UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

_________________

(Mark one)

For the quarterly period ended June 27, 2004

OR

For the transition period from                        to                        

Commission File Number 0-19528

QUALCOMM Incorporated

(858) 587-1121
(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 twelve 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 ninety 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 [  ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on July 19, 2004, were as follows:

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

QUALCOMM Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
ASSETS

See Notes to Condensed Consolidated Financial Statements.

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QUALCOMM Incorporated

See Notes to Condensed Consolidated Financial Statements.

* As adjusted (Note 9).

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QUALCOMM Incorporated

See Notes to Condensed Consolidated Financial Statements.

*As adjusted (Note 9).

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QUALCOMM Incorporated

Note 1 – Basis of Presentation

Financial Statement Preparation

     The accompanying interim condensed consolidated financial statements have been prepared by QUALCOMM Incorporated (the Company or QUALCOMM), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair presentation of its consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States. The condensed consolidated balance sheet at September 28, 2003 is derived from the audited consolidated balance sheet at that date which is not presented herein. The Company operates and reports using a 52-53 week fiscal year ending on the last Sunday in September. The three and nine month periods ended on both June 27, 2004 and June 29, 2003 included 13 weeks and 39 weeks, respectively.

     In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, which are only normal and recurring, necessary for a fair presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2003. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation.

Principles of Consolidation

     The Company’s condensed consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries and other subsidiaries controlled by the Company. The ownership of other interest holders of consolidated subsidiaries, if any, is reflected as minority interest. All significant intercompany accounts and transactions are eliminated. The Company deconsolidated the Vésper Operating Companies during the first quarter of fiscal 2004 as a result of their sale in December 2003 and TowerCo during the second quarter of fiscal 2004 as a result of its sale in March 2004 (Note 9). Results of operations and cash flows related to the Vésper Operating Companies and TowerCo are presented as discontinued operations. The Company’s statements of operations and cash flows for all prior periods have been adjusted to present the discontinued operations. The balance sheet as of September 28, 2003 was not adjusted to present assets and liabilities related to discontinued operations separately.

     Effective as of the beginning of the second quarter of fiscal 2004, the Company adopted the revised interpretation of Financial Accounting Standards Board (FASB) Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities,” (FIN 46-R). FIN 46-R requires that certain variable interest entities be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company does not have any investments in entities it believes are variable interest entities for which the Company is the primary beneficiary.

Royalty Revenues

     The Company earns royalties on Code Division Multiple Access (CDMA) products sold worldwide by its licensees in the period that the licensees’ sales occur. The Company’s licensees, however, do not report and pay royalties owed until the subsequent quarter and, in some instances, payment is on a semi-annual basis. Therefore, the Company estimates royalty revenues from certain licensees (the Estimated Licensees) in the current quarter when reliable estimates of such amounts can be made. Not all royalties earned are estimated. Royalties for licensees for which the Company has minimal history and certain licensees that do not buy the Company’s integrated circuit products are recorded one quarter in arrears when they are reported to the Company by those licensees. Once royalty reports are received from the Estimated Licensees, the variance between such reports and the estimate is recorded in royalty revenue in the period the reports are received. The recognition of this variance in most cases lags the royalty estimate by one quarter.

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QUALCOMM Incorporated

     The following table summarizes royalty related data for external licensees (in millions). The three- and nine-month periods presented are referred to as the Reporting Periods:

Earnings Per Common Share

     Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-based compensation plans and shares subject to written put options, and the weighted average number of common shares outstanding during the reporting period. The incremental dilutive common share equivalents, calculated using the treasury stock method, for the three months and nine months ended June 27, 2004 were 30,236,000 and 28,790,000 respectively. The incremental dilutive common share equivalents, calculated using the treasury stock method, for the three months and nine months ended June 29, 2003 were 25,345,000 and 28,957,000, respectively.

     Employee stock options to purchase approximately 16,184,000 and 23,790,000 shares of common stock during the three months and nine months ended June 27, 2004, respectively, and employee stock options to purchase approximately 50,188,000 and 44,557,000 shares of common stock during the three months and nine months ended June 29, 2003, respectively, were outstanding but not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the common stock, and therefore, the effect on dilutive earnings per common share would be anti-dilutive. Put options outstanding to purchase 3,000,000 shares of common stock were not included in the earnings per share computation for the three months and nine months ended June 27, 2004 because the put options’ exercise prices were less than the average market price of the common stock during the period, and therefore, the effect on diluted earnings per common share would be anti-dilutive (Note 6).

Stock-Based Compensation

     The Company records compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” Because the Company establishes the exercise price based on the fair market value of the Company’s stock at the date of grant, the options have no intrinsic value upon grant, and therefore no expense is recorded. Each quarter, the Company reports the potential dilutive impact of stock options in its diluted earnings per common share using the treasury stock method. Out-of-the-money stock options (i.e., the average stock price during the period is below the strike price of the option) are not included in diluted earnings per common share.

     As required under Statement of Financial Accounting Standards No. 123 (FAS 123), “Accounting for Stock-Based Compensation,” and Statement of Financial Accounting Standards No. 148 (FAS 148), “Accounting for Stock-Based Compensation – Transition and Disclosure,” the pro forma effects of stock-based compensation on net income and net earnings per common share have been estimated at the date of grant using the Black-Scholes option-pricing model.

     The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. The Black-Scholes model does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee options. Use of an option valuation model, as required by FAS 123, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant. Because the

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QUALCOMM Incorporated

Company’s employee stock options have characteristics significantly different from those of freely traded options, and because changes in the subjective input assumptions can materially affect the Company’s estimate of the fair value of those options, in the Company’s opinion, existing valuation models, including Black-Scholes, are not reliable single measures and may misstate the fair value of the Company’s employee stock options. The Black-Scholes weighted average estimated fair values of stock options granted during the three months and nine months ended June 27, 2004 were $33.77 and $27.66 per share, respectively. The Black-Scholes weighted average estimated fair values of stock options granted during the three months and nine months ended June 29, 2003 were $17.40 and $19.31 per share, respectively. The Black-Scholes weighted average estimated fair values of purchase rights granted pursuant to the Employee Stock Purchase Plans during the nine months ended June 27, 2004 and June 29, 2003 were $13.14 and $10.37 per share, respectively.

     For purposes of pro forma disclosures, the estimated fair value of the stock options is assumed to be amortized to expense over the stock options’ vesting periods. The pro forma effects of recognizing compensation expense under the fair value method on net income and net earnings per common share were as follows (in thousands, except for earnings per common share):

Guarantees and Product Warranties

     Changes in the Company’s warranty liability were as follows (in thousands):

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Comprehensive Income

     Components of accumulated other comprehensive income (loss) consisted of the following (in thousands):

     Total comprehensive income consisted of the following (in thousands):

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2 – Composition of Certain Financial Statement Items

Marketable Securities

     Marketable securities were comprised as follows (in thousands):

Accounts Receivable

     Accounts receivable were reduced by $22 million from September 28, 2003 as a result of discontinued operations (Note 9).

Finance Receivables

     Finance receivables, which are included in other assets, result from arrangements in which the Company has agreed to provide its customers or certain CDMA customers of Telefonaktiebolaget LM Ericsson (Ericsson) with long-term interest bearing debt financing for the purchase of equipment and/or services.

     The Company had an equipment loan facility with Pegaso Comunicaciones y Sistemas S.A. de C.V., a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (collectively referred to as Pegaso). On December 15, 2003, Pegaso prepaid $193 million, including accrued interest, in full satisfaction of the equipment loan facility. As a result, the financing and related agreements were terminated. The Company recognized $12 million in interest income related to Pegaso during the nine months ended June 27, 2004, including $10 million of deferred interest income recorded as a result of the prepayment.

     A long-term financing commitment for $346 million under an arrangement with Ericsson expired on November 6, 2003. At June 27, 2004, the Company had a remaining commitment to extend up to $118 million in long-term

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

financing to certain CDMA customers of Ericsson. The funding of this commitment, if it occurs, is not subject to a fixed expiration date and is subject to the CDMA customers meeting conditions prescribed in the financing arrangement and, in certain cases, to Ericsson also financing a portion of such sales and services. Financing under this arrangement is generally collateralized by the related equipment. The commitment represents the maximum amount to be financed; actual financing may be in lesser amounts.

Inventories

     Inventories were reduced by $8 million from September 28, 2003 as a result of discontinued operations (Note 9).

Property, Plant and Equipment

     Depreciation and amortization expense from continuing operations related to property, plant and equipment for the three months and nine months ended June 27, 2004 was $34 million and $96 million, respectively, as compared to $30 million and $84 million for the three months and nine months ended June 29, 2003, respectively. The gross and net carrying values of property, plant and equipment were reduced by $170 million and $103 million, respectively, from September 28, 2003 as a result of discontinued operations (Note 9).

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Intangible Assets

     The components of purchased intangible assets, which are included in other assets, were as follows (in thousands):

     The gross carrying values of wireless licenses, customer-related intangible assets and marketing-related intangible assets were reduced by $105 million, $5 million and $1 million, respectively, from September 28, 2003 as a result of discontinued operations (Note 9).

     Amortization expense from continuing operations for the three months and nine months ended June 27, 2004 was $3 million and $14 million, respectively, as compared to $5 million and $13 million for the three months and nine months ended June 29, 2003, respectively. Amortization expense related to these intangible assets is expected to be $3 million for the remainder of fiscal 2004, $12 million in fiscal 2005, $12 million in fiscal 2006, $11 million in fiscal 2007 and $8 million in fiscal 2008.

     During the first quarter of fiscal 2004, a European subsidiary of the Company acquired certain assets and assumed certain liabilities of Alcatel Mobicom for approximately $12 million. The acquisition resulted in $1 million, $3 million and $5 million increases in marketing-related intangible assets, customer-related intangible assets and goodwill, respectively. The purchase price was allocated based on the estimated fair values of acquired assets and assumed liabilities. Goodwill was increased by $4 million in the first nine months of fiscal 2004 due to contingent consideration paid by the Company. Pro forma results have not been presented because the effect of this acquisition is not material.

     Capitalized software development costs, which are included in other assets, were $42 million and $36 million at June 27, 2004 and September 28, 2003, respectively. Accumulated amortization on capitalized software was $36 million and $26 million at June 27, 2004 and September 28, 2003, respectively. Amortization expense from continuing operations related to capitalized software for the three months and nine months ended June 27, 2004 was $3 million and $10 million, respectively, as compared to $3 million and $9 million for the three months and nine months ended June 29, 2003, respectively.

Note 3 – Investments in Other Entities

Inquam Limited

     The Company has invested $200 million in the convertible preferred shares of Inquam Limited (Inquam) for an approximate 42% ownership interest in Inquam. Inquam owns, develops and manages wireless communications systems, either directly or indirectly, with the intent of deploying CDMA-based technology, primarily in Europe. Starting in the third quarter of fiscal 2003, the Company and another investor (the Other Investor) have also extended $115 million in bridge loan financings to Inquam, including a new $5 million bridge loan put in place during the third quarter of fiscal 2004. The Company has funded its approximate $57 million share of these bridge loans and had no remaining funding commitment at June 27, 2004. The Other Investor had funded approximately $55 million under these bridge loans through June 27, 2004 and funded the remaining $2 million commitment on July 7, 2004. Inquam is a variable interest entity. The Company does not consolidate Inquam because it is not the primary beneficiary. The Company uses the equity method to account for its investment in Inquam. The Company recorded its equity in losses of Inquam of $17 million and $51 million for the three months and nine months ended June 27, 2004, respectively, as compared to $31 million and $85 million for the three months and nine months ended June 29,

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2003, respectively. At June 27, 2004, the Company’s equity and debt investments in Inquam totaled $49 million, net of equity in losses.

     On September 22, 2003, the Company agreed, along with the Other Investor, to guarantee the payment of amounts due by Inquam under a bank credit agreement. On June 15, 2004, the Company and the Other Investor agreed to extend the guarantee and increase the maximum amount subject to the guarantee to $55 million. The Company’s maximum liability under the guarantee is limited to an amount equal to 50% of the amounts outstanding under Inquam’s credit agreement, up to a maximum of approximately $28 million. Amounts outstanding under the bank credit agreement totaled $32 million as of June 27, 2004. The guarantee expires on November 30, 2004.

     While the Company has no other obligations to provide funding to Inquam, the Company continues to have active discussions with Inquam and the Other Investor concerning the necessary funding for all or a part of Inquam’s business plan. While it is likely that the Company will provide some additional funding and/or credit support in furtherance of Inquam’s plan, the amount and form of such support is unclear, and none will be provided without commensurate support or consideration being provided by the Other Investor.

Other

     Other strategic investments as of June 27, 2004 totaled $128 million, including $48 million accounted for using the cost method. At June 27, 2004, effective ownership interests in these investees ranged from less than 1% to 50%. Funding commitments related to these investments totaled $21 million at June 27, 2004, which the Company expects to fund through fiscal 2009. Such commitments are subject to the investees meeting certain conditions; actual equity funding may be in lesser amounts. An investee’s failure to develop and provide competitive products and services due to lack of financing, market demand or an unfavorable economic environment could adversely affect the value of the Company’s investment in the investee. There can be no assurance that the investees will be successful in their efforts.

Note 4 – Investment Income (Expense)

     Investment income (expense) was comprised as follows (in thousands):

*As adjusted (Note 9).

     Interest income of approximately $6 million was recorded during the nine months ended June 27, 2004 as a result of a refund from the United States Internal Revenue Service.

Note 5 – Income Taxes

     The Company currently estimates its annual effective income tax rate for continuing operations to be approximately 29% for fiscal 2004, as compared to the actual 34% effective income tax rate for continuing operations in fiscal 2003. The reduction in the estimated rate for fiscal 2004 resulted from higher expected foreign earnings taxed at less than the United States federal rate and the Company’s forecast of its ability to utilize capital losses generated in fiscal 2004. Foreign earnings taxed at less than the United States federal rate are higher in fiscal 2004 primarily due to the adjustment of an intercompany royalty agreement and an increase in foreign earnings. The estimated annual effective tax rate for continuing operations for fiscal 2004 is 6% lower than the United States federal statutory rate due primarily to a benefit of approximately 10% related to research and development tax

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

credits and foreign earnings taxed at less than the United States federal rate, partially offset by state taxes of 5%. The prior fiscal year rate for continuing operations was lower than the United States federal statutory rate as a result of research and development credits, the deduction of certain losses related to foreign subsidiaries, and foreign earnings taxed at less than the United States federal rate, partially offset by state taxes and foreign and capital losses for which no tax benefit was recorded. The Company’s estimated effective tax rate from continuing operations for fiscal 2004 decreased from 30% in the second quarter to 29% in the third quarter, which resulted in a 27% effective tax rate from continuing operations in the third quarter of fiscal 2004. The Company reduced its income tax expense by approximately $26 million in the third quarter of fiscal 2004 to record adjustments related to the filing of its 2003 federal tax return in June 2004, partially offset by a $14 million adjustment to the Company’s forecast of its ability to utilize capital losses.

     The Company has not provided for United States income taxes and foreign withholding taxes on a cumulative total of approximately $1.4 billion of undistributed earnings of certain non-United States subsidiaries permanently invested outside the United States. Should the Company decide to repatriate foreign earnings, the Company would have to adjust the income tax provision in the period management determined that the Company would repatriate the earnings.

     The Company believes, more likely than not, that it will have sufficient taxable income after stock option related deductions to utilize its net deferred tax assets. As of June 27, 2004, the Company has provided a valuation allowance on net capital losses and foreign tax credit carryforwards in the amounts of $162 million and $54 million, respectively. The valuation allowance related to capital losses reflects the uncertainty surrounding the Company’s ability to generate sufficient capital gains to utilize all capital losses. Based on the Company’s current estimates of future taxable income, the Company expects that approximately $54 million of foreign tax credits will expire unutilized by the end of fiscal year 2005. The valuation allowance for these foreign tax credits was recorded in the first quarter of fiscal 2004 as a charge to paid-in capital because the expected expiration of foreign tax credits will result from deductions related to stock options.

     The net deferred tax assets decreased by approximately $268 million from September 28, 2003 to June 27, 2004 because of the foreign tax credit valuation allowance and the use of deferred tax assets to offset the current tax liability that otherwise would have resulted from current operations. Gross deferred tax assets and an equal amount of valuation allowance each decreased by approximately $495 million from September 28, 2003 to June 27, 2004, primarily as a result of the disposition of the Vésper Operating Companies (Note 9), with no net effect on net deferred tax assets.

Note 6 – Stockholders’ Equity

     Changes in stockholders’ equity for the nine months ended June 27, 2004 were as follows (in thousands):

Stock Repurchase Program

     On February 11, 2003, the Company authorized the investment of up to $1 billion to repurchase shares of the Company’s common stock over a two year period. During the three months and nine months ended June 29, 2003, the Company bought 1,300,000 and 4,915,000 shares, respectively, at a net aggregate cost of $42 million and $158 million, respectively. While the Company did not repurchase any of the Company’s common stock under this program during the nine months ended June 27, 2004, the Company continues to evaluate repurchases under this program. At June 27, 2004, $834 million remains authorized for repurchases under the program.

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     In connection with the Company’s stock repurchase program, the Company sold put options under three separate contracts with independent third parties during the three months ended March 28, 2004 that may require the Company to purchase 3,000,000 shares of its common stock upon exercise. The Company accounts for the written put options in accordance with Statement of Financial Standards No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” In the event the put options are exercised, the contracts require that the options be physically settled in cash. The Company has determined that the put options should be classified as liabilities in accordance with FAS 150. As such, the Company recorded the $5 million in premiums received as additions to other current liabilities, and changes in the fair values of the put options are recognized in the Company’s statement of operations. At June 27, 2004, all three contracts, with expiration dates ranging from September 1, 2004 to September 9, 2004, were outstanding, and the recorded values of the option liabilities were less than $1 million. If the options are exercised, the Company’s effective repurchase prices for its shares (the strike prices less the option premiums received) will be below $52 per share. Any shares repurchased upon exercise of the put options will be retired.

     During the three months ended March 30, 2003, the Company sold put options under three separate contracts with independent third parties that required the Company to purchase 3,000,000 shares of its common stock upon exercise. All of these put options expired unexercised. The Company classified the put options as permanent equity in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” which was subsequently amended by FAS 150. As such, the Company recorded the $7 million in premiums received as paid-in capital.

Dividends

     On June 25, 2004, the Company paid a cash dividend of $0.10 per share on the Company’s common stock to stockholders of record as of the close of the business on May 28, 2004. During the nine months ended June 27, 2004, dividends charged to retained earnings were $194 million. During the three months and nine months ended June 29, 2003, dividends charged to retained earnings were $40 million and $79 million, respectively. On July 13, 2004, the Company announced a cash dividend (Note 11).

Note 7 – Commitments and Contingencies

Litigation

     Schwartz, et al v. QUALCOMM: 87 former QUALCOMM employees filed a lawsuit against the Company in the District Court for Boulder County, Colorado, alleging claims for intentional misrepresentation, nondisclosure and concealment, violation of C.R.S. Section 8-2-104 (obtaining workers by misrepresentation), breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, negligent misrepresentation, unjust enrichment, violation of California Labor Code Section 970, violation of California Civil Code Sections 1709-1710, rescission, violation of California Business & Professions Code Section 17200 and violation of California Civil Code Section 1575. The complaint seeks economic, emotional distress and punitive damages and unspecified amounts of interest. On November 29, 2001, the Court granted the Company’s motion to dismiss 17 of the plaintiffs from the lawsuit. Subsequently, the Court dismissed three other plaintiffs from the lawsuit. On November 18, 2002, the Court granted the Company’s motion to dismiss 61 of the remaining 67 plaintiffs from the lawsuit. The Company subsequently resolved the matters with the remaining plaintiffs. Those plaintiffs whose claims were dismissed have appealed.

     Hanig et al. v. QUALCOMM, Boesel, et al v. QUALCOMM, Stone v. QUALCOMM, Ortiz et al v. QUALCOMM, Shannon et al. v. QUALCOMM, Deshon et al v. QUALCOMM, Earnhart et al. v. QUALCOMM: These cases were filed in San Diego County Superior Court by over 100 former employees, alleging claims for declaratory relief, breach of contract, intentional/negligent fraud, concealment, rescission, specific performance, work, labor and services, breach of the implied covenant of good faith and fair dealing, violation of California Business & Professions Code Section 17200 and unjust enrichment, claiming that they were entitled to full vesting of unvested stock options as a result of the sale of the Company’s infrastructure business to Ericsson in 1999. The Company has answered the complaints, which have been consolidated, and discovery is ongoing. On July 16, 2004, the Court granted the Company’s summary adjudication motion, dismissing plaintiffs’ breach of contract claims.

     Durante, et al v. QUALCOMM: On February 2, 2000, three former QUALCOMM employees filed a putative class action against the Company, ostensibly on behalf of themselves and those former employees of the Company whose employment was terminated in April 1999. Virtually all of the purported class of plaintiffs received severance

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

packages at the time of the termination of their employment, in exchange for a release of claims, other than federal age discrimination claims, against the Company. The complaint was filed in California Superior Court in and for the County of Los Angeles and purports to state ten causes of action including breach of contract, age discrimination, violation of Labor Code Section 200, violation of Labor Code Section 970, unfair business practices, intentional infliction of emotional distress, unjust enrichment, breach of the covenant of good faith and fair dealing, declaratory relief and undue influence. The complaint seeks an order accelerating all unvested stock options for the members of the class, plus economic and liquidated damages of an unspecified amount. On June 27, 2000, the case was ordered transferred from Los Angeles County Superior Court to San Diego County Superior Court. On July 3, 2000, the Company removed the case to the United States District Court for the Southern District of California, and discovery commenced. On May 29, 2001, the Court dismissed all plaintiffs’ claims except for claims arising under the federal Age Discrimination in Employment Act. On July 16, 2001, the Court granted conditional class certification on the remaining claims, to be revisited by the Court at the end of the discovery period. On April 15, 2003, the Court granted the Company’s summary judgment motions as to all remaining class members’ disparate impact claims. On June 18, 2003, the Court ordered decertification of the class and dismissed the remaining claims of the opt-in plaintiffs without prejudice. Plaintiffs have filed an appeal. On June 20, 2003, 76 of the opt-in plaintiffs filed an action in Federal District Court for the Southern District of California, alleging violations of the Age Discrimination in Employment Act as a result of their layoffs in 1999. To date, the complaint has not been served.

     Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM, Inc. and SnapTrack, Inc.: On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. (Zoltar) filed suit against QUALCOMM and SnapTrack, Inc. (SnapTrack), a QUALCOMM wholly-owned subsidiary, in the United States District Court for the Northern District of California seeking damages and injunctive relief and alleging infringement of three patents. On August 27, 2001, Zoltar filed an amended complaint adding Sprint Corp. as a named defendant and narrowing certain infringement claims against QUALCOMM and SnapTrack. Since then, Zoltar has dismissed Sprint Corp. as a defendant. Trial of this matter commenced on February 24, 2004. On March 25, 2004, the jury reached a unanimous verdict of no infringement in favor of the Company on six of the seven patent claims asserted by Zoltar. The jury was unable to reach a unanimous decision as to the seventh claim and as to certain issues relating to the invalidity and enforceability of the patents. The court now has under submission motions by the parties, including QUALCOMM and SnapTrack’s motions for non-infringement as to the seventh claim and motions seeking the court’s determination as to the invalidity and enforceability of certain of the patents and patent claims.

     Texas Instruments Incorporated v. QUALCOMM Incorporated: On July 25, 2003, the Company filed an action in Delaware Superior Court against Texas Instruments Incorporated for breach of a patent portfolio license agreement between the parties, seeking damages and other relief. On September 23, 2003, Texas Instruments filed an action in Delaware Chancery Court against the Company alleging breach of the same agreement, seeking damages and other relief. The Company has since dismissed its case in Superior Court and refiled its claims as part of the action in the Chancery Court. In a written order dated July 14, 2004, the Court granted QUALCOMM’s summary judgment motion, dismissing all of Texas Instruments’ claims against QUALCOMM. In addition, the Court ruled that Texas Instruments had breached the patent portfolio license agreement, though the breach was non-material, and therefore Texas Instruments license under the agreement would not be forfeited. The case is scheduled for a bench trial as to what, if any, damages should be awarded to QUALCOMM for Texas Instruments’ breach, currently set for August 16, 2004, in Delaware.

     QUALCOMM Incorporated v. Conexant Systems, Inc. and Skyworks Solutions Inc.: On October 8, 2002, the Company filed an action in the United States District Court for the Southern District of California against Conexant and Skyworks alleging infringement of five patents and misappropriation of trade secrets and seeking damages and injunctive relief. On December 4, 2003, Skyworks answered and counterclaimed against QUALCOMM, alleging infringement of four patents and misappropriation of trade secrets and seeking damages and injunctive relief. On April 30, 2004, the Court granted the Company’s motion to dismiss defendants’ inequitable conduct affirmative defenses and counterclaims. The Company filed an amended complaint on June 16, 2004, bringing the total number of the Company’s patents at issue to eight. Discovery in the matter is continuing.

     QUALCOMM Incorporated v. Maxim Integrated Products, Inc.: On December 2, 2002, the Company filed an action in the United States District Court for the Southern District of California against Maxim Integrated Products, Inc. (Maxim) alleging infringement of three patents and seeking damages and injunctive relief. The Company has since amended the complaint, bringing the total number of patents at issue to four. On May 5, 2004, the Court

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

granted Maxim’s motion that no indirect infringement arose in connection with defendants’ sales of certain products to certain licensees of the Company. Discovery in the matter is continuing. On June 21, 2004, the Court granted the Company’s motion to stay all of Maxim’s antitrust counterclaims and its patent misuse defense. On July 9, 2004, Maxim filed an Answer and Counterclaims to the Company’s Third Amended Complaint. Maxim’s amended counterclaims allege violation of antitrust laws and unfair business practices and seek damages and other relief. The Company believes the amended counterclaims are without merit and, if and when the Court’s stay is lifted, the Company will seek dismissal of those counterclaims as a matter of law.

     The Company has been named, along with many other manufacturers of wireless phones, wireless operators and industry-related organizations, as a defendant in purported class action lawsuits (In re Wireless Telephone Frequency Emissions Products Liability Litigation, United States District Court for the District of Maryland), and in several individually filed actions, seeking personal injury, economic and/or punitive damages arising out of its sale of cellular phones. On March 5, 2003, the Court granted the defendants motions to dismiss five of the consolidated cases (Pinney, Gimpleson, Gillian, Farina and Naquin) on the grounds that the claims were preempted by federal law. On April 2, 2003, the plaintiffs filed a notice of appeal of this order and the Court’s order denying remand. All remaining cases filed against the Company allege personal injury as a result of their use of a wireless telephone. The courts that have reviewed similar claims against other companies to date have held that there was insufficient scientific basis for the plaintiffs’ claims in those cases, and the judge responsible for the multi-district litigation proceedings recently made such a ruling in another case to which the Company is not a party.

     Although there can be no assurance that unfavorable outcomes in any of the foregoing matters would not have a material adverse effect on the Company’s operating results, liquidity or financial position, the Company believes the claims are without merit and will vigorously defend the actions. The Company has not recorded any accrual for contingent liability associated with the legal proceedings described above based on the Company’s belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. The Company is engaged in numerous other legal actions arising in the ordinary course of its business and believes that the ultimate outcome of these actions will not have a material adverse effect on its operating results, liquidity or financial position.

Operating Leases

     The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from two to ten years and with provisions for cost-of-living increases. Future minimum lease payments for the remainder of fiscal 2004 and for each of the subsequent four years from fiscal 2005 through fiscal 2008 are $11 million, $39 million, $26 million, $15 million and $4 million, respectively, and $1 million thereafter.

Purchase Obligations

     The Company has agreements with suppliers to purchase inventory and other goods and services and estimates its noncancelable obligations under these agreements to be approximately $587 million for the remainder of fiscal 2004 and $324 million in fiscal 2005. Of these amounts, commitments to purchase integrated circuit product inventories comprised $560 million and $311 million, respectively. The Company also has commitments to purchase telecommunications services for the remainder of fiscal 2004 and for each of the subsequent four years from fiscal 2005 through fiscal 2008 for approximately $5 million, $20 million, $18 million, $1 million and $2 million, respectively, and $2 million thereafter.

Letters of Credit and Other Financial Commitments

     In addition to the financing commitments to Ericsson (Note 2) and the Inquam guarantee commitment (Note 3), the Company had outstanding letters of credit and other financial commitments totaling $1 million as of June 27, 2004, none of which were collateralized.

Note 8 – Segment Information

     The Company is organized on the basis of products and services. The Company aggregates three of its divisions into the QUALCOMM Wireless & Internet segment. Reportable segments are as follows:

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

•		QUALCOMM CDMA Technologies (QCT) – develops and supplies CDMA-based integrated circuits and system software for wireless voice and data communications and global positioning system products;
•		QUALCOMM Technology Licensing (QTL) – grants licenses to use portions of the Company’s intellectual property portfolio, which includes certain patent rights essential to or useful in the manufacture and sale of CDMA products, and collects license fees and royalties in partial consideration for such licenses;
•		QUALCOMM Wireless & Internet (QWI) – comprised of:

•		QUALCOMM Internet Services (QIS) - provides technology to support and accelerate the convergence of wireless data, Internet and voice services, including its BREW product and services and QChat and BREWChat, which enable push-to-chat functionality on CDMA-based devices;
•		QUALCOMM Digital Media (QDM) - provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies; and
•		QUALCOMM Wireless Business Solutions (QWBS) - provides satellite and terrestrial-based two-way data messaging, application and position reporting services to transportation companies, private fleets, construction equipment fleets and other enterprise companies.

•

QUALCOMM Strategic Initiatives (QSI) - manages the Company’s strategic investment activities. QSI makes strategic investments to promote the worldwide adoption of CDMA products and services for wireless voice and Internet data communications.

     The Company evaluates the performance of its segments based on earnings (loss) before income taxes (EBT) from continuing operations, excluding certain impairment and other charges that are not allocated to the segments for management reporting purposes. EBT includes the allocation of certain corporate expenses to the segments, including depreciation and amortization expense related to unallocated corporate assets. Segment data includes intersegment revenues.

     As a result of the disposition of the remaining operations and assets related to the Vésper Operating Companies and TowerCo (Note 9), consolidated investees of QSI, the Company determined that the results of operations related to the Vésper Operating Companies and TowerCo should be presented as discontinued operations. QSI revenues and EBT for all prior periods have been adjusted to reflect the reclassification of revenues and EBT related to these consolidated investees to discontinued operations.

     During the second quarter of fiscal 2004, the Company reorganized its wholly-owned subsidiary SnapTrack, a developer of wireless position location technology. The Company previously presented all of the revenues and operating results of SnapTrack in the QCT segment. As a result of the reorganization of SnapTrack, revenues and operating results related to SnapTrack’s server software business (software for computer servers that allows operators to offer location-based services and applications) became part of the QIS division in the QWI segment. Revenues and operating results related to SnapTrack’s client business (the gpsOne hybrid assisted global positioning system wireless location technology that is embedded with the integrated circuit products) remain with the QCT segment. Prior period segment information has been adjusted to conform to the new segment presentation.

18

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     The table below presents revenues and EBT from continuing operations for reportable segments (in thousands):

*As adjusted.

     Reconciling items in the previous table were comprised as follows (in thousands):

*As adjusted.

     Generally, revenues between operating segments are based on prevailing market rates for substantially similar products and services or an approximation thereof. Certain charges are allocated to the corporate functional department in the Company’s management reports based on the decision that those charges should not be used to evaluate the segments’ operating performance. Unallocated charges include amortization of acquisition-related intangible assets, research and development expenses and marketing expenses related to the development of the CDMA market that were not deemed to be directly related to the businesses of the operating segments.

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     Revenues from external customers and intersegment revenues were as follows (in thousands):

*As adjusted.

     Segment assets are comprised of accounts receivable, finance receivables and inventory for QCT, QTL and QWI. The QSI segment assets include marketable securities, notes receivable, wireless licenses and other investments. Total segment assets differ from total assets on a consolidated basis as a result of unallocated corporate assets primarily comprised of cash, cash equivalents, certain marketable securities, property, plant and equipment, and goodwill. Segment assets were as follows (in thousands):

*As adjusted.

     QSI assets decreased by $265 million from September 28, 2003 as a result of discontinued operations (Note 9).

Note 9 – Discontinued Operations in the QSI Segment

     In fiscal 1999, the Company acquired ownership interests in Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies). The Vésper Operating Companies were formed by a consortium of investors to provide fixed wireless and wireline telephone services in the northern, northeast and eastern regions of Brazil and in the state of São Paulo. In November 2001, the Company consummated a series of transactions resulting in an overall financial restructuring of the Vésper Operating Companies, which resulted in its holding direct and indirect controlling ownership interests in the Vésper Operating Companies. As a result, the Vésper Operating Companies were consolidated in the Company’s QSI segment.

     On December 2, 2003 (the Closing Date), Embratel Participações S.A. (Embratel) acquired the Company’s direct and indirect ownership interests in the Vésper Operating Companies (the Embratel sale transaction) for no consideration. The Vésper Operating Companies’ existing communication towers and related interests in tower site property leases (Vésper Towers) were not included in the Embratel sale transaction, and as such, the Company effectively retained, through a new wholly-owned subsidiary (TowerCo), ownership and control of the Vésper Towers. The Vésper Towers had a net book value of approximately $5 million on the Closing Date. Concurrent with the closing, the Vésper Operating Companies entered into a 10-year agreement (renewable at the Vésper Operating

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Companies’ option for up to two successive 5-year terms) whereby the Vésper Operating Companies would pay a monthly fee to the Company for use of aerial and ground space on the tower sites. The Company provided approximately $6 million to fund operations of the Vésper Operating Companies during the first quarter of fiscal 2004 prior to their sale and additionally provided approximately $39 million in aggregate funding to or for the benefit of the Vésper Operating Companies on or before the Closing Date to facilitate the Embratel sale transaction. Such funding enabled the Vésper Operating Companies to completely extinguish their existing local bank debt (at an agreed discount) to allow the Company to retain ownership of the Vésper Towers free and clear of any local bank security interest. The major classes of assets and liabilities sold in the Embratel sale transaction included: $25 million in accounts receivable, $5 million in inventory, $24 million in other current assets, $95 million in property, plant and equipment, $6 million in other assets, $52 million in accounts payable, $5 million in payroll and other benefits related liabilities, $6 million in unearned revenue, $1 million in other current liabilities, $14 million in long-term debt and $3 million in other liabilities. The Company realized a net loss of $52 million on the Embratel sale transaction during the first quarter of fiscal 2004, including a $74 million loss on the net assets sold to Embratel and a $46 million loss related to the recognition of cumulative foreign currency translation losses previously included in stockholders’ equity, partially offset by $68 million in gains related to the extinguishment of local bank debt and the settlement of other liabilities.

     On November 19, 2002, the Company won bids to acquire personal mobile service (SMP) licenses in certain regions of Brazil. Approximately $8 million of the approximate $82 million purchase price for the SMP licenses was paid in December 2002. The remaining Brazilian real-denominated obligation was financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation. These SMP licenses were not included in the Embratel sale transaction. In December 2003, the Company initiated a waiver and return of the SMP licenses to Anatel, the telecommunications regulatory agency in Brazil. In February 2004, the waiver and return of the SMP licenses was approved by Anatel, and the license debt was extinguished. The Company realized a net gain of $19 million as a result of the removal of the $104 million SMP licenses and the related $123 million debt and accrued interest during the second quarter of fiscal 2004.

     On March 2, 2004, the Company sold TowerCo to Embratel in a separately negotiated transaction (the TowerCo sale transaction) for $45 million in cash. TowerCo’s assets were primarily comprised of $5 million in property, plant and equipment. The Company realized a net gain of $40 million on the TowerCo sale transaction during the second quarter of fiscal 2004. As a result of the disposition of the remaining operations and assets related to the Vésper Operating Companies, the Company determined that the results of operations and cash flows related to the Vésper Operating Companies, including the results related to TowerCo and the SMP licenses and the gains and losses realized on the Embratel and TowerCo sales transactions, should be presented as discontinued operations in its condensed consolidated statements of operations and cash flows. The Company’s statements of operations and cash flows for all prior periods have been adjusted to present the discontinued operations.

     For the nine months ended June 27, 2004, revenues of $36 million were reported in the loss from discontinued operations. For the three months and nine months ended June 29, 2003, revenues of $30 million and $85 million, respectively, were reported in the loss from discontinued operations. At June 27, 2004, the Company had no remaining assets or liabilities related to the Vésper Operating Companies, TowerCo or the SMP licenses recorded on its condensed consolidated balance sheet.

Note 10 — Auction Discount Voucher

     The Company was awarded a $125 million Auction Discount Voucher (ADV) by the Federal Communications Commission (FCC) in June 2000 as the result of a legal ruling. The ADV is fully transferable and may, subject to certain conditions, be used in whole or in part by any entity in any FCC spectrum auction over a period of three years, including those in which the Company is not a participant. During November 2002, the FCC amended the terms of the ADV to allow the Company to use the ADV to satisfy existing FCC debt of other companies. The FCC agreed to extend the ADV twice, most recently in June 2004. The ADV expires in September 2004. The Company used approximately $77 million of the ADV’s value prior to fiscal 2004.

     During the first nine months of fiscal 2004, the Company recorded $4 million in other operating income and $4 million in selling, general and administrative expenses in the QSI segment for cooperative marketing expenses incurred, with no effect on net income, related to an arrangement under which a portion of the ADV was transferred to a wireless operator prior to fiscal 2004.

21

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     During the first nine months of fiscal 2004, the Company transferred approximately $12 million of the ADV’s value to a wireless operator for approximately $11 million in cash. As a result of this transfer, the Company recorded an additional $11 million in other operating income in the QSI segment during the first nine months of fiscal 2004. The Company also used approximately $30 million of the ADV during the first nine months of fiscal 2004 as final payment for wireless licenses granted in fiscal 2004 in which the Company was the highest bidder in a FCC auction held during fiscal 2003. On a cumulative basis, the Company used $38 million of the ADV as payment for these wireless licenses, for which the Company had no cost basis at June 27, 2004. The remaining value of the ADV at June 27, 2004 was approximately $6 million. The Company had no cost basis in the ADV at June 27, 2004.

Note 11 — Subsequent Events

     On July 13, 2004, the Company announced a two-for-one stock split, to be effected in the form of a stock dividend, and a cash dividend. Stock will be distributed on August 13, 2004 to stockholders of record as of July 23, 2004 to effect the stock split. The cash dividend of $0.14 per share of common stock pre-split ($0.07 per share post-split) will be paid on September 24, 2004 to stockholders of record as of the close of business on August 27, 2004. Pro forma earnings (loss) per common share, giving retroactive effect to the stock split, are as follows (in thousands, except for earnings per common share):

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     This information should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended September 28, 2003 contained in our 2003 Annual Report on Form 10-K.

     In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ substantially from those referred to herein due to a number of factors, including but not limited to risks described in the section entitled Risk Factors and elsewhere in this Quarterly Report.

Overview

Quarterly Highlights

     Revenues for the third quarter of fiscal 2004 were $1.3 billion, with net income of $486 million. During this quarter, the following developments occurred with respect to key elements of our business:

	•		Strong CDMA market growth throughout the world drove demand for our products and the products of our licensees. The popularity of color screens, imbedded cameras and the introduction of camcorder and other multimedia applications increased CDMA phone sales. CDMA2000 1xEV-DO (Evolution Data Optimized) continued to attract new subscribers in Korea and Japan, increasing phone replacement sales. Improved competitive positioning of CDMA operators in North America, Latin America and Japan, plus local number portability initiatives in South Korea and North America, also contributed to growth. Network expansions continued in developing regions including India, China and smaller southeast Asia countries. We shipped approximately 35 million Mobile Station Modem (MSM) integrated circuits for mobile phones, nearly all of which were third generation (3G), including CDMA2000 1X, 1xEV-DO and WCDMA (UMTS).
	•		WCDMA (UMTS) networks grew to over six million subscribers, mostly in Japan and Europe, by the end of the quarter (according to the EMC World Cellular Information Service, a researcher and publisher of wireless industry market intelligence), due to expanded network coverage, improved network and phone interoperability, and new phone models. Several leading manufacturers announced the selection of our WCDMA (UMTS) integrated circuits for their WCDMA (UMTS) phone products. Eleven subscriber licensees and eleven infrastructure licensees reported sales of WCDMA (UMTS) products, and WCDMA (UMTS) royalties contributed approximately 25% of royalties reported in the third fiscal quarter for licensee sales during the second fiscal quarter. Currently, average WCDMA phone prices are significantly higher than worldwide average CDMA2000 phone prices.
	•		Our integrated circuits business continued to experience supply constraints which resulted in our inability to meet certain customer demands. To enable better supply of integrated circuit products, we have increased and extended firm orders to our foundry suppliers and are working with them to increase capacity. We are also evaluating potential new suppliers to augment our future needs.

Our Business and Operating Segments

     We design, manufacture and market digital wireless telecommunications products and services based on our CDMA technology and other technologies. We derive revenue principally from sales of integrated circuit products, from license fees and royalties for use of our intellectual property, from services and related hardware sales and from software development and related services. Operating expenses primarily consist of cost of equipment and services, research and development, selling, general and administrative, amortization of acquisition-related intangible assets, asset impairment charges and other expenses.

     We conduct business through four operating segments. These segments are: QUALCOMM CDMA Technologies, or QCT; QUALCOMM Technology Licensing, or QTL; QUALCOMM Wireless & Internet, or QWI; and QUALCOMM Strategic Initiatives, or QSI.

     QCT is a leading developer and supplier of integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning. QCT’s integrated circuit products and software are used in wireless phones and infrastructure equipment. The wireless phone integrated circuits include the Mobile

23

Station Modem (MSM), Radio Frequency (RF) and Power Management (PM) devices. The wireless phone integrated circuits and software perform voice and data communication, multimedia and global positioning functions, radio conversion between radio and baseband signals and power management. The infrastructure equipment integrated circuits provide the core baseband CDMA modem functionality in the operator’s equipment. QCT software products are the operating systems that control the phone and the functionality imbedded in our integrated circuit products. QCT revenues comprised 59% and 62% of total consolidated revenues in the third quarter of fiscal 2004 and 2003, respectively. QCT revenues comprised 60% and 64% of total consolidated revenues in the first nine months of fiscal 2004 and 2003, respectively.

     QTL grants licenses to use portions of our intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA (including, without limitation, cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV, TD-SCDMA and WCDMA (UMTS)) products. QTL receives license fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating our intellectual property. QTL revenues comprised 33% and 27% of total consolidated revenues in the third quarter of fiscal 2004 and 2003, respectively. QTL revenues comprised 31% and 25% of total consolidated revenues in the first nine months of fiscal 2004 and 2003, respectively.

     QWI, which includes QUALCOMM Wireless Business Solutions (QWBS), QUALCOMM Internet Services (QIS) and QUALCOMM Digital Media (QDM), generates revenue primarily through mobile communication products and services, software and software development aimed at support and delivery of wireless applications. QWBS provides satellite and terrestrial-based two-way data messaging and position reporting services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. QIS provides the BREW product and services for the development and over-the-air deployment of data services on wireless devices. QIS also provides QChat and BREWChat, which enable push-to-chat functionality on CDMA-based wireless devices, and QPoint, which enables operators to offer E-911 and location-based applications and services. The QDM division is comprised of the Government Systems and Digital Cinema businesses. The Government Systems business provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies. In June 2004, QDM was notified that a competing digital cinema compression technology was selected by the studio consortium group tasked with technology selection for digital cinema applications. As such, QDM will no longer pursue its Digital Cinema business. Revenues from the Digital Cinema business were $1 million and $2 million in the first nine months of fiscal 2004 and 2003, respectively. QWI revenues comprised 11% and 13% of total consolidated revenues in the third quarter of fiscal 2004 and 2003, respectively. QWI revenues comprised 11% and 12% of total consolidated revenues in the first nine months of fiscal 2004 and 2003, respectively.

     QSI makes strategic investments to promote the worldwide adoption of CDMA products and services for wireless voice and Internet data communications. Our strategy is to invest in CDMA operators, licensed device manufacturers and start-up companies that we believe open new markets for CDMA technology, support the design and introduction of new CDMA-based products or possess unique capabilities or technology to promote Internet data communications.

Looking Forward

     As we look through the end of the next fiscal year, our business is presented with certain key opportunities and risks. Worldwide demand for CDMA phones and devices with increased functionality such as color screens, cameras, camcorders, and multimedia capabilities is increasing, and we believe this trend will continue. The expansion of broadband data services is expected to increase demand for CDMA products. In South Korea, Japan, the United States and Brazil, operators are offering the higher data speeds of 1xEV-DO capable phones and high-speed internet access for laptop computers and other devices. Additional 1xEV-DO launches are expected worldwide, notably nationwide service in the United States by Verizon Wireless and Sprint PCS.

     We are working closely with many operators and manufacturers to support rapid and reliable WCDMA (UMTS) deployment and the availability of attractive, feature rich phones and data modules. We expect an acceleration of growth in WCDMA (UMTS) markets in calendar 2004 and 2005 due to service launches, reduced phone pricing and increased multimedia capabilities. Over 30 GSM operators worldwide have begun deployment of WCDMA (UMTS) services, and over the next few years, we expect further expansion of WCDMA (UMTS) services in additional countries outside of Europe and Japan. We expect that average WCDMA phone prices will be higher than average CDMA2000 phone prices for a period of time.

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     We expect continued CDMA growth in Asia. In South Korea, local number portability and 1xEV-DO services are contributing to strong CDMA phone sales and more than seven million 1xEV-DO subscribers at the end of June 2004, based on data compiled from operator websites. In Japan, CDMA2000 and WCDMA (UMTS) networks continue to attract new subscribers and phone upgrades by existing subscribers. We anticipate 3G wireless licenses will be granted in China in calendar 2005. When the licenses are granted, we expect operators in China will be authorized to upgrade and deploy third generation CDMA based networks.

     BREW is expected to play an increasingly important role in generating consumer demand for wireless phones. BREW offers operators new capabilities for their products, as well as increased data revenues. We expect more operators to launch BREW services and greater volumes of BREW software downloads to drive increasing revenues for us.

     Although we have taken action to mitigate shortages of integrated circuits that we supply, the effects of such shortages have caused some customer frustration and could negatively affect our future business. We expect that the costs of certain integrated circuit products could increase as a result of our efforts to increase the availability of products in short supply. While we work closely with customers to expedite their processes for evaluating products from our new foundry suppliers, in some instances, transition to new product supply may cause a temporary decline in shipments of specific products to individual customers. As a result of our efforts to increase capacity at our current suppliers combined with the potential to bring on additional suppliers, we expect recent channel inventory shortages of integrated circuits to be alleviated in the future.

     We are dependent upon the adoption and commercial deployment of 3G wireless communications equipment, products and services based on our CDMA technology to increase our revenues and market share. We face significant competition in our markets, which may result in reduced average selling prices for our products and reduced average royalties.

     We expect to continue expanding our workforce, including talented engineers to develop new products. As a result, we expect labor-related expenses to increase.

     You should also refer to the Risk Factors included in this Quarterly Report for further discussion of these and other risks related to our business.

Revenue Concentrations

     Revenues from customers in South Korea, the United States and Japan comprised 43%, 21% and 19%, respectively, of total consolidated revenues in the first nine months of fiscal 2004 as compared to 46%, 22% and 16%, respectively, in the first nine months of fiscal 2003. We distinguish revenue from external customers by geographic areas based on customer location. The increase in revenues from customers in Japan, as a percentage of the total, is primarily attributed to higher royalties from licensees in Japan resulting from the growth of CDMA and WCDMA (UMTS) in Japan as well as their success in exporting products worldwide. The decrease in revenues from customers in South Korea and the United States, as a percentage of the total, is primarily attributed to overall increases in revenues in geographic regions other than South Korea and the United States.

Developments Related to Certain Strategic Investments in the QSI Segment

     Key developments in our strategic investments during the first nine months of fiscal 2004 included the sale of the Vésper Operating Companies and related assets which are presented as discontinued operations, our receipt from Pegaso of prepayment of our $193 million loan facility, and ongoing investment in Inquam.

     Discontinued Operations

     In fiscal 1999, we acquired ownership interests in Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies). In November 2001, we consummated a series of transactions resulting in an overall financial restructuring of the Vésper Operating Companies, which resulted in our holding direct and indirect controlling ownership interests in the Vésper Operating Companies.

     On December 2, 2003 (the Closing Date), Embratel Participações S.A. (Embratel) acquired our direct and indirect ownership interests in the Vésper Operating Companies (the Embratel sale transaction) for no consideration. The Vésper Operating Companies’ existing communication towers and related interests in tower site property leases (Vésper Towers) were not included in the Embratel sale transaction, and as such, we effectively retained, through a new wholly-owned subsidiary (TowerCo), ownership and control of the Vésper Towers. The Vésper Towers had a net book value of approximately $5 million at December 28, 2003. Concurrent with the closing, the Vésper Operating Companies entered into a 10-year agreement (renewable at the Vésper Operating Companies’ option for up to two successive 5-year terms) whereby the Vésper Operating Companies would pay a monthly fee to us for use

25

of aerial and ground space on the tower sites. We provided approximately $6 million to fund operations of the Vésper Operating Companies during the first quarter of fiscal 2004 prior to their sale and additionally provided approximately $39 million in aggregate funding to or for the benefit of the Vésper Operating Companies on or before the Closing Date to facilitate the Embratel sale transaction. Such funding enabled the Vésper Operating Companies to completely extinguish their existing local bank debt (at an agreed discount) to allow us to retain ownership of the Vésper Towers free and clear of any local bank security interest. The major classes of assets and liabilities sold in the Embratel sale transaction included: $25 million in accounts receivable, $5 million in inventory, $24 million in other current assets, $95 million in property, plant and equipment, $6 million in other assets, $52 million in accounts payable, $5 million in payroll and other benefits related liabilities, $6 million in unearned revenue, $1 million in other current liabilities, $14 million in long-term debt and $3 million in other liabilities. We realized a net loss of $52 million on the Embratel sale transaction during the first quarter of fiscal 2004, including a $74 million loss on the net assets sold to Embratel and a $46 million loss related to the recognition of cumulative foreign currency translation losses previously included in stockholders’ equity, partially offset by $68 million in gains related to the extinguishment of local bank debt and the settlement of other liabilities.

     On November 19, 2002, we won bids to acquire personal mobile service (SMP) licenses in certain regions of Brazil. Approximately $8 million of the approximate $82 million purchase price for the SMP licenses was paid in December 2002. The remaining Brazilian real-denominated obligation was financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation. These SMP licenses were not included in the Embratel sale transaction. In December 2003, we initiated a waiver and return of the SMP licenses to Anatel, the telecommunications regulatory agency in Brazil. In February 2004, the waiver and return of the SMP licenses was approved by Anatel, and the license debt was extinguished. We realized a net gain of $19 million as a result of the removal of the $104 million SMP licenses and the related $123 million debt and accrued interest during the second quarter of fiscal 2004.

     On March 2, 2004, we sold TowerCo to Embratel in a separately negotiated transaction (the TowerCo sale transaction) for $45 million in cash. TowerCo’s assets were primarily comprised of $5 million in property, plant and equipment. We realized a net gain of $40 million on the TowerCo sale transaction during the second quarter of fiscal 2004. As a result of the disposition of the remaining operations and assets related to the Vésper Operating Companies, we determined that the results of operations and cash flows related to the Vésper Operating Companies, including the results related to TowerCo and the SMP licenses and the gains and losses realized on the Embratel and TowerCo sales transactions, should be presented as discontinued operations in our condensed consolidated statements of operations and cash flows. Our statements of operations and cash flows for all prior periods have been adjusted to present the discontinued operations.

     For the nine months ended June 27, 2004, revenues of $36 million were reported in the loss from discontinued operations. For the three and nine months ended June 29, 2003, revenues of $30 million and $85 million, respectively, were reported in the loss from discontinued operations. At June 27, 2004, we had no remaining assets or liabilities related to the Vésper Operating Companies, TowerCo or the SMP licenses recorded on our condensed consolidated balance sheet.

     Prepayment of the Pegaso Telecomunicaciones, S.A. de C.V. Loan Facility

     We had an equipment loan facility with Pegaso Comunicaciones y Sistemas S.A. de C.V., a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (collectively referred to as Pegaso). On December 15, 2003, Pegaso prepaid $193 million, including accrued interest, in full satisfaction of the equipment loan facility. As a result, the financing and related agreements were terminated. We recognized $12 million in interest income related to Pegaso during the nine months ended June 27, 2004, including $10 million of deferred interest income recorded as a result of the prepayment.

     Investment in Inquam Limited

     We have invested $200 million in the convertible preferred shares of Inquam Limited (Inquam) for an approximate 42% ownership interest in Inquam. Inquam owns, develops and manages wireless communications systems, either directly or indirectly, with the intent of deploying CDMA-based technology, primarily in Europe. Starting in the third quarter of fiscal 2003, we and another investor (the Other Investor) have also extended $115 million in bridge loan financings to Inquam, including a new $5 million bridge loan put in place during the third quarter of fiscal 2004. We have funded our approximate $57 million share of these bridge loans and had no remaining funding commitment at June 27, 2004. The Other Investor had funded approximately $55 million under

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these bridge loans through June 27, 2004 and funded the remaining $2 million commitment on July 7, 2004. Inquam is a variable interest entity. We do not consolidate Inquam because we are not the primary beneficiary. We use the equity method to account for our investment in Inquam. We recorded our equity in losses of Inquam of $17 million and $51 million for the three months and nine months ended June 27, 2004, respectively, as compared to $31 million and $85 million for the three months and nine months ended June 29, 2003, respectively. At June 27, 2004, our equity and debt investments in Inquam totaled $49 million, net of equity in losses.

     On September 22, 2003, we agreed, along with the Other Investor, to guarantee the payment of amounts due by Inquam under a bank credit agreement. On June 15, 2004, we and the Other Investor agreed to extend the guarantee and increase the maximum amount subject to the guarantee to $55 million. Our maximum liability under the guarantee is limited to an amount equal to 50% of the amounts outstanding under Inquam’s credit agreement, up to a maximum of approximately $28 million. Amounts outstanding under the bank credit agreement totaled $32 million as of June 27, 2004. The guarantee expires on November 30, 2004.

     Inquam recently transferred certain of its non-CDMA operations to the Other Investor and is currently evaluating the prospects for the other operations. Inquam is expected to use approximately $40 million to $60 million in cash through the second half of calendar 2004. Inquam’s management does not expect Inquam to be cash flow positive until calendar 2006 with its current business plan. While we have no other obligations to provide funding to Inquam, we continue to have active discussions with Inquam and the Other Investor concerning the necessary funding for all or a part of Inquam’s business plan. While it is likely that we will provide some additional funding and/or credit support in furtherance of Inquam’s plan, the amount and form of such support is unclear, and none will be provided without commensurate support or consideration being provided by the Other Investor. If the Inquam operating companies cannot raise debt financing as expected or new investors cannot be found, Inquam’s growth potential and the value of our investment in Inquam may be negatively affected.

Third Quarter of Fiscal 2004 Compared to Third Quarter of Fiscal 2003

     Revenues

     Total revenues for the third quarter of fiscal 2004 were $1,341 million, compared to $892 million for the third quarter of fiscal 2003.

     Revenues from sales of equipment and services for the third quarter of fiscal 2004 were $888 million, compared to $653 million for the third quarter of fiscal 2003. Revenues from sales of integrated circuit products increased $223 million, resulting primarily from an increase of $330 million related to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of $106 million related to the effects of reductions in average sales prices and changes in product mix.

     Revenues from licensing and royalty fees for the third quarter of fiscal 2004 were $453 million, compared to $239 million for the third quarter of fiscal 2003. The increase resulted primarily from higher QTL segment royalties, resulting primarily from an increase in phone and infrastructure equipment sales by our licensees at higher average selling prices.

     Cost of Equipment and Services

     Cost of equipment and services revenues for the third quarter of fiscal 2004 was $369 million, compared to $286 million for the third quarter of fiscal 2003. Cost of equipment and services revenues as a percentage of equipment and services revenues was 42% for the third quarter of fiscal 2004, compared to 44% in the third quarter of fiscal 2003. The improvement in margin percentage in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 was primarily due to an improvement in certain integrated circuit product margin percentages resulting from the effect of cost reductions, partially offset by the effects of reductions in average sales prices and changes in product mix. Cost of equipment and services revenues as a percentage of equipment and services revenues may fluctuate in future quarters depending on the mix of products sold and services provided, competitive pricing, new product introduction costs and other factors.

     Research and Development Expenses

     For the third quarter of fiscal 2004, research and development expenses were $194 million or 14% of revenues, compared to $136 million or 15% of revenues for the third quarter of fiscal 2003. The dollar increase in research and development expenses was primarily due to a $55 million increase in costs related to integrated circuit products and

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corporate initiatives to support multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products, including CDMA2000 1xEV-DO/1xEV-DV and WCDMA (UMTS).

     Selling, General and Administrative Expenses

     For the third quarter of fiscal 2004, selling, general and administrative expenses were $162 million or 12% of revenues, compared to $116 million or 13% of revenues for the third quarter of fiscal 2003. The dollar increase was primarily due to a $17 million increase in employee-related expenses, a $12 million increase in professional fees and outside services and an $11 million increase related to a charitable grant to an educational institution for the primary purpose of furthering the study of engineering and math.

     Asset Impairment and Related Charges

     There were no asset impairment charges in the third quarter of fiscal 2004. During the third quarter of fiscal 2003, we recorded a $34 million impairment loss on our wireless licenses in Australia due to developments that affected potential strategic alternatives for using the spectrum. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.

     Other Operating Income

     For the third quarter of fiscal 2004, other operating income was $6 million, compared to $30 million for the third quarter of fiscal 2003. Other operating income during the third quarter of fiscal 2004 resulted primarily from the transfer of a portion of an Auction Discount Voucher (ADV) awarded to us by the FCC in fiscal 2000 to a wireless operator. Other operating income during the third quarter of fiscal 2003 resulted from $43 million of other income related to the transfers of portions of the ADV to two wireless operators, partially offset by a $13 million charge related to the write down of a note receivable from an early stage CDMA wireless operator.

     Net Investment Income (Expense)

     Net investment income was $46 million for the third quarter of fiscal 2004, compared to $43 million for the third quarter of fiscal 2003. The change was primarily comprised as follows (in millions):

     The increase in interest income on cash and marketable securities held by corporate and other segments was a result of higher average cash and marketable securities balances, partially offset by the impact of lower interest rates earned on these balances. The decrease in QSI interest income was primarily the result of the prepayment on the Pegaso debt facility in the first quarter of fiscal 2004. The other-than-temporary losses on other investments during the third quarter of fiscal 2003 primarily related to a $9 million impairment of our investment in a development stage CDMA wireless operator. The increase in the fair values of derivative instruments is primarily related to put options we sold in the second quarter of fiscal 2004. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $17 million for the three months ended June 27, 2004, as compared to $31 million for the three months ended June 29, 2003.

     Income Tax Expense

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     Income tax expense from continuing operations was $182 million for the third quarter of fiscal 2004, compared to $150 million for the third quarter of fiscal 2003. The 27% third quarter fiscal 2004 tax rate from continuing operations was reduced by approximately $26 million related to the filing of our 2003 federal tax return in June 2004, partially offset by a $14 million adjustment to our forecast of our ability to utilize capital losses. The 27% third quarter tax rate from continuing operations for fiscal 2004 is lower than the 38% tax rate from continuing operations recorded in the third quarter of fiscal 2003 primarily because of our ability to utilize capital losses generated in fiscal 2004 and higher foreign earnings taxed at less than the United States federal tax rate.

     The expected 2004 effective tax rate for continuing operations of 29% is lower than the actual 2003 effective tax rate for continuing operations of 34%, as anticipated foreign earnings taxed at less than the United States federal tax rate are greater in fiscal 2004 and estimated foreign and capital losses for which no tax benefit will be recorded are less than those realized for fiscal 2003, partially offset by the effect of the deduction of certain losses related to foreign subsidiaries in fiscal 2003. Foreign earnings taxed at less than the United States federal rate are higher in fiscal 2004 primarily due to the adjustment of an intercompany royalty agreement and an increase in foreign earnings. The estimated annual effective tax rate for continuing operations for fiscal 2004 is 6% lower than the United States federal statutory rate due primarily to a benefit of approximately 10% related to research and development tax credits and foreign earnings taxed at less than the United States federal rate, partially offset by state taxes of 5%.

     As of June 27, 2004, we had a valuation allowance of approximately $162 million on previously incurred capital losses due to uncertainty as to our ability to generate sufficient capital gains to utilize all capital losses. We will continue to assess the realizability of capital losses. The amount of the valuation allowance on capital losses may be adjusted in the future as our ability to utilize capital losses changes. A change in the valuation allowance may impact the provision for income taxes in the period the change occurs. We are currently considering actions that may result in our ability to utilize some of the capital loss currently reserved, which may result in a reduction of our valuation allowance and tax expense in subsequent quarters.

First Nine Months of Fiscal 2004 Compared to First Nine Months of Fiscal 2003

     Revenues

     Total revenues for the first nine months of fiscal 2004 were $3,763 million, compared to $2,977 million for the first nine months of fiscal 2003. Revenues from Samsung, LG Electronics, Motorola and Kyocera, customers of our QCT, QTL and other nonreportable segments, comprised an aggregate of 15%, 15%, 10% and 8% of total consolidated revenues, respectively, in the first nine months of fiscal 2004, as compared to 18%, 13%, 13% and 10% of total consolidated revenues, respectively, in the first nine months of fiscal 2003. The percentage for Kyocera in the first nine months of fiscal 2003 included 1% related to services provided to Kyocera by employees from our terrestrial-based CDMA wireless consumer phone business which was sold to Kyocera in February 2000. This arrangement expired in February 2003.

     Revenues from sales of equipment and services for the first nine months of fiscal 2004 were $2,560 million, compared to $2,245 million for the first nine months of fiscal 2003. Revenues from sales of integrated circuit products increased $318 million, resulting primarily from an increase of $571 million related to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of $240 million related to the effects of reductions in average sales prices and changes in product mix.

     Revenues from licensing and royalty fees for the first nine months of fiscal 2004 were $1,202 million, compared to $732 million for the first nine months of fiscal 2003. The increase resulted from higher QTL segment royalties, resulting primarily from an increase in phone and infrastructure equipment sales by our licensees at higher average selling prices and a $40 million increase in the prior period variance (royalties reported in excess of estimated royalties) included in current period revenues.

     Cost of Equipment and Services

     Cost of equipment and services revenues for the first nine months of fiscal 2004 was $1,074 million, compared to $979 million for the first nine months of fiscal 2003. Cost of equipment and services revenues as a percentage of equipment and services revenues was 42% for the first nine months of fiscal 2004, compared to 44% in the first nine months of fiscal 2003. The improvement in margin percentage in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003 was primarily due to an improvement in certain integrated circuit product margin percentages resulting from the effect of cost reductions, partially offset by the effects of reductions in average sales prices and changes in product mix. Cost of equipment and services revenues as a percentage of equipment and

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services revenues may fluctuate in future quarters depending on the mix of products sold and services provided, competitive pricing, new product introduction costs and other factors.

     Research and Development Expenses

     For the first nine months of fiscal 2004, research and development expenses were $513 million or 14% of revenues, compared to $380 million or 13% of revenues for the first nine months of fiscal 2003. The dollar and percentage increases in research and development expenses primarily resulted from a $126 million increase in costs related to integrated circuit products and corporate initiatives to support multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products, including CDMA2000 1xEV-DO/1xEV-DV and WCDMA (UMTS).

     Selling, General and Administrative Expenses

     For the first nine months of fiscal 2004, selling, general and administrative expenses were $422 million or 11% of revenues, compared to $354 million or 12% of revenues for the first nine months of fiscal 2003. The dollar increase was primarily due to a $41 million increase in employee-related expenses, a $20 million increase in professional fees and outside services and a $10 million increase related to a charitable grant to an educational institution for the primary purpose of furthering the study of engineering and math.

     Asset Impairment and Related Charges

     There were no asset impairment charges in the first nine months of fiscal 2004. During the third quarter of fiscal 2003, we recorded a $34 million impairment loss on our wireless licenses in Australia due to developments that affected potential strategic alternatives for using the spectrum. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.

     Other Operating Income

     For the first nine months of fiscal 2004, other operating income was $17 million, compared to $30 million for the first nine months of fiscal 2003. Other operating income during the first nine months of fiscal 2004 resulted primarily from the transfers of portions of the ADV to a wireless operator. Other operating income during the first nine months of fiscal 2003 resulted from $43 million of other income related to the transfers of portions of the ADV to two wireless operators, partially offset by a $13 million charge related to the write down of a note receivable from an early stage CDMA wireless operator.

     Net Investment Income (Expense)

     Net investment income was $115 million for the first nine months of fiscal 2004, compared to net investment expense of $37 million for the first nine months of fiscal 2003. The change was primarily comprised as follows (in millions):