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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

    (Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2004

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-16617

ALTERA CORPORATION

(Exact name of registrant as specified in its charter)

101 INNOVATION DRIVE

SAN JOSE, CALIFORNIA 95134

(Address of principal executive offices)(zip code)

408-544-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x    No ¨

Number of shares of common stock outstanding at July 30, 2004: 371,742,658

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ALTERA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements.

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ALTERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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ALTERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

See accompanying notes to condensed consolidated financial statements.

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ALTERA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Organization and Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements of Altera Corporation and subsidiaries, referred to herein as “we”, “us”, or “our”, have been prepared by us in accordance with accounting principles generally accepted in the United States of America. This financial information reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary to present fairly the statements of financial position as of July 2, 2004, results of operations for the three and six months ended July 2, 2004 and July 4, 2003, and cash flows for the six months ended July 2, 2004 and July 4, 2003. The January 2, 2004 balance sheet was derived from our audited financial statements included in our 2003 Annual Report on Form 10-K. All significant intercompany transactions and balances have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and material effects on our operating results and financial position may result.

These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended January 2, 2004 included in our Annual Report on Form 10-K, as filed on March 15, 2004 with the Securities and Exchange Commission, or SEC. The results of operations for the three and six months ended July 2, 2004 are not necessarily indicative of the results to be expected for any future periods.

Note 2 – Balance Sheet Details:

Certain reclassifications have been made to prior period balances in order to conform to the current period’s presentation. None of these reclassifications had an impact on our consolidated statements of income.

Inventories at July 2, 2004 and January 2, 2004 were comprised of the following (in thousands):

We realized gross margin benefits of $4.4 million for the three months ended July 2, 2004 and $8.0 million for the six months ended July 2, 2004, resulting from the sale of inventory previously written down in 2001. These benefits were $9.2 million and $18.3 million for the three and six months ended July 4, 2003.

As of July 2, 2004, the book value of the inventory written down in 2001 was essentially zero while the cost basis was $17.9 million. The cost was comprised of $13.1 million of raw materials and work in process inventory and $4.8 million of finished goods inventory.

We have entered into business arrangements with certain distributors to advance cash to defray their working capital costs associated with servicing our end customers. These arrangements are set forth in legal agreements and these advances are unsecured, bear no interest and are due upon demand. These advances consist of two components. The first component is an advance of anticipated price discounts and is included as a component of deferred income and allowances on sales to distributors. Such advance totaled $54.7

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million at July 2, 2004 and $29.1 million at January 2, 2004. The second component is, in substance, an arrangement to finance distributors’ accounts receivable and inventory and is classified as other current assets and totaled $29.4 million at July 2, 2004 and $20.6 million at January 2, 2004.

Property and equipment at July 2, 2004 and January 2, 2004 were comprised of the following (in thousands):

Note 3 – Comprehensive Income:

The components of comprehensive income were as follows (in thousands):

Accumulated other comprehensive (loss) income presented in the accompanying condensed consolidated balance sheets consists of the accumulated unrealized (loss) gain on investments, net of tax.

Note 4 – Income Per Share:

In accordance with Statement of Financial Accounting Standards No. 128, or SFAS No. 128, “Earnings Per Share,” we compute basic income per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period (excluding the dilutive effect of stock options and restricted stock). Diluted income per share reflects the dilution of potential common shares outstanding during the period. In computing diluted income per share, we adjust share count by assuming that all in-the-money options are exercised and that we repurchase shares with the proceeds of these hypothetical exercises along with the tax benefit resulting from the hypothetical option exercises. We further assume that any unamortized deferred stock-based compensation is also used to repurchase shares. In determining the hypothetical shares repurchased, we use the average stock price for the period.

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Diluted income per share excludes out-of-the-money stock options and unvested restricted stock totaling 30.7 million shares for the three months ended July 2, 2004 and 28.2 million shares for the three months ended July 4, 2003, as their effect is anti-dilutive. Anti-dilutive stock options and unvested restricted stock totaled 30.1 million shares for the six months ended July 2, 2004 and 33.1 million for the six months ended July 4, 2003. While these options are currently anti-dilutive, they could be dilutive in the future. A reconciliation of basic and diluted income per share is presented below (in thousands, except per share amounts):

Note 5 – Deferred Income Taxes and Other Assets, Net:

Our deferred income taxes and other assets consisted primarily of the non-current portion of deferred tax assets of $34.1 million at July 2, 2004 and January 2, 2004, and acquired intangible assets which are amortized on a straight-line basis over their estimated useful lives. Our acquired intangible assets comprised of the following (in thousands):

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Amortization of total acquired intangible assets was $0.6 million for the three months ended July 2, 2004 and was $2.3 million for the same period last year. Amortization of acquired intangible assets was $3.2 million for the six months ended July 2, 2004 and was $3.3 million for the six months ended July 4, 2003. The estimated future amortization expense of acquired intangible assets as of July 2, 2004 was as follows (in thousands):

Note 6 – Indemnification and Product Warranty:

We indemnify certain customers, distributors, suppliers, and subcontractors for attorney fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third party intellectual property rights, including patents, trade secret, trademarks, or copyrights. In all cases, there are limits on and exceptions to our potential liability for indemnification relating to intellectual property infringement claims. We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements. To date, we have not paid any claim or been required to defend any action related to our indemnification obligations, and accordingly, we have not accrued any amounts for such indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.

We generally warrant our products against defects in materials and workmanship and non-conformance to our specifications for varying lengths of time. If there is a material increase in customer claims compared with our historical experience, or if costs of servicing warranty claims are greater than expected, we may record a charge against cost of sales.

The following table summarizes the activity for the six months ended July 2, 2004 related to our product warranty liability, which was included in accrued liabilities in our consolidated balance sheets. We had no activity related to our warranty liability for the six months ended July 4, 2003.

Note 7 – Common Stock Repurchases:

Share repurchase activity for the second quarter of 2004 was as follows:

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Since the inception of our repurchase program in 1996 through July 2, 2004, we have repurchased a total of 65.0 million shares of our common stock for an aggregate cost of $1.4 billion. All shares were retired upon acquisition. At July 2, 2004, 13.0 million shares remained authorized for repurchases under the plan.

Note 8 – Stock-Based Compensation Plans:

We currently have three stock-based compensation plans, which are described below. We account for stock-based compensation using the intrinsic value method prescribed in APB No. 25, “Accounting for Stock Issued to Employees” as allowed under SFAS No. 123.

Stock Option Plans

Our stock option program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. We currently grant stock options under two plans: the 1996 Stock Option Plan, which provides for the periodic issuance of stock options to our employees, and the 1998 Director Stock Option Plan, which provides for the periodic issuance of stock options to members of our Board of Directors who are not employees. The majority of the options granted under these plans generally vest over four years. All options have a maximum term of ten years. On May 11, 2004, our stockholders approved an amendment to our 1996 Stock Option Plan to increase the number of shares reserved for issuance from 74.0 million shares to 86.0 million shares. As of July 2, 2004, 14.1 million shares were available for future grants. The 1998 Director Stock Option Plan had 680,000 shares reserved for issuance and 149,000 shares were available for future grants.

Employee Stock Purchase Plan

On May 11, 2004, our stockholders approved an amendment to our 1987 Employee Stock Purchase Plan to increase the number of shares reserved for issuance from 17.7 million shares to 18.7 million shares. As of the end of our fiscal second quarter of 2004, 3.2 million shares were available for future issuances under that plan. Sales under the Employee Stock Purchase Plan were 414,055 shares of common stock at an average price of $16.67 for the six months ended July 2, 2004, and 567,328 shares of common stock at an average price of $10.56 per share for the six months ended July 4, 2003.

Pro Forma Net Income and Net Income Per Share

The fair value of each option grant, as defined by SFAS No. 123, is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions. However, options granted under our stock option plans are not freely tradable, or fully transferable, and have vesting restrictions. The Black-Scholes model also requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the fair value.

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As required by SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure”, the following table illustrates the effect on our net income and net income per share if we had recorded compensation costs based on the estimated grant date fair value defined by SFAS No. 123 for all granted stock-based awards (in thousands, except per share amounts):

Note 9 – Income Taxes:

We are currently under examination by various taxing authorities. Although the outcome of any tax audit is uncertain, we believe we have adequately provided in our financial statements for additional taxes that we may be required to pay as a result of such examinations. If the payment ultimately proves to be unnecessary, the reversal of these tax reserves would result in tax benefits being recognized in the period we determine such reserves are no longer necessary. However, if an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense will result.

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained in “Risk Factors” below and elsewhere in this report, contains forward-looking statements, which are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include statements regarding (1) the adequacy of our provision for adjustments as a result of tax audits; (2) the commercial success of our new products; (3) trends in future sales; and (4) our research and development efforts.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deem reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks described below under “Risk Factors” and those risks described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 2, 2004.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires our management to make judgments and estimates that affect the amounts reported in our financial statements and accompanying notes. Our management believes that we consistently apply these judgments and estimates and the financial statements and accompanying notes fairly represent all periods presented. However, any errors in these judgments and estimates may have a material impact on our statement of operations and financial conditions. Critical accounting estimates, as defined by the Securities and Exchange Commission, are those that are most important to the portrayal of our financial condition and results of operations and require our management’s most difficult and subjective judgments and estimates of matters that are inherently uncertain. Our critical accounting estimates include those regarding (1) revenue recognition; (2) valuation of inventories; and (3) taxes. For a discussion of the critical accounting estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended January 2, 2004.

RESULTS OF OPERATIONS

Sales

We design, manufacture, and market high-performance, high-density programmable logic devices, or PLDs; low-cost, masked programmed HardCopy^® structured ASIC devices; pre-defined design building blocks known as intellectual property, or IP, cores; and associated development tools. Our PLDs, which consist of field-programmable gate arrays, or FPGAs, and complex programmable logic devices, or CPLDs, are semiconductor integrated circuits that are manufactured as standard chips that our customers program to perform desired logic functions within their electronic systems. FPGAs, which represented 69% of our sales for the three months ended July 2, 2004 and 67% for the six months ended July 2, 2004, consist of our Stratix^®, Stratix GX, Stratix II, Cyclone^™, APEX^™, APEX II, FLEX^®, ACEX^®, Excalibur^™, and Mercury^™ families, and CPLDs, which represented 23% and 24% of our total sales during the same periods, consist of our MAX^®, and Classic^™ families. Our products serve a wide range of markets, including communications, computer and storage, consumer, and industrial market segments.

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We classify our products into three categories: New, Mainstream, and Mature and Other Products. During the fourth quarter of 2003, we updated our product categories, and all prior period data have been adjusted to reflect the following compositions:

Sales during the three months ended July 2, 2004 were $269.0 million compared to $205.3 million for the three months ended July 4, 2003, representing a 31% increase in sales year over year. The increase was driven primarily by the sales of New Products which increased 216% year over year predominantly due to higher sales of our Stratix and Cyclone families. FPGA sales accounted for 69% of total sales and grew 37% year over year, driven predominantly by increased sales of our Stratix, Cyclone, and ACEX 1K families. CPLD sales accounted for 23% of total sales and increased 14% compared to the same period a year ago, driven primarily by increases in sales of our MAX 3000A and MAX 7000A families. Sales during the six months ended July 2, 2004 were $511.9 million compared to $400.3 million for the six months ended July 4, 2003, representing a 28% increase in sales year over year. These increases for the three and six month periods were primarily due to higher unit sales in all product categories, partially offset by routine declines in average unit selling prices in our Mainstream and Mature and Other categories.

Sales increased 11% sequentially in the second quarter of 2004. New Products continue to drive growth with a 45% sequential gain driven predominantly by the Stratix and Cyclone families. Stratix was our largest selling family in the quarter and grew over 60% sequentially as a number of customer programs entered volume production and prototyping activity continued to be strong.

Sales by Product Category

Sales by product category, as a percentage of total sales, as well as year-over-year and sequential change, were as follows:

We expect that sales of the Stratix and Cyclone families will continue to increase as customer adoption of our New Products continues to be strong, and customers ramp their programs into volume production.

Sales by Market Segment

The following market segment data is derived from data that is provided to us by our distributors and end customers. With a broad base of customers, who in some cases manufacture end products spanning multiple market segments, the assignment of revenue to a market segment requires the use of estimates, judgment, and extrapolation. As such, actual results may differ from those reported.

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Sales by market segment, as a percentage of total sales, as well as year-over-year and sequential change, were as follows:

In absolute dollars, sales in all four market segments provided strong growth for the three and six months ended July 2, 2004 compared to the same periods a year ago as a result of better end market conditions and increased usage of PLDs. Sales in the Communications market segment had the largest growth year over year driven primarily by improving market conditions in the wireline subsegment and increased penetration in the wireless subsegment.

While we expect that Communications will remain our largest market segment, we anticipate that the Industrial and Consumer market segments will continue to significantly contribute to our future growth. For the three and six months ended July 2, 2004 and July 4, 2003, no single end customer provided more than 10% of our sales.

Sales by Geography

The following table is based on the geographic location of the original equipment manufacturers, or OEMs, or the distributors who purchased our products. For sales to our distributors, their geographic locations may be different from the geographic locations of the ultimate end users. Sales by geography, as a percentage of total sales, as well as year-over-year and sequential change, were as follows:

In absolute dollars, sales increased, year over year, in all geographies, but most significantly in the international geographies. The percentage of total sales represented by international locations increased year over year, due to increased sales to end customers as well as the transfer of end customers’ business from North America to the Asia Pacific region. We expect that sales will continue to transfer from North America.

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Gross Margin

The year-over-year increase in gross margin was primarily due to yield enhancements especially in newer products, as well as overall declines in material and subcontractor costs. Gross margin included benefits resulting from the sale of inventory previously written down in 2001.

As of July 2, 2004, the book value of the inventory written down in 2001 was essentially zero while the cost basis was $17.9 million. The cost was comprised of $13.1 million of raw materials and work in process inventory and $4.8 million of finished goods inventory.

Research and Development