sells dual mode GPRS/FDD chips in 2002, then we will receive chip revenue in 2002. However, we do not anticipate significant chip revenues until 2003.

From a conversation with IR on Dec. 14, ‘01:

Q. Infineon’s M-Gold chipset is now being promoted. What might this chipset sell for and what would be our percentage range or set $ amount range per chipset?

A. Infineon has not yet published any official guidelines as to the pricing of this product and therefore we are not at liberty to say what the possible prices might be either. Also can not give a possible range for our take on this chipset. I mentioned that Infineon was indicating that M-Gold would have TDD add-on features. She said that a TDD bolt would be a rather low cost add-on. But she thought the first roll-out of this chip would be GSM/GPRS/FDD only.

Q. Does Nokia have any input into who our TDD chip partner might be? Has Nokia indicated to us if they will buy or commit to buy 3G chipsets from our chip partners?

A. No and no. Nokia has made no firm announcement about who they will use for 3G chips. They may use Infineon; they may use someone else. I asked if Nokia might be negotiating the phase 2 royalty rate with some type of chip purchase commitment. Janet replied that there has been no relationship established by us that tie-in royalty rates to possible chip purchases.

Q. It appears as though we have much more than the protocol stack for a TDD chipset. From Rip’s recent presentations, it seems as though we can contribute the RF integrated circuitry and the baseband also. Am I interpreting this correctly?

A. We are mainly providing the levels 2 and 3 protocol stack for Infineon. Infineon is using their own level 1 protocol stack. We can furnish the full suite for TDD including levels 1, 2, and 3 of the protocol stack. We do have RF circuit engineers who can provide help in that area. Janet said that she thought the complete protocol stack and the baseband were essentially the same thing.

From a conversation with IR on Jan. 18 ’02:

Q. It was also stated in the Infineon press release that IDCC would be the exclusive provider of level 2 and 3 protocol stacks to Infineon for FDD, unless the customer required a different stack or we entered into an FDD development project with another chip company. I know we can enter into a TDD chip agreement with another company, but what about a dual mode TDD/FDD chip with another chip company? Would this violate the FDD exclusion provision with Infineon?

A. Janet said that it would depend upon the actual structure of the relationship as to whether the FDD exclusion provision would be violated. I mentioned that I was somewhat concerned about this dual mode issue, because according to the business plan we plan to have two chip agreements. Since the Infineon agreement was clearly FDD only at this point, then it appeared to me that we will probably use two different chip companies.

Janet said that one can not necessarily assume that we will use two separate chip companies. She said that the business plan predated the Infineon contract by about five to six months. At the time of the business plan, we were strongly considering several smaller chip companies. We thought that we might go with two of the smaller ones. We did not really think, at that time, that the chip agreement would be with a prominent chip company like Infineon.

From a conversation with IR on August 31, ‘01:

Q: Do we have IPR in CDMA 2000 1X chips? Does Qualcomm need to update their '94 agreement with us? Does Texas Instruments need to license with us to produce GSM/GPRS chipsets?

A: Yes we do have essential IPR in CDMA 2000 chips. Can not really make any comment about license possibilities between us and specific companies, such as Q and TI. In general, a company that makes any type of product according to “standard” is obligated to license with the IPR owner. It doesn’t really matter if the product is a component product (chipset) or an end product (handset, laptop, PDA). However, the end product manufacturer is normally where we try to focus license agreements. The royalty at the end product level would be greater than at the chipset level, because the end product sells for significantly more than the chipset. But we are not precluded from seeking licenses at the chip level, if that would be more beneficial to us.

Q: Would our high-chip rate TDD work with Nokia preclude us from doing TD-SCDMA work with someone like Siemens? Are we considering any type of chip development work in TD-SCMA? Do we have many essential patents in TD-SCDMA as compared to WCDMA?

A: No, the TDD development work with Nokia does not restrict us in any way from development work with other companies. Much of out TDD work applies to both WCDMA and TD-SCDMA, and therefore much of our technology blocks could also be used in a TD-SCDMA product. However, there would be additional work that would be required from us to provide a final product solution, such as a TD-SCDMA chipset. Can not state at this point the specific extent of our essential patents in TD-SCDMA. We are watching the market in this area very closely.


Although IDCC has not named a WTDD chip partner yet, the development work on this chip is well underway. From an InterDigital press release on Oct. 18, ‘01:

Dr. Briancon described the WTDD Baseband Modem Chip for 3G terminals that InterDigital is developing. “The stand-alone chip we are developing incorporates leading-edge designs utilizing our pioneering technology”. This is a fully standards-compliant baseband modem chip for multi-mode 3G terminals designed to interface seamlessly with FDD/GSM hardware and software to enhance terminals with WTDD capability. Our chip will be designed to enable wireless devices to support voice and data traffic up to two megabits per second.

“Our design is harmonized with FDD and is implemented with a low gate count, enabling use of the WTDD technology at a low incremental cost," he said. InterDigital's complete WTDD solution consists of the baseband modem, a software protocol stack and the RF reference design. It will be particularly effective in delivering advanced voice and data capability to smart phones, wireless personal digital assistants, laptop computers, and other innovative wireless terminals.






7. More 3G contracts should be following Matsushita with their $19.5 million advance royalty, Sharp with their $11 million advance, and NEC with their $19.5 million royalty advance fairly soon.


IDCC has “essential” and “commercially important” patents in ALL modes of the 3G standard. Therefore, anyone and everyone who makes a 3G standard-compliant phone or other wireless device will need to obtain a license from IDCC. 3G is rapidly approaching; CDMA 2000 IX and GPRS are already out and true 3G network infrastructure is beginning to be shipped, tested, and implemented. Docomo’s 3G FOMA (WCDMA) network is up and running in Japan. Other WCDMA networks are scheduled to be operational with available 3G handsets in Europe and other Asian countries during the latter half of 2002.

From the latest Annual Report under the Goals for 2002 section, an execution objective for the current year is to:

“Add five 3G licenses and resolve at least one of our outstanding 2G licensing disputes”

InterDigital signed two new 3G licenses in 2001 with Matsushita and Sharp. IDCC has signed two new 3G licenses thus far in 2002 with NEC and Japan Radio. That leaves three more anticipated 3G licenses to be signed during the remainder of 2002 to meet the stated goal.

From a recap of a conversation with IR on April 23, ‘01:

1. The specific royalty rate on the Matsushita 3G contract cannot be disclosed, but it is within IDCC's general range of 1% to 3%. The specific royalty rate can be different on each 3G contract but should be within the general range.

From a Question and Answer conversation with Investor Relations on July 17, ‘01:

Q: With the new 3G license with Matsushita at the end of March, we were hoping that this would open the door for more new 3G contracts fairly soon thereafter? What are the current feelings about progress on new 3G contracts? Have we modified the business plan projection of 5 new 3G contacts before the end of 2002?

A: We are “pushing ahead” and still very actively pursuing new 3G contracts. We have a licensing team composed of between 4 to 6 attorneys, who are in various stages of negotiations with several companies. They generally go out alone or in groups of two to cover as many companies as possible. No we have not altered the business plan of 5 new 3G licenses by the end of next year.

Q: Will Matsushita pay us royalty on CDMA 2000 products including 1X?

A: Yes that is in the Matsushita contract. We still have some more CDMA 2000 patents to be issued to us. Although we are currently working on developing WCDMA, some of this development work overlaps with and applies to CDMA 2000. Thus, we are still applying for patents in the CDMA 2000 standard.

Q: Will other 3G contracts probably have the same/similar provisions for CDMA 2000 products as the Matsushita contract?

A: Yes we will try to negotiate toward including CDMA 2000 into future 3G contracts also. We do have “essential” patents already in CDMA 2000 and have additional patents pending.

From a conversation with IR on August 3, ‘01:

Next I asked if IDCC had significant IPR in the 3G infrastructure basestations. Rip said that Yes we do have significant and important IPR for basestations, in addition to the handset IPR. Yes Matsushita would owe us royalty on their sales of 3G basestations, but Matsushita is not all that big in 3G-infrastructure equipment. He stated that the royalty rate for infrastructure would be similar to the royalty rate for handsets, but would not say if the rates were the same in the Matsushita contract. (note: Nokia will also pay us royalty on basestations once phase 2 begins).

From a conversation with IR on Sept. 15, ‘01:

Q. Is the royalty rate in the new Sharp agreement within our desired range of 1% to 3%? How does the new 3G royalty rate compare to Sharp’s old royalty rate on 2G PDC/PHS phones?

A. Yes the royalty rate in the Sharp agreement is within the desired rate range of 1% to 3%. (IR had previously confirmed that the royalty rate in Matsushita contract was within the desired 1% to 3% range also) Can not speak specifically about the 2G rate compared to the 3G rate. However the 3G contract is a broader “convenience license” in that Sharp will pay us royalty on any product that they may sell in 3G. Therefore, this would keep down controversy about any future products that might not be even envisioned when the contract was originally signed.

From a conversation with IR on Nov. 15, ‘01:

Q. Rip mentioned that our 2G royalty rate was in the 1% to 3% range, the same as our desired range for 3G. Were the Sharp and Matsushita royalty rates just one rate for each company that fell within the desired range, or several different rates for each company according to specific standards?

A. Not at liberty to specifically say whether a licensed company has one blanket royalty rate or several different rates depending upon the standard. It is possible for IDCC to have both types of royalty structures. Some licensees might have just one overall blanket rate; whereas some licenses might have varying rates based on the different standards.


During Jan. ’02 Japan Radio Company signed a new 3G contract, and then NEC signed a new 3G contract as part of the arbitration settlement. The NEC settlement involves $53 million for past disputed amounts. More importantly a new 3G contract was signed with NEC, with an upfront royalty advance of $19.5 million due in the second quarter of this year. This advance is in addition to the $53 million. Once the advance is used-up, NEC will pay recurring royalty as it sales licensed products. The NEC contract now encompasses all the various wireless standards and all types of wireless products. NEC is Japan's largest wireless company, and is rapidly becoming a world leader for 3G in partnership with Siemens.

From a conversation with IR on Jan. 18 ’02:

Q. Are NEC's 2G and 3G royalty rate(s) within our desired 1% to 3% range? Will NEC pay one blanket rate or several different rates based on standard or product?

A. Can’t specifically disclose whether NEC falls within our desired range or whether there is one rate or several rates. We are currently working on a 3G rate model that we will officially disclose later. We are well aware that analysts and the financial community need a rate model from us to help with their revenue projections. Therefore, we are not a liberty to disclose any specifics about the 3G rate range at this time. I mentioned that she had previously told me that the new contracts for both Matsushita and Sharp were both in the desired 1% to 3% range. Janet said that although she could not address the specific rate range at this time, IDCC is “pleased with the 3G rates thus far”.





8. Ericy litigation is encouragingly progressing toward a favorable resolution. Very significant dollars involved in this litigation.

Certainly in litigation or arbitration no one knows what will happen until the very end. But we can sure keep up with the developments in the Ericy litigation. Link to an article written by John Robino for the Street.com about the Ericy litigation:

http://www.thestreet.com/_yahoo/funds/strategies/1408253.html

Assessment of the Special Master’s Report from the Markman hearing including IDCC press release:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=62078
At the Annual Stockholders Meeting in June of 2001 the Chairman of IDCC’s Board of Directors made an unexpected and optimistic statement about progress in the litigation. Questions and answers that I had with IDCC’s Investors Relations Department on June 7, 2001 to confirm this statement:

Q: Did Howard Goldberg say during the Q&A part of the ASM that he wished he could tell the stockholders about the good things he knew regarding Ericy negotiations but could not?

A: Harry Campagna, not Howard, made the comment. He did allude to “good things”, which was referring to recent positive developments/activities going on in the Ericy negotiations.

Q: What do you make of our new analyst’s update on IDCC referring to rumors of a possible Ericy settlement?

A: Little unusual but probably the analyst felt that he had an obligation to report this rumor, because of the affect it would have on the stock price if Ericy does settle. He wanted to be in front of any possible material developments and not behind.

The court ordered the case to mediation. IDCC officials have said that the case is still in the mediation process according to an IDCC press release dated June 3, ’02. Texas attorneys on the RB club board have stated that mediation has resulted in settlement in Texas (where the case is being tried) 80% to 85% of the time. Link to the text for the Mediation Order:

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=61195

Credentials of the mediator, who has a mediation settlement rate of 95%:

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=62276
An agreed order concerning summary judgment dated 09/19/01 that includes the following statement: “Whereas, based on the Court's claim construction rulings, each party now believes it can resolve all or part of the litigation on summary judgment”. The deadline for filing summary judgments was originally the last week of November but later amended to the first week in December. Link to this court order as follows:

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=68532

The dispositive summary judgment motions were filed on Dec. 4, ‘01. The court then amended the scheduling order on 12/18/01 to have opposition responses to the dispositive motions by 1/22/02 and replies to any opposition responses by 2/11/02. The link to this order as follows:

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=78163

There may be some very significant developments in this case once the judge rules on these summary judgment motions, which are now finalized and before him. The judge was also probably awaiting the Supreme Court’s ruling on the Festo case before rendering all of his pretrial decisions on these various motions. The “doctrine of equivalents” at issue in Festo has some bearing on some of the claims at issue in the Ericy case. The Supreme Court rendered a unanimous decision at the end of May ‘02 in Festo, which essentially reestablished the doctrine of equivalents to help protect the patent owners from minor modifications and alterations by patent infringers. An update on the Ericy litigation from a very recent press release as follows:

“KING OF PRUSSIA, Pa., Jun 3, 2002 (BUSINESS WIRE) -- InterDigital Communications Corporation (Nasdaq:IDCC), today announced that certain pre-trial motions have been ruled upon by the presiding Federal District Court Judge in the patent infringement lawsuit involving the Company, its wholly-owned subsidiary, InterDigital Technology Corporation and Ericsson Inc.
As previously reported in the Company's filings with the Securities and Exchange Commission, each party has filed pre-trial motions with the Court under seal seeking to limit issues at trial and to dismiss the other party's case in whole or in part. The Judge has ruled on portions of the pre-trial motions of both parties, removing certain patent claims from further consideration with regard to the infringement issues in the District Court case, the effect of which is to narrow the issues remaining for trial. The Company believes these rulings, which remain under Court seal, do not materially affect the relief sought by InterDigital Technology Corporation. Court ordered mediation continues and no trial date has been set.”

The remainder of the scheduling order of Sept. 27 remains unchanged. Therefore a resolution to the Ericy matter is now on two distinct tracks. One track remains a possible mediated settlement, whereas the other track involves a defined court schedule. The court schedule would include the judge’s ruling on the remaining summary judgment motions, and then the setting of a trial date if the parties still can not reach a settlement. The court scheduling order of Sept. 27 is linked as follows:

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=78203


Very recent amendment of the protective order dated 11/06/01 on who can access confidential documents is expanded to include very important decision-makers from both companies:

http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=73527


The recent NEC settlement involved some of the same Japanese equivalent TDMA system patents that are involved in the Ericy litigation. The IDCC patents involved in the Ericy dispute have also been revalidated by the US patent office in late 1999, and upheld in the German court system over opposition by Siemens, Alcatel, and Phillips. These same disputed patents were also declared valid by the Swedish Patent Office in Ericy’s home country and after Ericy’s opposition.






9. NEC settled the arbitration dispute over past royalties for $53 million, and in addition to the settlement amount, signed a new 3G contract with a royalty advance of $19.5 million. Many other 2G infringers should be licensing with IDCC fairly soon. The triggers for signing these other companies will be the NEC settlement, an Ericy resolution, and/or the need for 3G licenses.

The settlement of the NEC arbitration dispute, a successful resolution of the Ericy litigation, and the need for 3G licenses should help trigger new 2G licenses. Since IDCC has “essential” patents in all of the 3G modes, every company that builds a 3G standard compliant phone or other wireless device will eventually have to come to IDCC for a 3G license and thus deal with 2G issues also.

The very recent NEC settlement involved royalty disputes from the 1995 agreement over 2G PDC/PHS sales. NEC paid $27 million as a royalty advance in 1995, but did not pay recurring royalty when the advance ran out due to a patent dispute. Therefore IDCC and NEC were in arbitration from March '01 until the settlement in Jan. '02. The settlement provides for payments of $53 million within a 24 month period for the disputed 2G past royalties, in addition to the previous $27 million already paid by NEC in 1995.

More importantly a new 3G contract was signed with NEC, with an additional upfront royalty advance of $19.5 million due in the second quarter of this year. This advance is also in addition to the above amounts. Once the advance is used-up, NEC will pay recurring royalty as it sales licensed products.

From a conversation with IR on Jan. 18 ’02:

Q. When do the installment payments on the $53 million settlement amount with NEC start up and will they also involve interest? Why is there an accounting question over how/when to record the settlement payments into revenue? Hasn't part of the $19.5 million upfront advance for 3G products already been earned, because NEC has already shipped 3G infrastructure?

A. The $53 million settlement amount will be non-interest bearing installment payments to be received within the next 24 months. Can’t disclose when the first installment payment on the settlement is due. NEC had previously paid us $27 million under the original contract back in 1995, which is in addition to the $53 million settlement. An additional $19.5 million advance is due in the second quarter this year.

Q. NEC received a paid-up license for PDC and PHS. Did they receive a paid-up license for other 2G standards like TDMA, GSM, GPRS, IS-95, etc.

A. They received a paid-up license for PDC and PHS. Although technically they did not receive a paid-up license on TDMA, GSM, GPRS, we do not think that we will receive any further payments from NEC for these other TDMA-based standards. There was some clause in the original contract that somehow precluded or minimized royalty on the other TDMA-based standards from NEC. The ongoing recurring royalties from NEC will involve all the 3G standards and the 2G CDMA standards, including IS-95 and CDMAOne, on a world-wide basis. Although NEC is not that much involved in 2G CDMA standards, they are at the forefront of 3G deployment. They are currently one of the leading providers of 3G chips, basestations, and handsets.


From the second quarter earnings release:
“The current environment also has affected discussions with new potential licensees, particularly those manufacturers who are experiencing financial difficulties. Despite the short-term challenges, we remain cautiously optimistic that we will be able to grow our 2G and 3G licensee base during the remainder of the year.”

Question and answer from IDCC’s IR department on July 17, 2001 dealing with possible 2G holdups are as follows:

Q: We have not had a new 2G licensee in over a year since Ubinetics. Could you provide any update on the progress of new 2G contracts with creative “past-infringement royalty” solutions? What are some of the creative solutions that IDCC is considering? Which is the greater holdup on new 2G licenses: the current awful economic climate for telecommunication companies or the Ericy litigation?

A: Can’t be specific about the different creative solutions for dealing with 2G past infringement royalties. There are a lot of things being negotiated with several different proposals on the table. Yes the two reasons that I mentioned in my above question are the two main holdups in getting new 2G contracts. Janet would not say if one of the two aforementioned factors were more important than the other one.

From a conversation with IR on June 7, ‘01:

We discussed whether IDCC would have to grant a 3G license to a company, which had unresolved 2G issues with IDCC, ie 2G infringers. To be part of the ITU 3G standards a company had to agree to grant licenses to everyone on a "fair and reasonable basis". Does this fair and reasonable clause force us to grant 3G licenses to 2g infringers?.

Janet said that no IDCC was not required to issue a 3G license to a company that had unresolved 2G royalty/licensing issues. However IDCC could issue a 3G license to a company with unresolved 2G issues, if they so desired. IDCC has the choice of whether to issue the 3G license or not. My opinion: as 3G rapidly approaches and becomes more of a reality, IDCC should gain tremendous leverage over 2G infringers. Perhaps this is why Goldberg and Fagan had previously mentioned creative type contracts. The contract may have to deal with past infringement issues, current 2G and 2.5G, and 3G issues all in one license.

From a conversation with IR on July 17, ‘01:

Q: What is IDCC currently doing or plan to do about companies who are now selling CDMA 2000 1X products without a license agreement with us?

A: Even though IDCC is not doing developmental work in CDMA 2000 per se, we are still very active in trying to license all of our technology including CDMA 2000. We are in various correspondence, meetings, and negotiations with existing licensees and with non-licensees about CDMA 2000 and other standards. Those companies that make CDMA 2000 1X products are aware of our claims in that area.




10. Royalty arbitration with Samsung that could involve in excess of $100 million in disputed royalties.

From IDCC’s most recent 10K annual report:

In February 2002, ITC filed a Complaint against Samsung with the International Chamber of Commerce, International Court of Arbitration. The dispute involves the applicability of the MFL clause contained in ITC's patent license agreement with Samsung and Samsung's underreporting of, failure to report and failure to pay royalties on its more recent covered sales. MFL clauses typically permit a licensee to elect to apply the terms of a subsequently executed license agreement that are more favorable than those of the licensee's agreement. The application of the MFL clause may affect, and generally acts to reduce, the amount of royalty obligations of the licensee. The application of an MFL clause can be complex, given the varying terms among patent license agreements.

Based on the limited sales information that ITC has been able to gather, ITC has alleged in its Complaint that past due royalties presently owed by Samsung, absent the application of the MFL clause, could be in excess of $100 million. Among the issues to be addressed in the arbitration is whether Samsung can make use of its MFL rights and, if so, how such rights would affect Samsung's royalty obligations. Under various MFL scenarios which we expect Samsung to advance, including scenarios related to Nokia's paid-up $31.5 million license for the period ending December 31, 2001, Samsung's ultimate royalty obligation to ITC could be reduced, in some cases substantially, below the amount in the Complaint. Under the patent license agreement, Samsung pre-paid royalties of $17 million in 1996 and, in 1999, became entitled to an additional royalty credit of $1.7 million. ITC also seeks an audit of information relating to Samsung's covered sales and payment of royalties due. Samsung has not responded to ITC's Complaint.

While ITC has advanced what it believes to be strong and persuasive arguments regarding the application of the MFL clause, ITC can give no assurance that the arbitration will be decided in its favor. Further, even if ITC is successful in the arbitration, the arbitrators could grant substantially less than the relief requested by ITC if they agree with any of Samsung's arguments. Moreover, any consensual settlement would likely be at substantially lower levels than the amount alleged in Complaint. There can be no assurance that any consensual settlement of the arbitrated dispute will be reached.

From the latest Annual Report, an execution objective in 2002 is to:

“Add five 3G licenses and resolve at least one of our outstanding 2G licensing dispute”

Since the only two outstanding licensing disputes involve Ericy and Samsung, then at least one of these two disputes is expected to be resolved this year.





11. Well over $100 million in cash (over $2 per share), virtually no debt, and significantly increased the engineering staff (100% increase in 2000 and another 70% increase in 2001), while also paying for other substantial 3G ramp-up expenses and litigation costs. This substantial ramp-up for 3G and patent defense has been remarkably accomplished while increasing, rather than decreasing, the cash balance.


Nokia has helped fund, through an engineering service contract, InterDigital’s 3G ramp-up expenses. Engineering personnel were increased 100% in 2000 from 100 to 200 engineers. The number of engineers is currently 270, which would be an additional 70% increase in 2001 over the original starting base of 100 engineers. IDCC engineers are working jointly with Nokia engineers to develop Nokia’s complete TDD suite. Also InterDigital engineers are working jointly with Infineon engineers in the development of the 3G system on a chip. Interdigital expects that engineering services will provide another important source of current and future revenues in addition to chip/product sales and licensing royalties. During 2001 IDCC incurred significant legal fees involved with the Ericy litigation and the NEC arbitration. These legal expenses are expected to decrease significantly in the first quarters of 2002.

In January ‘02, NEC settled the arbitration dispute with IDCC and signed a new 3G license. A royalty upfront advance on the new contract of $19.5 million and the first $13 million installment on the settlement was received from NEC at the beginning of the second quarter. The total settlement amount of $53 million is to be paid in four installments within two years, in addition to the $19.5 million advance. Of course, the remaining $40 million on the NEC settlement will certainly provide an additional infusion of cash over the next eighteen months.

The Business Plan projects two new equipment manufacturer partnerships similar in form to the existing Nokia partnership. These partnerships would involve more than just licenses and royalties. They will most likely involve engineering developmental service revenues also. IDCC officials have stated that they can complete the 3G ramp-up efforts without needing any additional debt or equity financing.

From a conversation with IR on Oct. 25, ‘01:

Q. What are all of our additional engineers going to work on now that the Nokia phase 1 project is winding down to validation testing rather than development? Do we anticipate any new engineering contract work from other companies in the near-term horizon to help us defray expenses?

A. Our licensing teams are discussing engineering services work with all those companies that we are in negotiations with. Engineering service work is definitely part of our creative solutions for non-licensees with past infringement issues. We might work out deals somewhat similar to Nokia, which would involve some initial payment for past infringement and also an engineering services contract.




12. Recurring royalties from our 26 existing licensees are improving dramatically. The accounting change that spreads prepaid royalty over the appropriate years as the royalties are earned is helping to smooth-out and make these royalties easier to project. The first quarter of 2002 marked the first quarter in which IDCC recorded earned revenue from some of the 3G prepaid advance royalties, in addition to having a significant increase in 2G recurring royalties.
.

Recurring royalties were less than $10 million in 1999. In both 2000 and 2001, recurring royalties were over $30 million. During the first quarter of 2002, recurring royalty increased to $19 million. First-time recurring royalty in the first quarter of 2002 included 3G earned royalties of $7 million, CDMA narrowband royalties of $2 million, and NEC 2G settlement royalties of $2.6 million for the period Jan.16 to Mar. 31. The NEC settlement of $53 million will be recorded into revenue at the rate of $13 million per year over four years beginning in 2002. Thus IDCC has a sure base of $3.3 million of recurring royalty per full quarter for the next sixteen quarters just from the NEC settlement alone. Also IDCC has over $106 million of deferred royalties on the books at Mar. 31, 2002. These deferred royalties will turn into recurring royalty revenue as they are earned by licensee product sales under SAP accounting principles. Therefore, IDCC’s recurring royalties has and should continue to increase dramatically in 2002.

IDCC expects to have at least a 20% increase in total revenues throughout 2002, even with a significant anticipated decline in engineering service revenues. The very significant increase in recurring royalty is helping to compensate for the expected decline from Nokia engineering service revenues, as the Nokia WTDD engineering project winds down. The projected revenue increases do not even include anything yet for Nokia P2 recurring royalties, which started accruing as of Jan.1, 2002, because the royalty rate has not been finalized yet. Howard Goldberg, CEO, stated in the first quarter CC that we have "ample opportunities for much more upside to recurring royalty for this year". At this point, nothing has been included in recurring royalty projections for three big possible financial events that might be done this year according to Howard. Those events included a Nokia rate agreement, an Ericy resolution, and a Samsung arbitration resolution.

Howard Goldberg did mention in the first quarter CC that IDCC would be discussing the rate and licensing matters with Nokia during the second quarter. Rich Fagan, CFO, mentioned in the CC that when a rate is finalized with Nokia there would be no restatement of a previous quarter. The cumulative provision for recurring royalty for Nokia from Jan. 1, '02 would be recorded into the quarter that the rate is finalized.

The following are excerpts from Hilliard Lyons analyst, Tom Carpenter’s updated report on IDCC dated April, 1 2002:
"However, once Phase II began, Nokia would pay IDCC royalties for 2G and 3G wireless handsets and infrastructure equipment that it sold. According to the 10K, Phase II began January 1, 2002 and IDCC is now accruing royalty revenue from Nokia for handsets and infrastructure equipment NOK sells which contains IDCC's technology. Our understanding is that this covers all or almost every handset and equipment that NOK sells. Unfortunately, the royalty rate has not yet been finalized. As the rate can have a huge impact on IDCC's revenue and profitability, IDCC has conservatively elected not to accrue the revenue on its income statement until the rate is finalized."

"We believe IDCC's targeted royalty rate for 2G was 1-3% and the target for 3G was slightly below that range. Compared to IDCC's 2001 revenue of $58 million, the inclusion of licensing revenue from Nokia significantly impacts IDCC's revenue and earnings stream. As the exact royalty rate is the great unknown and the impact so large, we choose to be conservative in our projections. We estimate that if Nokia pays IDCC one half of one percent royalty on the handsets that it manufactures and NOK maintains its current 35%-37% market share then IDCC could generate between $110 and $117 million in handset royalty revenue from Nokia during 2002. Any infrastructure revenue would be icing on the cake."

“if a 3G licensing arrangement were to result from the Samsung arbitration, we would view this as extremely positive since Samsung is one of the 4 largest mobile phone manufacturers.”

The following are excerpts from PMG analyst, Scot Robertson's updated report on IDCC dated May 10, 2002:

"In addition to the NEC settlement, InterDigital has struck licensing agreements during the year with Matsushita, Sharp, Japan Radio Corp. and a 10-year joint cooperative development relationship with Infineon, all of which represent expected 3G royalties streams, in addition to the mammoth Nokia royalty arrangement we are expecting InterDigital to hammer out in the near-term."

"Meanwhile, similar to the recent NEC agreement, any one of a number of developments on both the legal and licensing front could drive the shares precipitously. These near-term catalysts include legal proceedings with Ericsson and Samsung, as well as licensing issues with Nokia (which is well into technology validation with InterDigital's TDD solution). In the wake of the NEC settlement, InterDigital certainly seems to be in an aggressive position to resolve legal situations with Ericsson and Samsung in an acceptable manner for the company, in our opinion. Moreover, as we have said before, the company is also considering additional efforts to enforce its IPR with other major players in the industry in the months ahead."

From a conversation with IR on June 7, ‘01:

Q: Does IDCC's or the analysts' projections for recurring future revenue include Nokia? Do the projections for 2001 and 2002 include any new licensees or only existing ones?

A: The projections include no provision for Nokia recurring revenues, because of uncertainty over the rate and not wanting to give away when phase 2 may begin. The projections do include very conservative amounts of recurring royalties from anticipated new licensees. The projections do not include any provisions for “past infringement” royalties nor possible settlements.(litigation or arbitration)

Therefore, there is no provision in the current projections for any recurring royalties from Nokia. Once the rate is settled and Nokia begins to pay IDCC recurring royalties, then the growth rate will be explosive. There is also no provision for settlement royalties from other infringers for 2G in the revenue projections either. The NEC settlement, an Ericy resolution, and a Samsung resolution should certainly increase the possibility that other companies will license and settle past royalty disputes with us as well. Possible settlement amounts from others might also be structured as recurring royalty on a forward basis, as was the NEC settlement.




13. Two new analysts initiated coverage of IDCC in 2001 with probably others to follow. Additionally IDCC is getting more press in the mass media, including Bill Nagovitz’s recommendation on CNBC and in Worth and John Rubino’s article in theStreet.com. More press should come as these other events unfold.

Until very recently there were no Wall Street analysts formally following IDCC, mainly due to their small size and little need for investment banking services. InterDigital currently has only about 53 million shares of stock outstanding, over $100 million in cash and securities, virtually no debt, and no need for external financing. A stated goal of the company is to obtain additional analysts’ coverage. An analyst with PMG Capital initiated coverage of InterDigital in April ’01 followed by initial coverage from an analyst with Hilliard Lyons in May. The following are some very important excerpts from the PMG Capital analyst report of Joel Achramowicz:

“In our opinion, Qualcomm investors might consider taking a good look at Interdigital. Indeed, we believe Interdigital has one of the strongest patent positions in both FDD and TDD W-CDMA technology by contrast, Qualcomm has a very limited position in TDD technology, if any, at the current time.”

“Most importantly, the company is one of only two or three companies in the world with a defensible TDD W-CDMA IPR franchise. In fact, we believe InterDigital is the world leader in TDD W-CDMA IPR, ahead of Siemens and Pansonic.”

“Qualcomm will of course benefit both from royalties accruing from the use of its cdma2000 technology and from the CDMA aspects of the UMTS specification, but it's also quite evident that Interdigital stands to dominate the TDD aspects of the W-CDMA standard specification in its own right. It is also important to remember that Interdigital has added to Qualcomm's prior CDMA art by contributing new CDMA patent art to the cumulative body of technical knowledge reflected in that spread spectrum air interface specification.”

“It's our opinion that clients interested in playing the 3G bonanza must hold positions of some type in Interdigital (long term Qualcomm holders most especially) ... And when Interdigital profits begin to drop to the bottom line, there will be no friction to meet them, and the company will become an unmitigated cash cow"

The following are excerpts from the recently updated Hilliard Lyons report of Tom Carpenter:

“InterDigital's 10K revealed that IDCC is now in Phase II of its Nokia relationship, and thus began accruing 2G and 3G royalty revenue as of January 1, 2002 from the leading mobile phone manufacturer. This is VERY POSITIVE, in our opinion. Our understanding is that this covers all or almost every handset and equipment that NOK sells. Unfortunately, the royalty rate has not yet been finalized. As the rate can have a huge impact on IDCC's revenue and profitability, IDCC has conservatively elected not to accrue the revenue on its income statement until the rate is finalized.

“if a 3G licensing arrangement were to result from the Samsung arbitration, we would view this as extremely positive since Samsung is one of the 4 largest mobile phone manufacturers.”

“We maintain our BUY rating and $22 price target based a 10 year discounted cash flow analysis and a 20x multiple of our $1.13 2003 EPS estimate… We wish to remain conservative in our valuation approach as IDCC is a small-cap company.”

During the Annual Stockholder Meeting on June 5, ’02 Guy Hicks, VP of Communication, indicated that IDCC now has seven to ten new analysts who are closely following IDCC developments. These are analysts who follow the wireless industry and our partners, and some of our licensees. Mr. Hicks said that they are just a little leery of the entire wireless sector right now, and being a little premature in recommending any new wireless companies at this particular conjecture.

An example of recent mass media press coverage is IDCC being the top pick of the editors of 10x5y, which picks the companies most likely to have a tenfold increase in stock price within 5 years:
http://ragingbull.lycos.com/mboard/boards.cgi?board=CLB00004&read=61683

IDCC’s formal Business Plan, which was articulated in a press release and is on IDCC’s website, projects the following favorable and significant financial events for 2001/2002:

1. Five new 3G licenses before the end of 2002 (four so far in Matsushita, Sharp, NEC, and Japan Radio company)
2. Two chip agreements (one so far in Infineon)
3. Two new equipment manufacturer partnerships similar in form to the existing Nokia partnership.
4. A new technology partnership (probably with another IPR owner with synergistic patents to ours)

From a conversation with IR on March 15, 2002:

Q. Has the Business Plan for 2001/2002 been altered? Do we still anticipate two new partnerships with equipment manufacturers, one strategic technology partnership, and one new chip agreement by the end of this year?

A. We have not altered our Business Plan. We stated five 3G licenses and have already gotten four. We stated two chip agreements and have already gotten one. However, we might not seek another chip partner because we got an agreement with such a prominent world-class chip company in Infineon.

We are actively pursuing the other partnerships as stated in the Business Plan. I mentioned that I was most concerned that we had not yet entered into another strategic partnership with another prominent equipment manufacturer, which would involve licensing royalties and engineering services work. I said that our business plan had to anticipate more engineering services work in order to help defray our large ramp-up in additional engineering expenses for 3G. Without this additional engineering service work our significantly increased expenses are really eating into profits.

Janet talked about the increase in our engineering staff. IDCC made the decision to ramp-up for 3G to be on the cutting edge. We increased our engineers significantly in 2000 and again in 2001, before leveling-off around the middle of 2001. Many of the additional engineers are working on the Infineon chip project even though it is being self-funded. We knew we would enter a bridging period before real significant revenues would begin appearing for 3G. However we hope to have licenses, relationships, and strategic partnerships all in place before the significant 3G revenues begin appearing. That is why IDCC hopes that investors will focus on our cash flow and not our earnings in the near-term.

The recently released 2001 Annual Report added to the previous Business Plan by including the following as official Goals for 2002:

1. Add five 3G licenses, which would be in addition to the two 3G licenses added in 2001.
2. Resolve at least one outstanding 2G licensing dispute. (Note: the only two outstanding 2G licensing formal disputes involve Ericy and Samsung)
3. Expand the number and scope of strategic relationships.


Add to the above lists these significant financial events:

1. Nokia phase 2 recurring royalties began accruing on Jan. 1, 2002.
2. NEC settlement in Jan. ’02.
3. Ericy possible settlement.
4. Samsung possible favorable arbitration.
5. Additional 2G licenses with large “past royalties”.

These events will force Wall Street to take much more notice of IDCC. I think Wall Street will be looking for those companies that will benefit the most financially in the new wireless world and this fascinating 3G technological revolution. The name of the game is making money in the tremendous market opportunity that will be 3G. InterDigital will be a very important and prominent player.




14. IDCC is strategically positioned within an explosive industry, which is projected to generate astronomical future revenues, and offers superior value over its competitors.


Several industry statistical groups are currently projecting total 3G and 4G revenues in the trillions of dollars. We are just beginning a new wireless revolution which will entail: Wireless + an always on Internet + multimedia messaging + streaming video + video conferencing + music on demand + location services + mobile ecommerce + computer functions + voice + complete mobility of all these functions = a New World. Those companies, such as IDCC, that are strategically positioned to take advantage of this technological shift in paradigms will reap huge financial rewards. IDCC has embedded their technology into all of the future standards. No matter which wireless standard or what type of wireless products/devices become dominant in 3G, IDCC’s technology will be there. One will need special calculators with extra 0’s, according to our CEO Howard Goldberg, to just calculate a 1% minimum royalty on all future 3G devices.

IDCC’s closest competitor, who has a similar business model, is Qualcomm. Both companies own substantial wireless IPR. Neither company is an equipment manufacturer any longer. Qualcomm sold their handset and infrastructure divisions, whereas IDCC quit manufacturing their fixed local loop Ultraphone system. Both companies' business models now focus on IPR licensing, wireless protocol software and chips, and developmental services. Both companies are positioned to do extremely well in 3G.

However, there are some notable differences between these two competitors. IDCC has developed IPR in the TDMA/GSM standards, whereas Qualcomm has not. IDCC has focused upon wideband CDMA in 3G to best accommodate huge amounts of data, whereas, Qualcomm has focused on narrowband CDMA. Wideband CDMA, which is projected by most wireless industry groups to capture at least 80% of the future 3G market, is something of a marriage between TDMA and CDMA. WCDMA is IDCC’s forte. Qualcomm’s strength lies in the CDMA 2000 narrowband standard, which is projected to garner at most only 15% of the 3G market. However, Qualcomm does have some IPR in WCDMA, and IDCC does have some IPR in CDMA 2000.

Qualcomm has licensed over 100 companies for its 2G technology, whereas IDCC has licensed only 26 companies. QCOM has been fully rewarded already for its
2G contributions and IPR. IDCC has not yet been properly compensated for all of their 2G contributions and IPR. All equipment manufacturers will eventually need to come to IDCC for a 3G license. At that point or before, unresolved 2G issues with unlicensed manufacturers will need to be worked out. This might entail 2G settlement amounts with future installment payments, similar to the NEC arrangement, or higher 3G royalty rates, or guaranteed 3G chip purchases from an IDCC chip partner, or combinations thereof with other possible creative solutions.

Qualcomm may have a lot of its’ great future potential already factored into its’ current share price, but IDCC does not. Qualcomm’s share price at the end of 2001 is a little above $50 or a split-adjusted price of $800 per share (using a multiple of 16 to adjust for three stock splits), compared to IDCC’s share price of at the end of 2001 of a little under $10 (no stock splits). At the end of 2001, Qualcomm’s market cap is $38 Billion versus IDCC’s $540 Million. Is Qualcomm really worth over 70 times more than IDCC considering both companies' future 3G potential? My opinion is that IDCC offers tremendous potential value for its’ shareholders and that very little, if any, of this potential has been factored into its’ year-end share price.