Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2004

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number 0-19528

QUALCOMM Incorporated

INDEX

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PART I. FINANCIAL INFORMATION

QUALCOMM Incorporated

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 six months ended March 28, 2004 were $30.53 and $23.97 per share, respectively. The Black-Scholes weighted average estimated fair values of stock options granted during the three months and six months ended March 30, 2003 were $20.84 and $20.57 per share, respectively. The Black-Scholes weighted average estimated fair values of purchase rights pursuant to the Employee Stock Purchase Plans during the three months and six months ended March 28, 2004 were $13.14 and $10.72 per share, respectively. The weighted average estimated fair values of purchase rights pursuant to the Employee Stock Purchase Plans during the three months and six months ended March 30, 2003 were $10.37 and $9.75 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):

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Company recognized $12 million in interest income related to Pegaso during the six months ended March 28, 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 March 28, 2004, the Company had a remaining commitment to extend up to $118 million in long-term 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 six months ended March 28, 2004 was $32 million and $62 million, respectively, as compared to $29 million and $54 million for the three months and six months ended March 30, 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).

11

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     On July 14, 2003, the Company approved an additional $50 million equity investment in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investor in Inquam. The terms of the new equity investments are currently being negotiated. No commitments related to these potential investments were in place at March 28, 2004. It is the intention of both parties that $30 million of the bridge loans will be repaid with the proceeds from this anticipated equity investment. The Company continues to evaluate its strategic alternatives with regard to its investment in and prospective involvement with Inquam.

     On September 22, 2003, the Company agreed, along with the other major investor in Inquam, to guarantee the payment of amounts due by Inquam under a bank credit agreement. 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 $10 million. The full $20 million was outstanding under the bank credit agreement as of March 28, 2004.

     On January 12, 2004, the Company agreed to lend up to approximately $4 million to a party affiliated with one of the other investors in Inquam for the purpose of supporting the continued expansion of CDMA in the 450 MHz frequency band in Western Europe. The Company funded $1 million of this loan during the second quarter, and the loan was repaid in full on April 16, 2004. The availability period of this loan expired on January 31, 2004, and the Company no longer had an obligation to fund under this agreement at March 28, 2004.

Other

     Other strategic investments as of March 28, 2004 totaled $117 million, including $44 million accounted for using the cost method. At March 28, 2004, effective ownership interests in these investees ranged from less than 1% to 50%. Funding commitments related to these investments totaled $28 million at March 28, 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 adjust(Note 9)

     During the second quarter of fiscal 2004, the Congressional Joint Committee on Taxation approved a refund to the Company of approximately $42 million resulting from an audit by the United States Internal Revenue Service (IRS) of fiscal years 1997 through 1999. A tax receivable had previously been recorded for the tax refund excluding interest. Interest income of approximately $7 million was recorded in the second quarter of fiscal 2004 for the interest expected to be received from the IRS.

Note 5 — Income Taxes

     The Company currently estimates its annual effective income tax rate for continuing operations to be approximately 30% for fiscal 2004, as compared to the actual 34% effective income tax rate for continuing operations in fiscal 2003. The Company’s estimated effective tax rate from continuing operations for fiscal 2004 decreased from 32% in the first quarter to 30% in the second quarter, which resulted in a 28% effective tax rate from

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

continuing operations in the second quarter of fiscal 2004. The change in the estimated rate for fiscal 2004 resulted from the Company’s forecast of its ability to utilize capital losses and higher expected foreign earnings taxed at less than the United States federal rate. The estimated annual effective tax rate for continuing operations for fiscal 2004 is lower than the United States federal statutory rate due to a benefit related to research and development tax credits and foreign earnings taxed at less than the United States federal rate, partially offset by state taxes. 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 has not provided for United States income taxes and foreign withholding taxes on a cumulative total of approximately $1.2 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 the majority of its deferred tax assets. As of March 28, 2004, the Company has provided a valuation allowance on net capital losses, foreign tax credits, and other foreign deferred tax assets in the amounts of $166 million, $54 million and $20 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. Additionally, although the majority of foreign net operating losses have unlimited carryforward periods, the Company continues to provide a valuation allowance on substantially all of its foreign deferred tax assets at March 28, 2004 because of uncertainty regarding their realization due to a history of losses from these particular foreign operations.

     The net deferred tax assets decreased by approximately $187 million from September 28, 2003 to March 28, 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, primarily related to unused Brazilian net operating losses, each decreased by approximately $475 million from September 28, 2003 to March 28, 2004 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 six months ended March 28, 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 six months ended March 30, 2003, the Company bought 3,615,000 shares at an aggregate cost of $124 million. While the Company did not repurchase any of the Company’s common stock under this program during the six months ended March 28, 2004, the Company continues to evaluate repurchases under this program. At March 28, 2004, $834 million remains authorized for repurchases under the program.

14

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 March 28, 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 $5 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.” As such, the Company recorded the $7 million in premiums received as paid-in capital.

Dividends

     On March 2, 2004, the Company announced a cash dividend of $0.10 per share on the Company’s common stock, payable on June 25, 2004 to stockholders of record as of the close of business on May 28, 2004. During the three months and six months ended March 28, 2004 dividends charged to retained earnings were $81 million and $193 million, respectively. During the three months and six months ended March 30, 2003, dividends charged to retained earnings were $39 million.

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.

      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

15

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, 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. On March 11, 2004, the Chancery Court denied Texas Instrument’s motion seeking dismissal of the Company’s claims. The case is now scheduled for a bench trial to occur on 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. The Company is seeking to amend the complaint to bring the total number of patents at issue to nine. 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. Discovery in the matter has recently begun.

      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 five. On April 12, 2004, Maxim filed a First Amended Answer and Counterclaims to the Company’s Second 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 will seek the dismissal of the claims as a matter of law.

16

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     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 2008 are $24 million, $38 million, $25 million, $14 million and $5 million, respectively.

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 $591 million for the remainder of fiscal 2004 and $129 million in fiscal 2005. Of these amounts, commitments to purchase integrated circuit product inventories comprised $563 million and $126 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 $11 million, $20 million, $19 million, $2 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 March 28, 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:

•		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 for such licenses;
•		QUALCOMM Wireless & Internet (QWI) — comprised of:

17

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

•		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 wireless devices;
•		QUALCOMM Digital Media (QDM) — provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies and develops technologies and provides equipment to support the processing, transmission and management of content for a variety of media applications, including the delivery of digitized motion pictures (Digital Cinema); 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), 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 Inc. (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

*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.

19

     *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 Companies’ option for up to two successive 5-year terms) whereby the Vésper Operating

20

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 each of the three months and six months ended March 28, 2004, revenues of $36 million were reported in the income (loss) from discontinued operations. For the three and six months ended March 30, 2003, revenues of $26 million and $55 million, respectively, were reported in the income (loss) from discontinued operations. At March 28, 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. During April 2003, the FCC granted the Company’s request for a one-year extension of the ADV. As a result, the ADV expires in June 2004. The Company is evaluating whether it will need to seek another extension of the ADV. The Company used approximately $77 million of the ADV’s value prior to fiscal 2004.

     During the first six 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

21

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

     During the first six months of fiscal 2004, the Company transferred approximately $8 million of the ADV’s value to a wireless operator for approximately $8 million in cash. As a result of this transfer, the Company recorded an additional $8 million in other operating income in the QSI segment during the first six months of fiscal 2004. The Company also used approximately $30 million of the ADV during the first six 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 March 28, 2004. The remaining value of the ADV at March 28, 2004 was approximately $10 million. The Company had no cost basis in the ADV at March 28, 2004.

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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 second quarter of fiscal 2004 were $1.2 billion, with net income of $488 million, including $47 million of income relating to discontinued operations. During this quarter, the following developments occurred with respect to key elements of our business:

•		Strong growth in CDMA subscribers throughout the world drove demand for our products and the products of our licensees. Network expansions in India, China and CDMA2000 1xEV-DO (Evolution Data Optimized) deployments by operators in South Korea, Japan and the United States, number portability requirements by regulators in South Korea and the United States, and the popularity of color screens and camera phones were major contributors. We shipped approximately 32 million Mobile Station Modem (MSM) integrated circuits, 99% of which were third generation (3G) CDMA2000 1X and 1xEV-DO;
•		Better network coverage, network and handset interoperability and new handsets resulted in over four million WCDMA (UMTS) subscribers 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. Several leading manufacturers have announced the selection of our WCDMA (UMTS) compatible MSM 6250 integrated circuits for their WCDMA (UMTS) phone products. Nine subscriber licensees and eight infrastructure licensees reported sales of WCDMA (UMTS) products, and WCDMA (UMTS) royalties contributed approximately 12% of royalties reported in the second fiscal quarter for licensee sales during the first fiscal quarter;
•		Our integrated circuits business experienced supply constraints which resulted in our inability to meet certain customer demands. To ensure better delivery of parts and components from our suppliers, we have extended our firm orders to our suppliers. Additionally, we are working to add capacity at our existing supply base, as well as evaluating potential new suppliers to augment our needs;
•		Our QSI business activities continue to decrease as planned. We sold TowerCo in Brazil and no longer have any involvement with the Vésper Operating Companies. Outstanding QSI commitments decreased by $127 million.

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 revenues, research and development, selling, general and administrative, amortization of acquisition-related intangible assets 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 Station Modem (MSM), Radio Frequency (RF) and Power Management (PM) devices. The wireless phone

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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 64% of total consolidated revenues in the second quarter of fiscal 2004 and 2003, respectively. QCT revenues comprised 60% and 65% of total consolidated revenues in the first six 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 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 32% and 26% of total consolidated revenues in the second quarter of fiscal 2004 and 2003, respectively. QTL revenues comprised 31% and 25% of total consolidated revenues in the first six 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. The Digital Cinema business develops technologies and provides equipment to support the processing, transmission and management of content for a variety of media applications, including the delivery of digitized motion pictures. QWI revenues comprised 12% and 13% of total consolidated revenues in the second quarter of fiscal 2004 and 2003, respectively. QWI revenues comprised 12% of total consolidated revenues in the first six months of both fiscal 2004 and 2003.

     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 this 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 and multimedia capabilities is increasing, and we believe this trend will continue. The expansion of broadband global data service is expected to drive increased demand for CDMA products. We expect to see the next generation of 1xEV-DO capable phones, external and embedded modules for laptop computers and other devices in the near term. Verizon’s recent announcement of its intent to proceed with a nationwide deployment of CDMA2000 1xEV-DO has had a positive effect, and we anticipate CDMA2000 IxEV-DO usage to expand.

     We are working closely with many operators and manufacturers to support rapid and reliable WCDMA (UMTS) deployment and the availability of attractive, feature rich handsets and modules. We continue to anticipate growth in WCDMA (UMTS) in calendar 2004. We expect to see WCDMA (UMTS) deployments outside of Japan and Europe.

     We expect continued subscriber growth in Asia. Local number portability and 1xEV-DO services are contributing to strong CDMA handset sales in South Korea, where the IxEV-DO subscriber base exceeded six million at the end of March 2004, based on data compiled from operator websites. In Japan, CDMA2000 and WCDMA (UMTS) networks continue to attract new subscribers and handset upgrades by existing subscribers. We anticipate additional wireless licenses will be granted in China in calendar 2005, where the Chinese government is currently evaluating and considering 3G license awards for the 2.1 GHz spectrum band. When the awards are granted, additional operators in China will be authorized to upgrade to 3G or begin deployment of CDMA based networks.

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     BREW will play an increasingly important role in generating consumer demand for a broad range of applications. BREW offers operators new capabilities for their products, as well as increased data revenues. We expect additional operators to launch BREW services and increasing volume in BREW downloads.

     Although we have taken action to mitigate our shortages of integrated circuits supply, the effect of such shortages has caused some customer frustration, which could negatively affect our future business. To ensure better delivery of parts and components from our suppliers, we have extended our firm orders to our suppliers. Additionally, we are working to add capacity at our existing supply base, as well as evaluating potential new suppliers to augment our needs. We expect costs of certain integrated circuit products to increase as a result of these actions.

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

     In order to continue to develop new products to meet business opportunities, we must continue to expand our workforce of capable engineers. We expect research and development 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 44%, 22% and 18%, respectively, of total consolidated revenues in the first six months of fiscal 2004 as compared to 48%, 22% and 14%, respectively, in the first six 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, as a percentage of the total, is primarily attributed to overall increases in revenues in geographic regions other than South Korea.

Developments Related to Certain Strategic Investments in the QSI Segment

     Key developments in our strategic investments during the first six 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 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,

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$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 each of the three months and six months ended March 28, 2004, revenues of $36 million were reported in the income (loss) from discontinued operations. For the three and six months ended March 30, 2003, revenues of $26 million and $55 million, respectively, were reported in the income (loss) from discontinued operations. At March 28, 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 six months ended March 28, 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 primary intent of deploying CDMA-based technology, primarily in Europe. Inquam is a variable interest entity. We do not consolidate Inquam because we are not the primary beneficiary. We also extended $55 million in bridge loan financings to Inquam, which another investor agreed to match. We have funded $55 million under these bridge loans since the third quarter of fiscal 2003 and had no remaining funding commitment at March 28, 2004. The other investor provided $39 million under these bridge loans through April 16, 2004 and has indicated that the remaining $16 million commitment will be funded during our third fiscal quarter. We use the equity method to account for our investment in Inquam. At March 28, 2004, our equity and debt investments in Inquam totaled $63 million, net of equity in losses.

     On July 14, 2003, we approved an additional $50 million equity investment in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investor in Inquam. The terms of the new equity investments are currently being negotiated. No commitments related to these potential investments were in place at March 28, 2004. It is the intention of both parties that $30 million of the bridge loans will be repaid with the proceeds from this anticipated equity investment.

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     On September 22, 2003, we agreed, along with the other major investor in Inquam, to guarantee the payment of amounts due by Inquam under a bank credit agreement. 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 $10 million. The full $20 million was outstanding under the bank credit agreement as of March 28, 2004.

     On January 12, 2004, we agreed to lend up to approximately $4 million to a party affiliated with one of the other investors in Inquam for the purpose of supporting the continued expansion of CDMA in the 450 MHz frequency band in Western Europe. We funded $1 million of this loan during the second quarter, and the loan was repaid in full on April 16, 2004. The availability period of this loan expired on January 31, 2004, and we no longer had an obligation to fund under this agreement at March 28, 2004.

     We expect that Inquam will focus its resources on the development of CDMA properties in the 450MHz frequency band in Romania and Western Europe and will transfer certain non-CDMA operations to one or more of Inquam’s other shareholders. Inquam is expected to use approximately $60 million to $80 million in cash through the second half of calendar 2004. Inquam’s management does not expect Inquam to be cash flow positive until calendar 2007 with its current business plan. We continue to evaluate our strategic alternatives with regard to our investment in and prospective involvement with Inquam. 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.

Second Quarter of Fiscal 2004 Compared to Second Quarter of Fiscal 2003

      Revenues

     Total revenues for the second quarter of fiscal 2004 were $1,216 million, compared to $1,017 million for the second quarter of fiscal 2003.

     Revenues from sales of equipment and services for the second quarter of fiscal 2004 were $820 million, compared to $764 million for the second quarter of fiscal 2003. Revenues from sales of integrated circuit products increased $57 million, resulting primarily from an increase of $141 million related to higher unit shipments of MSM and accompanying radio frequency (RF) integrated circuits, partially offset by a decrease of $83 million related to the effects of reductions in average sales prices and changes in product mix.

     Revenues from licensing and royalty fees for the second quarter of fiscal 2004 were $396 million, compared to $254 million for the second 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 and a $24 million increase in the prior period variance (royalties reported in excess of estimated royalties) included in current period revenues. In the second quarter of fiscal 2004, our licensees reported CDMA phone sales for the first quarter of fiscal 2004 of approximately 37 million units, as compared to the 32 million units we had expected.

      Cost of Equipment and Services

     Cost of equipment and services revenues for the second quarter of fiscal 2004 was $335 million, compared to $341 million for the second quarter of fiscal 2003. Cost of equipment and services revenues as a percentage of equipment and services revenues was 41% for the second quarter of fiscal 2004, compared to 45% in the second quarter of fiscal 2003. The improvement in margin percentage in the second quarter of fiscal 2004 compared to the second 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 second quarter of fiscal 2004, research and development expenses were $169 million or 14% of revenues, compared to $132 million or 13% of revenues for the second quarter of fiscal 2003. The dollar and percentage increases in research and development expenses were primarily due to a $35 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, GSM1x and WCDMA (UMTS).

      Selling, General and Administrative Expenses

     For the second quarter of fiscal 2004, selling, general and administrative expenses were $138 million or 11% of revenues, compared to $121 million or 12% of revenues for the second quarter of fiscal 2003. The dollar increase

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was primarily due to a $14 million increase in employee related expenses and a $7 million increase in professional fees and outside services.

      Other Operating Income

     For the second quarter of fiscal 2004, other operating income was $5 million. There was no other operating income in the second quarter of fiscal 2003. Other operating income during the second 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.

      Net Investment Income (Expense)

     Net investment income was $34 million for the second quarter of fiscal 2004, compared to net investment expense of $18 million for the second 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, and $7 million in interest income recorded as a result of a refund from the United States Internal Revenue Service. 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 marketable securities during the second quarter of fiscal 2003 primarily related to a $16 million impairment of our investment in a provider of semiconductor packaging, test and distribution services. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $19 million for the three months ended March 28, 2004, as compared to $33 million for the three months ended March 30, 2003.

      Income Tax Expense

     Income tax expense from continuing operations was $169 million for the second quarter of fiscal 2004, compared to $144 million for the second quarter of fiscal 2003. The annual effective tax rate for continuing operations is estimated to be 30% for fiscal 2004, compared to the 35% estimated annual effective tax rate for continuing operations recorded during the second quarter of fiscal 2003. Our estimated effective tax rate from continuing operations for fiscal 2004 decreased from 32% in the first quarter to 30% in the second quarter, which resulted in a 28% effective tax rate for continuing operations in the second quarter of fiscal 2004. The change in the estimated rate for fiscal 2004 resulted from our forecast of our ability to utilize capital losses and higher expected foreign earnings taxed at less than the United States federal rate.

     The estimated annual effective tax rate for continuing operations for fiscal 2004 is lower than the United States federal statutory rate due to a benefit related to research and development tax credits and foreign earnings taxed at less than the United States federal rate, partially offset by state taxes. The expected 2004 effective tax rate for continuing operations of 30% 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

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subsidiaries in fiscal 2003. Foreign earnings taxed at less than the United States federal rate are expected to increase in fiscal 2004 due to increased foreign earnings and the adjustment of an intercompany royalty agreement.

     As of March 28, 2004, we had a valuation allowance of approximately $166 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 losses currently reserved, which may result in a reduction of our valuation allowance and tax expense in subsequent quarters.

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

      Revenues

     Total revenues for the first six months of fiscal 2004 were $2,422 million, compared to $2,085 million for the first six months of fiscal 2003. Revenues from LG Electronics, Samsung, Motorola and Kyocera, customers of our QCT, QTL and other nonreportable segments, comprised an aggregate of 16%, 14%, 11% and 8% of total consolidated revenues, respectively, in the first six months of fiscal 2004, as compared to 13%, 18%, 12% and 10% of total consolidated revenues, respectively, in the first six months of fiscal 2003. The percentage for Kyocera in the first six months of fiscal 2003 included 2% 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 six months of fiscal 2004 were $1,673 million, compared to $1,592 million for the first six months of fiscal 2003. Revenues from sales of integrated circuit products increased $95 million, resulting primarily from an increase of $247 million related to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of $151 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 six months of fiscal 2004 were $750 million, compared to $493 million for the first six 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 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 six months of fiscal 2004 was $705 million, compared to $693 million for the first six months of fiscal 2003. Cost of equipment and services revenues as a percentage of equipment and services revenues was 42% for the first six months of fiscal 2004, compared to 44% in the first six months of fiscal 2003. The improvement in margin percentage in the first six months of fiscal 2004 compared to the first six months of fiscal 2003 was primarily due to an improvement in certain integrated circuit product margin percentages resulting from the effect of cost reductions, largely 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

     For the first six months of fiscal 2004, research and development expenses were $319 million or 13% of revenues, compared to $244 million or 12% of revenues for the first six months of fiscal 2003. The dollar and percentage increases in research and development expenses primarily resulted from a $71 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, GSM1x and WCDMA (UMTS).

      Selling, General and Administrative Expenses

     For the first six months of fiscal 2004, selling, general and administrative expenses were $260 million or 11% of revenues, compared to $238 million or 11% of revenues for the first six months of fiscal 2003. The dollar increase was primarily due to a $25 million increase in employee related expenses and an $8 million increase in professional fees and outside services, partially offset by a $5 million decrease related to the wind down of Wireless Knowledge

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activities and $5 million related to the write down of a note receivable from a development stage CDMA wireless operator in the first six months of fiscal 2003.

      Other Operating Income

     For the first six months of fiscal 2004, other operating income was $11 million. There was no other operating income in the first six months of fiscal 2003. Other operating income during the first six months of fiscal 2004 resulted primarily from the transfers of portions of the ADV to a wireless operator.

      Net Investment Income (Expense)

     Net investment income was $69 million for the first six months of fiscal 2004, compared to net investment expense of $78 million for the first six months 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 other-than-temporary losses on marketable securities during the first six months of fiscal 2003 primarily related to a $55 million impairment of our investment in an operator in Korea and a $16 million impairment of our investment in a provider of semi-conductor packaging, test and distribution services. The other-than-temporary losses on other investments during the first six months of fiscal 2003 related to the impairment of our investments in two development stage CDMA wireless operators. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $34 million for the six months ended March 28, 2004, as compared to $54 million for the six months ended March 30, 2003.

      Income Tax Expense

     Income tax expense from continuing operations was $362 million for the first six months of fiscal 2004, compared to $292 million from continuing operations for the first six months of fiscal 2003. The annual effective tax rate for continuing operations is estimated to be 30% for fiscal 2004, compared to the 35% annual effective tax rate for continuing operations recorded during the first six months of fiscal 2003.

     The estimated annual effective tax rate for continuing operations for fiscal 2004 is lower than the United States federal statutory rate due to a benefit related to research and development tax credits and foreign earnings taxed at less than the United States federal rate, partially offset by state taxes. The expected 2004 effective tax rate for continuing operations of 30% 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 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 expected to increase in fiscal 2004 due to increased foreign earnings and the adjustment of an intercompany royalty agreement.

     As of March 28, 2004, we had a valuation allowance of approximately $166 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

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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.

Our Segment Results for the Second Quarter of Fiscal 2004 Compared to the Second Quarter of Fiscal 2003

     The following should be read in conjunction with the second quarter financial results of fiscal 2003 for each reporting segment. See “Notes to Condensed Consolidated Financial Statements — Note 8 — Segment Information.”

      QCT Segment. QCT revenues for the second quarter of fiscal 2004 were $711 million, compared to $647 million for the second quarter of fiscal 2003. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $696 million for the second quarter of fiscal 2004, compared to $639 million for the second quarter of fiscal 2003. The increase in MSM and accompanying RF integrated circuits revenue was comprised of $141 million related to higher unit shipments, partially offset by a decrease of $83 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 32 million MSM integrated circuits were sold during the second quarter of fiscal 2004, compared to approximately 28 million for the second quarter of fiscal 2003.

     QCT’s earnings before taxes for the second quarter of fiscal 2004 were $258 million, compared to $222 million for the second quarter of fiscal 2003. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 36% in the second quarter of fiscal 2004, compared to 34% in the second quarter of fiscal 2003. The increase in operating margin percentage in the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003 primarily resulted from the increase in gross margin percentage, partially offset by a 26% increase in research and development and selling, general and administrative expenses. Research and development and selling, general and administrative expenses were $26 million higher and $6 million higher, respectively, for the second quarter of fiscal 2004 as compared to the second quarter of fiscal 2003 primarily associated with increased investment in new integrated circuit products and technology initiatives to support multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products including CDMA2000 1xEV-DO/1xEV-DV, GSM1x and WCDMA (UMTS).

      QTL Segment. QTL revenues for the second quarter of fiscal 2004 were $390 million, compared to $260 million for the second quarter of fiscal 2003. Royalty revenues from licensees were $345 million in the second quarter of fiscal 2004, compared to $217 million in the second quarter of fiscal 2003. Revenues from license fees were $15 million in the second quarter of both fiscal 2004 and 2003. Other revenues were comprised of intersegment royalties. During the second quarter of both fiscal 2004 and 2003, we recognized $1 million in revenue related to equity received as consideration for license fees.

     We earn royalties on CDMA products sold worldwide by our licensees in the period that the licensees’ sales occur. Our 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, we estimate the 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. 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. Given our historical position in CDMA, we believe that we have the ability to reliably estimate royalty revenues. As the CDMA market further develops and diversifies, our ability to forecast may decrease, and if so, we may no longer be able to reliably estimate and may change our accounting policy to record royalties as revenue when they are reported by our licensees.

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     The following table summarizes royalty related data (in millions):