Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

( Mark one)

For the quarterly period ended June 26, 2005

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 þ No o

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

     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 18, 2005, were as follows:

INDEX

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PART I. FINANCIAL INFORMATION

See Notes to Condensed Consolidated Financial Statements.

4

See Notes to Condensed Consolidated Financial Statements.

5

QUALCOMM Incorporated

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

had the initial one-time effect of reducing royalty revenues recorded in the fourth quarter of fiscal 2004. Accordingly, the Company did not estimate royalty revenues earned in the three months and nine months ended June 26, 2005. Total royalties reported by external licensees for the three months and nine months ended June 26, 2005 and recorded as revenues for those periods were $401 million and $1,197 million, respectively. Total royalties reported by external licensees during the three months and nine months ended June 27, 2004 were $373 million and $939 million, respectively, as compared to $389 million and $1,041 million, respectively, recorded as royalty revenues from external licensees for the same 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 share-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 26, 2005 were 50,289,000 and 57,542,000, respectively. The incremental dilutive common share equivalents, calculated using the treasury stock method, for the three months and nine months ended June 27, 2004 were 60,472,000 and 57,580,000, respectively.

     Employee stock options to purchase approximately 37,180,000 and 33,426,000 shares of common stock during the three months and nine months ended June 26, 2005, respectively, and employee stock options to purchase approximately 32,367,000 and 47,579,000 shares of common stock during the three months and nine months ended June 27, 2004, 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 diluted earnings per share would be anti-dilutive.

      Comprehensive Income. Total comprehensive income consisted of the following (in millions):

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      Share-Based Payments. 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 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 stock options have no intrinsic value upon grant, and therefore no expense is recorded. Each quarter, the Company reports the potential dilutive impact of share-based payments 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 stock option) are not included in diluted earnings per common share as their effect is anti-dilutive.

     As required under Financial Accounting Standards Board (FASB) Statement 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 share-based payments on net income and 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. This model does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee stock options or purchase rights granted pursuant to the Employee Stock Purchase Plans. 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 stock option grant. Because the Company’s share-based payments 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 fair values, in the Company’s opinion, existing valuation models may not be reliable single measures of the fair values of the Company’s share-based payments. The Black-Scholes weighted average estimated fair values of stock options granted during the three months and nine months ended June 26, 2005 were $12.37 and $15.03 per share, respectively. The Black-Scholes weighted average estimated fair values of stock options granted during the three months and nine months ended June 27, 2004 were $16.89 and $13.83 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 26, 2005 and June 27, 2004 were $10.20 and $6.57 per share, respectively.

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

8

      Future Accounting Requirements. In December 2004, the FASB revised Statement No. 123 (FAS 123R), “Share-Based Payment,” which requires companies to expense the estimated fair value of employee stock options and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R will be effective for the Company beginning in the first quarter of fiscal 2006. The Company will adopt the provisions of FAS 123R using a modified prospective application. Under modified prospective application, FAS 123R, which provides certain changes to the method for valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At June 26, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that the Company expects to record during fiscal 2006 was approximately $401 million before income taxes. The Company will incur additional expense during fiscal 2006 related to new awards granted during the remainder of fiscal 2005 and fiscal 2006 that cannot yet be quantified. The Company is in the process of determining how the guidance regarding valuing share-based compensation as prescribed in FAS 123R will be applied to valuing share-based awards granted after the effective date and the impact that the recognition of compensation expense related to such awards will have on its financial statements.

Note 2 – Composition of Certain Financial Statement Items

      Marketable Securities. Marketable securities were comprised as follows (in millions):

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10

     Depreciation and amortization expense from continuing operations related to property, plant and equipment for the three months and nine months ended June 26, 2005 was $45 million and $127 million, respectively, as compared to $34 million and $96 million for the three months and nine months ended June 27, 2004, respectively.

      Intangible Assets. The components of purchased intangible assets, which are included in other assets, were as follows (in millions):

     Wireless licenses increased as a result of the Company’s acquisition of additional 700 MHz spectrum in the United States during the nine months ended June 26, 2005 for its MediaFLO USA business (Note 8). Increases in other intangible asset categories primarily resulted from acquisitions during the first quarter of fiscal 2005 (Note 9). As a result of the acquisitions, the weighted-average amortization period for technology-based intangible assets was 9 years at June 26, 2005, as compared to 11 years at September 26, 2004. The weighted-average amortization period for other intangible assets was not affected.

     Amortization expense from continuing operations for the three months and nine months ended June 26, 2005 was $5 million and $14 million, respectively, as compared to $3 million and $14 million for the three months and nine months ended June 27, 2004, respectively. Amortization expense related to these intangible assets is expected to be $5 million for the remainder of fiscal 2005, $21 million in fiscal 2006, $18 million in fiscal 2007, $14 million in fiscal 2008 and $13 million in fiscal 2009.

Note 3 – Investments in Other Entities

      Inquam Limited. The Company and another investor (the Other Investor) have equity and debt investments in Inquam Limited (Inquam). Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, primarily in Romania and Portugal. The Company recorded $7 million and $26 million in equity in losses of Inquam during the three months and nine months ended June 26, 2005, respectively, as compared to $17 million and $51 million for the three months and nine months ended June 27, 2004, respectively. At June 26, 2005 the Company’s equity and debt investments in Inquam totaled $33 million, net of equity in losses.

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     During the nine months ended June 26, 2005, Inquam secured new long-term financing (the new facilities). The Company and the Other Investor have each guaranteed 50% of a portion of the amounts owed under certain of the new facilities, up to a combined maximum of $54 million. Amounts outstanding under the new facilities subject to the guarantee totaled $54 million as of June 26, 2005. The guarantee expires and the new facilities mature on December 25, 2011.

     At June 26, 2005, the Company had a remaining funding commitment under its bridge loan agreement of $1 million. The Company and the Other Investor continue to have active discussions with Inquam concerning the necessary funding for all or a part of Inquam’s business plan, potential restructuring and investment by other parties. While the Company may provide some additional funding in furtherance of Inquam’s business plan, the amount and form of such support is unknown, and none is expected without commensurate support or consideration being provided by the Other Investor.

      Other. Other strategic investments as of June 26, 2005 and September 26, 2004 totaled $96 million and $123 million, respectively, including $56 million and $50 million, respectively, accounted for using the cost method. Funding commitments related to these investments totaled $14 million at June 26, 2005, 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, Net

     Investment income, net, was comprised as follows (in millions):

Note 5 – Income Taxes

     The Company currently estimates its annual effective income tax rate to be approximately 22% for fiscal 2005, as compared to the 25% effective income tax rate in fiscal 2004. The Company’s estimated effective tax rate for fiscal 2005 decreased from 24% in the second quarter to 22% in the third quarter, which resulted in an 18% effective tax rate in the third quarter of fiscal 2005. The Company reduced its income tax expense in the third quarter of fiscal 2005 by recording a tax benefit of approximately $42 million related to the Company’s increased ability to use capital loss carryforwards and a tax benefit of approximately $38 million related to an election made to compute the Company’s California state income tax based solely on income earned within the United States.

     The estimated annual effective tax rate for fiscal 2005 is 13% lower than the United States federal statutory rate primarily due to benefits of approximately 10% related to foreign earnings taxed at less than the United States federal rate, 3% related to research and development tax credits, 3% related to an increase in tax benefits recorded arising from the Company’s forecast of its ability to use its capital loss carryforwards, partially offset by state taxes of approximately 3%. The prior fiscal year rate was lower than the United States federal statutory rate as a result of foreign earnings taxed at less than the United States federal rate, an increase in the forecast of our ability to use capital loss carryforwards, and research and development credits, partially offset by state taxes.

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     The Company has not provided for United States income taxes and foreign withholding taxes on a cumulative total of approximately $1.6 billion of undistributed earnings of certain non-United States subsidiaries indefinitely 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 is currently studying the impact of the one-time favorable foreign dividend provisions enacted on October 22, 2004 as part of the American Jobs Creation Act of 2004. The Company expects to repatriate $500 million of foreign earnings no later than fiscal 2006 at an expected tax cost of approximately $33 million.

     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 June 26, 2005, the Company has provided a valuation allowance on net capital losses of $73 million. 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.

     Deferred tax assets, net of valuation allowance, decreased by approximately $99 million from September 26, 2004 to June 26, 2005 primarily because of the use of certain deferred tax assets to offset the current tax liability that otherwise would have resulted from current operations.

Note 6 – Stockholders’ Equity

     Changes in stockholders’ equity for the nine months ended June 26, 2005 were as follows (in millions):

      Stock Repurchase Program. On March 8, 2005, the Company authorized the expenditure of up to $2 billion to repurchase shares of the Company’s stock. During the nine months ended June 26, 2005, the Company repurchased and retired 27,083,000 shares at a net aggregate cost of $953 million under this plan.

     In connection with the Company’s stock repurchase program, the Company sold two put options, with expiration dates of September 6, 2005 and December 7, 2005, under separate contracts with an independent third party during the nine months ended June 26, 2005 that may require the Company to purchase 11,500,000 shares of its common stock upon exercise at a net cost of $389 million (net of the option premiums received). The Company recorded the $29 million in premiums received as additions to other current liabilities and recognized $9 million and $12 million in losses on derivative instruments for the three months and nine months ended June 26, 2005, respectively, due to increases in the fair values of the options. At June 26, 2005, the recorded values of the option liabilities totaled $41 million. Any shares repurchased upon exercise of the put options will be retired.

     At June 26, 2005, $659 million remains authorized for repurchases under this program, which does not have an expiration date.

      Dividends. On March 8, 2005, the Company announced an increase in the future cash dividend rate on the Company’s common stock from $0.07 to $0.09 per share. Cash dividends announced in the nine months ended June 26, 2005 and June 27, 2004 were as follows (in millions, except per share data):

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     On July 7, 2005, the Company announced a cash dividend of $0.09 per share on the Company’s common stock, payable on September 23, 2005 to stockholders of record as of August 26, 2005, which will be reflected in the fourth quarter.

Note 7 – Commitments and Contingencies

      Litigation. Durante, et al v. QUALCOMM : On February 2, 2000, three former employees filed a putative class action against the Company, alleging unlawful age discrimination in their selection for layoff in 1999, and seeking monetary damages based thereon. On April 15, 2003, the United States District Court for the Southern District of California granted the Company’s summary judgment motions as to all then-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, which was argued on June 22, 2005. On June 20, 2003, 76 of the opt-in plaintiffs filed, but have not yet served, a new action in the same court, alleging violations of the Age Discrimination in Employment Act as a result of their layoffs in 1999. To date, all but 27 of the class members and plaintiffs agreed to dismiss all pending appeals and claims against the Company in exchange for a waiver of litigation costs.

      Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM, Inc. and SnapTrack, Inc. : On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. filed suit against QUALCOMM and its subsidiary SnapTrack, Inc. in the United States District Court for the Northern District of California seeking monetary damages and injunctive relief based on the alleged infringement of three patents. Following a verdict and finding of no infringement of Zoltar’s patent claims, the Court entered a judgment in favor of the Company and SnapTrack on Zoltar’s complaint and awarded the Company and SnapTrack their costs of suit. Zoltar filed a notice of appeal, and the Company and SnapTrack filed a responsive notice and motion to dismiss. Zoltar’s appeal was dismissed and the issue of reaching a final judgment on issues aside from non-infringement is pending before the district court.

      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 alleging infringement of three patents and seeking monetary damages and injunctive relief based thereon. The Company amended the complaint, bringing the total number of patents at issue to four and adding misappropriation of trade secret and unfair competition claims. Maxim counterclaimed against the Company, alleging antitrust violations, patent misuse and unfair competition seeking monetary damages and injunctive relief based thereon. On May 5, 2004, the Court granted Maxim’s motion that no indirect infringement arose in connection with defendants’ sales of certain products to certain licensees of the Company. A motion by the Company for preliminary injunction regarding the alleged trade secret misappropriations by Maxim was heard on January 4, 2005. The Court found that Maxim had acted unlawfully by misappropriating the Company’s trade secrets and issued an injunction order prohibiting further misappropriation and requiring Maxim to notify customers of the order. Maxim has sought appellate review of the injunction order.

      Whale Telecom Ltd v. QUALCOMM Incorporated: On November 15, 2004, Whale Telecom Ltd. sued the Company in the New York State Supreme Court, County of New York, seeking monetary damages based on the claim that the Company fraudulently induced it to enter into certain infrastructure services agreements in 1999 and later interfered with their performance of those agreements.

      Broadcom Corporation v. QUALCOMM Incorporated: On May 18, 2005, Broadcom filed two actions in the United States District Court for the Central District of California against the Company alleging infringement of ten patents and seeking monetary damages and injunctive relief based thereon. On the same date, Broadcom also filed a complaint in the United States International Trade Commission (ITC) alleging infringement of five of the same

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

patents at issue in the Central District Court cases seeking a determination and relief under Section 337 of the Tariff Act of 1930. On July 1, 2005, Broadcom filed an action in the United States District Court for the District of New Jersey against the Company alleging violations of state and federal antitrust and unfair competition laws as well as common law claims, generally relating to licensing and chip sales activities, seeking monetary damages and injunctive relief based thereon. Discovery has commenced in the ITC action. Discovery has yet to begin in the District Court actions.

      QUALCOMM Incorporated v. Broadcom Corporation: On July 11, 2005, the Company filed an action in the United States District Court for the Southern District of California against Broadcom alleging infringement of seven patents, each of which is essential to the practice of either the GSM or 802.11 standards, and seeking monetary damages and injunctive relief based thereon. Discovery has yet to begin in the action.

      Other: 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, including In re Wireless Telephone Frequency Emissions Products Liability Litigation, United States District Court for the District of Maryland, and several individually filed actions, seeking monetary 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 March 21, 2005, the 4 ^th Circuit Court of Appeals reversed the ruling by the District Court and ordered the cases remanded to state court. All remaining cases filed against the Company allege personal injury as a result of their use of a wireless telephone. Those cases have been remanded to the Washington, D.C. Superior Court. 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.

     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. In addition, some matters that have previously been disclosed may no longer be described in this Note because of rulings in the case, settlements, changes in the Company’s business or other developments rendering them no longer material to the Company’s operating results, liquidity or financial position.

      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. At June 26, 2005, the Company has a 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.

      Operating Leases. The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from less than 1 year to 20 years and with provisions for cost-of-living increases. Future minimum lease payments for the remainder of fiscal 2005 and each of the subsequent four years from fiscal 2006 through 2009 are $14 million, $48 million, $31 million, $18 million and $14 million, respectively, and $18 million thereafter.

      Purchase Obligations. The Company has agreements with suppliers and other parties to purchase inventory, other goods and services and long-lived assets and estimates its noncancelable obligations under these agreements for the remainder of fiscal 2005 and for each of the subsequent four years from fiscal 2006 through 2009 to be $343 million, $201 million, $74 million, $28 million and $7 million, respectively. Of the totals for the remainder of 2005 and for each of the subsequent four years from fiscal 2006 through 2009, commitments to purchase integrated circuit product inventories comprised $295 million, $144 million, $65 million, $24 million and $5 million, respectively.

15

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 and WCDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions 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 and/or useful in the manufacture and sale of CDMA (including, without limitation, all versions of cdmaOne, CDMA2000, TD-SCDMA, WCDMA and their derivatives) 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 the wireless data market, including its BREW product and services, QChat and QPoint;
	°		QUALCOMM Government Technologies (QGOV) – formerly QUALCOMM Digital Media, 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, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies.

•

QUALCOMM Strategic Initiatives (QSI) — manages the Company’s strategic investment activities, including MediaFLO USA, Inc. (MediaFLO USA), the Company’s wholly-owned wireless multimedia operator subsidiary. QSI makes strategic investments to promote the worldwide adoption of CDMA products and services.

     During the first quarter of fiscal 2005, the Company reorganized its MediaFLO USA business into the QSI segment. The operating expenses related to the MediaFLO USA business were included in reconciling items through the end of fiscal 2004. During the first quarter of fiscal 2005, the Company also reorganized a division in the QWI segment that develops and sells test tools to support the design, development, testing and deployment of infrastructure and subscriber products into the QCT segment. Prior period segment information has been adjusted to conform to the new segment presentation.

     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.

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

     Generally, revenues between 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 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 segments.

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

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     Segment assets are comprised of accounts receivable and inventory for QCT, QTL and QWI. The QSI segment assets include certain marketable securities, accounts receivable, finance receivables, notes receivable, wireless licenses, other investments and all assets of consolidated investees. 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, deferred tax assets, goodwill and certain other intangible assets. Segment assets were as follows (in millions):

     The increase in QTL’s segment assets resulted from an increase in accounts receivable from licensees that report royalties quarterly and make payments on a semi-annual basis.

Note 9 – Acquisitions

     In October 2004, the Company completed the acquisition of all of the outstanding capital stock of Iridigm Display Corporation (Iridigm), a privately held display technology company, that it did not already own. As a result of the closing of the acquisition, the Company no longer treats its previously owned interest in Iridigm as a cost method investment. The purchase price was approximately $188 million, comprised primarily of $160 million in cash consideration, $18 million related to the fair value of vested and unvested options exchanged at the closing date, and the $9 million recorded value of the Company’s earlier investment in Iridigm. The $160 million of total cash consideration less cash acquired of approximately $24 million resulted in a net cash outlay of approximately $136 million. Iridigm is a nonreportable segment included in reconciling items in the reconciliation of revenues and EBT for reportable segments to the consolidated totals.

     In October 2004, the Company completed the acquisition of all of the outstanding capital stock of Trigenix Limited (Trigenix), a United Kingdom-based developer of user interfaces for mobile phones for a purchase price of

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QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

approximately $35 million, comprised primarily of $33 million in cash consideration. Trigenix is consolidated in the QIS division of the QWI segment.

     In November 2004, the Company completed the acquisition of all of the outstanding capital stock of Spike Technologies, Inc., Spike InfoTech Private Limited, a wholly owned subsidiary of Spike Technologies, Inc., and Spike Technologies India Private Ltd. (collectively Spike). Spike is a semiconductor design services company based primarily in India. The initial purchase price of approximately $15 million was comprised primarily of $7 million in cash consideration, $6 million in notes payable to the former shareholders and $1 million related to the fair value of vested and unvested options exchanged at the closing date. The $7 million of cash consideration less cash acquired of approximately $3 million resulted in a net cash outlay of approximately $4 million. An additional $4 million in consideration is payable in cash through November 2006 if certain performance and other milestones are reached. Spike is consolidated in the QCT segment.

     The preliminary allocation of purchase price to the acquired assets and assumed liabilities based on the estimated fair values was as follows (in millions):

     The Company expects to finalize the purchase price allocations within one year of the acquisition dates and does not anticipate material adjustments to the preliminary purchase price allocations. Amounts allocated to other intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from three to seven years. The consolidated financial statements include the operating results of these businesses from their respective dates of acquisition. Pro forma results of operations have not been presented because the effect of the acquisitions was not material.

Note 10 – Discontinued Operations

     On December 2, 2003, Embratel Participações S.A. (Embratel) acquired the Company’s direct and indirect ownership interests in Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies), consolidated subsidiaries of the Company’s QSI segment, (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 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.

     In December 2003, the Company initiated a waiver and return of its personal mobile service (SMP) licenses in certain regions in Brazil 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.

     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. 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

19

QUALCOMM Incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 consolidated statements of operations and cash flows. For the nine months ended June 27, 2004, revenues of $36 million were reported in the loss from discontinued operations. At June 26, 2005 and September 26, 2004, the Company had no remaining assets or liabilities related to the Vésper Operating Companies, TowerCo or SMP licenses recorded on its condensed consolidated balance sheet.

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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 26, 2004 contained in our 2004 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 2005 were $1.36 billion, with net income of $560 million. The following recent developments occurred with respect to key elements of our business or our industry:

	•		CDMA based 3G subscribers to wireless operators’ services grew to at least 187 million worldwide through June 2005, including at least 15 million 1xEV-DO subscribers and approximately 29 million WCDMA subscribers, according to inputs from a large portion of the wireless operators around the world.
	•		CDMA and WCDMA handset shipments by manufacturers to wireless operators totaled approximately 43 million units at an average selling price of $231 as reported in the third quarter of fiscal 2005 for licensee sales during the second quarter of fiscal 2005. WCDMA royalties for all products contributed approximately 36% of our total royalty revenues.
	•		During the third quarter of fiscal 2005, we shipped approximately 36 million Mobile Station Modems (MSM) integrated circuits for mobile CDMA phones and data modules, nearly all of which were 3G, including CDMA2000 1X, 1xEV-DO and WCDMA.
	•		As of July 2005, 45 wireless operators were offering BREW services in 24 countries. BREW publishers and developers have earned more than $350 million to date from the sale of wireless applications and services developed for the BREW solution. Through July, three operators, including ALLTEL, have entered into agreements to license our UiOne user interface technology.

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 licensing and related services. Operating expenses primarily consist of cost of equipment and services, research and development and selling, general and administrative 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 products. QCT’s integrated circuit products and software are used in wireless phones and infrastructure equipment. The wireless phone integrated circuits include the 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 56% and 59% of total consolidated revenues for the third quarter of fiscal 2005 and 2004. QCT revenues comprised 58% and 60% of total consolidated revenues for the first nine months of fiscal 2005 and 2004, respectively.

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     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, all versions of cdmaOne, CDMA2000, TD-SCDMA, WCDMA and their derivatives) 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% of total consolidated revenues for the third quarter of both fiscal 2005 and 2004. QTL revenues comprised 33% and 31% of total consolidated revenues for the first nine months of fiscal 2005 and 2004, respectively.

     QWI, which includes QUALCOMM Wireless Business Solutions (QWBS), QUALCOMM Internet Services (QIS) and QUALCOMM Government Technologies (QGOV), generates revenues 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, position reporting and wireless application services to transportation companies, private fleets, construction equipment fleets and other enterprise companies. QIS provides the BREW (Binary Runtime Environment for Wireless) product and services, including the UiOne product, for the development and over-the-air deployment of data services on wireless devices. QIS also provides QChat and QPoint products and services. QChat enables virtually instantaneous push-to-chat functionality on CDMA-based wireless devices while QPoint enables operators to offer E-911 and location-based applications and services. The QGOV division provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies. QWI revenues comprised 12% and 11% of total consolidated revenues in the third quarter of fiscal 2005 and 2004, respectively. QWI revenues comprised 12% and 11% of total consolidated revenues for the first nine months of fiscal 2005 and 2004, respectively.

     QSI makes strategic investments to promote the worldwide adoption of CDMA products and services. 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. Effective as of the beginning of fiscal 2005, we present the operating results of our wireless multimedia operator, MediaFLO USA, Inc. (MediaFLO USA), in the QSI segment. Our MediaFLO USA subsidiary expects to offer a FLO (Forward Link Only) technology based network, initially targeting 100 top markets, with the eventual capability for broad nationwide coverage. This network is expected to be utilized as a shared resource for wireless operators and their customers in the United States starting in 2006. FLO is a multicast technology specifically designed for markets where dedicated spectrum is available and where regulations permit high-power transmission, thereby reducing the number of towers required to provide market coverage. MediaFLO USA plans to use our nationwide 700 MHz spectrum and will be responsible for procuring and distributing content made available to its wireless operator customers. Distribution, marketing, billing and customer relationships are expected to remain with the wireless operator partners. We are evaluating a number of corporate structuring options, including potentially distributing our ownership interest in MediaFLO USA to our stockholders in a spin-off transaction.

     Nonreportable segments include the Iridigm business, a display technology company that we acquired in the first quarter of fiscal 2005, and other product initiatives.

Looking Forward

     We expect continued growth in demand for CDMA2000 and WCDMA products and services in markets around the world:

	•		Operators on the CDMA2000 technology path are deploying 1xEV-DO and are preparing to deploy EV-DO Revision A. GSM operators are migrating their networks to WCDMA and are preparing to deploy HSDPA (High Speed Downlink Packet Access). The deployment of these 3G networks enables higher voice capacity and supports data intensive applications like multimedia.
	•		As of July 2005, 78 WCDMA networks have launched, as reported by the Global Mobile Suppliers Association, an international organization of WCDMA and GSM (Global System for Mobile Communications) suppliers.
	•		We expect volume increases and growing competition among WCDMA phone manufacturers will help decrease average WCDMA phone prices significantly and drive growth of WCDMA phone sales worldwide.

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	•		We expect growing demand for phones and devices with greater multimedia capabilities will continue to drive the need for increased MSM functionality and integration, and we intend to continue to invest significant resources in developing integrated circuit products.
	•		We expect growing demand for low end phones and have invested resources for single chip solutions which combine the baseband, radio frequency and power management chips into one package. Lower component counts and further integration drive costs down and enable faster time to market to meet the increasing demand for low end phones. While we are moving aggressively to address the low end market more effectively with CDMA, we still face significant competition with GSM in this market.
	•		We will also continue our development efforts with respect to our BREW applications development platform and our new MediaFLO multi-media distribution system and FLO technology for delivery of low cost multimedia content to multiple subscribers.

     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 continue to face significant competition from non-CDMA technologies, as well as competition from companies offering other CDMA-based products. 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, Japan and the United States comprised 38%, 21% and 19%, respectively, of total consolidated revenues in the first nine months of fiscal 2005 as compared to 43%, 19% and 21%, respectively, in the first nine months of fiscal 2004. We distinguish revenue from external customers by geographic areas based on customer location. The increase in revenues from customers in Japan from 19% of total revenues to 21% is primarily attributable to higher sales of integrated circuit products to manufacturers in Japan and higher royalties from licensees in Japan, both resulting from the growth of CDMA2000 and WCDMA sales in Japan as well as the success of Japanese manufacturers in exporting products worldwide. Combined revenues from customers in South Korea and the United States decreased as a percentage of total revenues, from 64% to 57%, due primarily to increases in revenues from WCDMA manufacturers in Western Europe and increased activity by Chinese manufacturers.

Third Quarter of Fiscal 2005 Compared to Third Quarter of Fiscal 2004

      Revenues. Total revenues for the third quarter of fiscal 2005 were $1.36 billion, compared to $1.34 billion for the third quarter of fiscal 2004.

     Revenues from sales of equipment and services for the third quarter of fiscal 2005 were $882 million, compared to $888 million for the third quarter of fiscal 2004. Revenues from sales of integrated circuit products decreased $27 million, resulting primarily from a decrease of $80 million related to the net effects of reductions in average sales prices and changes in product mix, partially offset by an increase of $52 million related to higher unit shipments of MSM and accompanying RF integrated circuits. Revenues from the sale of satellite and terrestrial-based two-way data messaging systems and related messaging services increased $12 million.

     Revenues from licensing and royalty fees for the third quarter of fiscal 2005 were $476 million, compared to $453 million for the third quarter of fiscal 2004. During the third quarter of fiscal 2005, the QTL segment recorded royalty revenues solely based on royalties reported by licensees during the quarter, as compared to the method used during the third quarter of fiscal 2004 of recording royalty revenues from certain licensees based on estimates of royalty revenues earned by those licensees during the quarter. Revenues from licensing and royalty fees increased primarily as a result of a $28 million increase in royalties reported to the QTL segment by its external licensees, resulting from an increase in phone and infrastructure equipment sales by its licensees at higher average selling prices of phones, partially offset by the effect of using estimates to record royalty revenues in the third quarter of fiscal 2004 and an adjustment due to a royalty reimbursement claim by a certain licensee. In the third quarter of fiscal 2005, our licensees reported CDMA phone sales for the second quarter of fiscal 2005 of approximately 43 million units, as compared to 38 million units reported in the third quarter of fiscal 2004 for phone sales during the second quarter of fiscal 2004.

      Cost of Equipment and Services. Cost of equipment and services revenues for the third quarter of fiscal 2005 was $389 million, compared to $369 million for the third quarter of fiscal 2004. Cost of equipment and services revenues as a percentage of equipment and services revenues was 44% for the third quarter of fiscal 2005, compared to 42% in the third quarter of fiscal 2004. The margin percentage decline in the third quarter of fiscal 2005 compared

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to the third quarter of fiscal 2004 was primarily due to a 1.0% decrease in the QCT margin percentage resulting primarily from an increase in product support costs. 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 2005, research and development expenses were $259 million or 19% of revenues, compared to $194 million or 14% of revenues for the third quarter of fiscal 2004. The dollar and percentage increases in research and development expenses primarily resulted from increases in costs related to the development of integrated circuit products and initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products, including CDMA2000 1xEV-DO, WCDMA, MediaFLO and HSDPA.

      Selling, General and Administrative Expenses. For the third quarter of fiscal 2005, selling, general and administrative expenses were $150 million or 11% of revenues, compared to $156 million or 12% of revenues for the third quarter of fiscal 2004. The dollar decrease was primarily due to a $13 million decrease in charitable contributions largely attributable to a grant to an educational institution in the third quarter of fiscal 2004 and a $4 million increase in other income, partially offset by an $8 million increase in employee related expenses and professional fees.

      Net Investment Income. Net investment income was $126 million for the third quarter of fiscal 2005, compared to $46 million for the third quarter of fiscal 2004. The net increase 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 and higher interest rates and dividends earned on these balances. Net realized gains on corporate investments increased primarily as a result of an increase in marketable equity securities as a percentage of total corporate investments in fiscal 2005, as compared to fiscal 2004. The increase in net realized gains on strategic investments in QSI resulted primarily from a $48 million gain on our minority investment in a wireless publisher. Gains and losses on derivative instruments in both fiscal 2005 and 2004 relate primarily to changes in the fair values of put options sold in connection with our stock repurchase program. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $7 million for the third quarter of fiscal 2005 as compared to $17 million for the third quarter of fiscal 2004.

      Income Tax Expense. Income tax expense from continuing operations was $126 million for the third quarter of fiscal 2005, compared to $182 million for the third quarter of fiscal 2004. The annual effective tax rate is estimated to be 22% for fiscal 2005, compared to the 29% estimated annual effective tax rate recorded during the third quarter of fiscal 2004, and the effective tax rate of 25% for fiscal 2004. The estimated effective tax rate for fiscal 2005 decreased from 24% in the second quarter to 22% in the third quarter, which resulted in an 18% effective tax rate in the third quarter of fiscal 2005. Our income tax expense in the third quarter of fiscal 2005 was reduced as the result of a tax benefit of approximately $42 million related to our increased ability to use capital loss carryforwards and a tax benefit of approximately $38 million related to an election made to compute our California state income tax based solely on our income earned within the United States.

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     The estimated annual effective tax rate for fiscal 2005 is 13% lower than the United States federal statutory rate primarily due to benefits of approximately 10% related to foreign earnings taxed at less than the United States federal rate, 3% related to research and development tax credits, 3% related to an increase in tax benefits recorded arising from our forecast of our ability to use our capital loss carryforwards, partially offset by state taxes of approximately 3%.

     As of June 26, 2005, we had a valuation allowance of approximately $73 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.

First Nine Months of Fiscal 2005 Compared to First Nine Months of Fiscal 2004

      Revenues. Total revenues for the first nine months of fiscal 2005 were $4.11 billion, compared to $3.76 billion for the first nine months of fiscal 2004. Revenues from LG Electronics, Samsung, and Motorola, customers of our QCT and QTL segments, comprised an aggregate of 16%, 12% and 11% of total consolidated revenues, respectively, in the first nine months of fiscal 2005, as compared to 15%, 15% and 10% of total consolidated revenues, respectively, in the first nine months of fiscal 2004.

     Revenues from sales of equipment and services for the first nine months of fiscal 2005 were $2.71 billion, compared to $2.56 billion for the first nine months of fiscal 2004. Revenues from sales of integrated circuit products increased $109 million, resulting primarily from an increase of $302 million related to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of $208 million related to the net effects of reductions in average sales prices and changes in product mix. Revenues from the sale of satellite and terrestrial-based two-way data messaging systems and related messaging services increased $28 million.

     Revenues from licensing and royalty fees for the first nine months of fiscal 2005 were $1.40 billion, compared to $1.20 billion for the first nine months of fiscal 2004. During the first nine months of fiscal 2005, the QTL segment recorded royalty revenues solely based on royalties reported by licensees during the quarter, as compared to the method used during the first nine months of fiscal 2004 of recording royalty revenues from certain licensees based on estimates of royalty revenues earned by those licensees during the quarter. Revenues from licensing and royalty fees increased primarily as a result of a $258 million increase in royalties reported to the QTL segment by its external licensees, resulting from an increase in phone and infrastructure equipment sales by its licensees at higher average selling prices of phones, partially offset by the effect of using estimates to record royalty revenues in the first nine months of fiscal 2004. In the first nine months of fiscal 2005, our licensees reported CDMA phone sales for the fourth quarter of fiscal 2004 and the first and second quarters of fiscal 2005 of approximately 134 million units, as compared to 107 million units reported in the first nine months of fiscal 2004 for phone sales during the comparative periods.

      Cost of Equipment and Services. Cost of equipment and services revenues for the first nine months of fiscal 2005 was $1.20 billion, compared to $1.07 billion for the first nine months of fiscal 2004. Cost of equipment and services revenues as a percentage of equipment and services revenues was 44% for the first nine months of fiscal 2005, compared to 42% in the first nine months of fiscal 2004. The margin percentage decline in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 was primarily due to a 1.8% decrease in QCT margin percentage. Increases in product support costs and the reserves for excess and obsolete inventory contributed 1.1% and 0.9%, respectively, to the total decrease in QCT margin percentage. 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 first nine months of fiscal 2005, research and development expenses were $740 million or 18% of revenues, compared to $513 million or 14% of revenues for the first nine months of fiscal 2004. The dollar and percentage increases in research and development expenses primarily resulted from increases in costs related to the development of integrated circuit products and initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products, including CDMA2000 1xEV-DO, WCDMA, MediaFLO and HSDPA.

      Selling, General and Administrative Expenses. For the first nine months of fiscal 2005, selling, general and administrative expenses were $452 million or 11% of revenues, compared to $409 million or 11% of revenues for the first nine months of fiscal 2004. The dollar increase was primarily due to a $30 million increase in employee related expenses and a $19 million increase in professional fees related to patent and audit activities, partially offset

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by a $12 million decrease in charitable contributions largely attributable to a grant to an educational institution in the third quarter of fiscal 2004 and a $5 million decrease in other income.

      Net Investment Income. Net investment income was $307 million for the first nine months of fiscal 2005, compared to $114 million for the first nine months of fiscal 2004. The net increase 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 and higher interest rates and dividends 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. Net realized gains on corporate investments increased primarily as a result of an increase in marketable equity securities as a percentage of total corporate investments in fiscal 2005, as compared to fiscal 2004. The increase in net realized gains on strategic investments in QSI resulted primarily from a $48 million gain on our minority investment in a wireless publisher and a $41 million gain on the sale of our investment in Next Wave Telecom Inc. Gains and losses on derivative instruments in both fiscal 2005 and 2004 relate primarily to changes in the fair values of put options sold in connection with our stock repurchase program. Equity in losses of investees decreased primarily due to a decrease in losses incurred by Inquam, of which our share was $26 million for the first nine months of fiscal 2005 as compared to $51 million for the first nine months of fiscal 2004.

      Income Tax Expense. Income tax expense from continuing operations was $418 million for the first nine months of fiscal 2005, compared to $543 million for the first nine months of fiscal 2004. The annual effective tax rate is estimated to be 22% for fiscal 2005, compared to the 29% estimated annual effective tax rate recorded during the first nine months of fiscal 2004, and the annual effective tax rate of 25% for fiscal 2004. The decrease in the estimated rate for fiscal 2005 is primarily the result of our increased ability to use capital loss carryforwards and an election made to compute our California state income tax based solely on our income earned within the United States.

     The estimated annual effective tax rate for fiscal 2005 is 13% lower than the United States federal statutory rate primarily due to benefits of approximately 10% related to foreign earnings taxed at less than the United States federal rate, 3% related to research and development tax credits, 3% related to an increase in tax benefits recorded arising from our forecast of our ability to use our capital loss carryforwards, partially offset by state taxes of approximately 3%.

     As of June 26, 2005, we had a valuation allowance of approximately $73 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.

Our Segment Results for the Third Quarter of Fiscal 2005 Compared to the Third Quarter of Fiscal 2004

     The following should be read in conjunction with the third quarter financial results of fiscal 2005 for each reporting segment. See “Notes to Condensed Consolidated Financial Statements – Note 8 – Segment Information.”

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      QCT Segment. QCT revenues for the third quarter of fiscal 2005 were $766 million, compared to $794 million for the third quarter of fiscal 2004. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $743 million for the third quarter of fiscal 2005, compared to $771 million for the third quarter of fiscal 2004. The decrease in MSM and accompanying RF integrated circuits revenue was comprised of a decrease of $80 million related to the net effects of reductions in average sales prices and changes in product mix, partially offset by an increase of $52 million related to higher unit shipments. Approximately 36 million MSM integrated circuits were sold during the third quarter of fiscal 2005, compared to approximately 35 million for the third quarter of fiscal 2004.

     QCT’s earnings before taxes for the third quarter of fiscal 2005 were $186 million, compared to $255 million for the third quarter of fiscal 2004. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 24% in the third quarter of fiscal 2005, compared to 32% in the third quarter of fiscal 2004. The decline in operating margin percentage in the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004 is primarily the result of a 37% increase in research and development expenses for the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004, mainly related to increased investment in new integrated circuit products and technology research and development initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products including CDMA2000 1xEV-DO, WCDMA and HSDPA.

      QTL Segment. QTL revenues for the third quarter of fiscal 2005 were $448 million, compared to $436 million for the third quarter of fiscal 2004. QTL’s earnings before taxes for the third quarter of fiscal 2005 were $407 million, compared to $398 million for the third quarter of fiscal 2004. QTL’s operating margin percentage was 91% in the third quarter of both fiscal 2005 and 2004. The increase in both revenues and earnings before taxes primarily resulted from a $28 million increase in royalties reported to us by our external licensees, partially offset by the effect of using estimates to record royalty revenue in the third quarter of fiscal 2004 and an adjustment due to a royalty reimbursement claim by a certain licensee. Royalties reported to us by external licensees were $401 million in the third quarter of fiscal 2005, compared to $373 million in the third quarter of fiscal 2004. The increase in royalties reported to us by external licensees was primarily due to an increase in sales of CDMA products by licensees, resulting from higher worldwide demand for CDMA products at higher average selling prices due primarily to the growth of higher priced WCDMA sales and shifts in the geographic distribution of sales of CDMA products. Revenues from amortization of license fees were $18 million in the third quarter of fiscal 2005, compared to $15 million in the third quarter of fiscal 2004. In each of these quarters, license fee revenue included $1 million related to equity received as license fees. Other revenues were comprised of intersegment royalties.

     During the periods preceding the fourth quarter of fiscal 2004, we estimated and recorded the royalty revenues earned for sales by certain licensees (the Estimated Licensees) in the quarter in which such sales occurred, but only when reasonable estimates of such amounts could be made. Not all royalties earned were recorded based on estimates. Starting in the fourth quarter of fiscal 2004, we determined that, due to escalating and changing business trends, we no longer have the ability to reliably estimate royalty revenues from the Estimated Licensees. These escalating and changing trends included the commercial launches and global expansion of WCDMA networks, changes in market share among licensees due to increased global competition, and increased variability in the integrated circuit and finished product inventories of licensees. Starting in the fourth quarter of fiscal 2004, we began recognizing royalty revenues solely based on royalties reported by licensees during the quarter. The change in the timing of recognizing royalty revenue was made prospectively and had the initial one-time effect of reducing royalty revenues recorded in the fourth quarter of fiscal 2004. Accordingly, we did not estimate royalty revenues earned in the third quarter of fiscal 2005.

      QWI Segment. QWI revenues for the third quarter of fiscal 2005 were $164 million, compared with $143 million for the third quarter of fiscal 2004. Revenues increased primarily due to a $12 million increase in QWBS revenue and an $8 million increase in QIS revenue. The increase in QWBS revenue is primarily attributable to a $9 million increase in equipment revenue, net of a $6 million decrease in amortization of deferred revenues related to historical equipment sales. QWBS shipped approximately 13,800 satellite-based systems and 19,600 terrestrial-based systems during the third quarter of fiscal 2005, compared to approximately 10,200 satellite-based systems and 2,300 terrestrial-based systems in the third quarter of fiscal 2004. The increase in QIS revenue is primarily attributed to an $11 million increase in fees related to our expanded BREW customer base and products.

     QWI’s earnings before taxes for the third quarter of fiscal 2005 were $12 million, compared to $1 million for the third quarter of fiscal 2004. QWI’s operating margin percentage was 7% in the third quarter of fiscal 2005, compared to 1% in the third quarter of fiscal 2004. The increases in QWI earnings before taxes and operating margin

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percentage were primarily due to an $8 million increase in QIS gross margin largely resulting from the increase in fees related to our expanded BREW customer base and products.

      QSI Segment. QSI’s earnings before taxes from continuing operations for the third quarter of fiscal 2005 were $30 million, compared to losses before taxes of $12 million for the third quarter of fiscal 2004. During the third quarter of fiscal 2005, QSI recorded $46 million in realized gains on marketable securities and other investments, compared to $7 million for the third quarter of fiscal 2004. Equity in losses of investees decreased by $11 million primarily due to a decrease in losses incurred by Inquam during the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004, of which our share was $7 million for the third quarter of fiscal 2005 as compared to $17 million for the third quarter of fiscal 2004. These improvements in QSI’s earnings before taxes from continuing operations were partially offset by a $12 million increase in MediaFLO operating expenses and the effect of $4 million of other income recorded in the third quarter of fiscal 2004 related to the transfer of a portion of the ADV to a wireless operator.

Our Segment Results for the First Nine Months of Fiscal 2005 Compared to the First Nine Months of Fiscal 2004

     The following should be read in conjunction with the first nine months financial results of fiscal 2005 for each reporting segment. See “Notes to Condensed Consolidated Financial Statements – Note 8 – Segment Information.”

      QCT Segment. QCT revenues for the first nine months of fiscal 2005 were $2.38 billion, compared to $2.26 billion for the first nine months of fiscal 2004. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $2.32 billion for the first nine months of fiscal 2005, compared to $2.21 billion for the first nine months of fiscal 2004. The increase in MSM and accompanying RF integrated circuits revenue was comprised of an increase of $302 million related to higher unit shipments, partially offset by a decrease of $208 million related to the net effects of reductions in average sales prices and changes in product mix. Approximately 111 million MSM integrated circuits were sold during the first nine months of fiscal 2005, compared to approximately 98 million for the first nine months of fiscal 2004.

     QCT’s earnings before taxes for the first nine months of fiscal 2005 were $586 million, compared to $776 million for the first nine months of fiscal 2004. QCT’s operating margin percentage was 25% in the first nine months of fiscal 2005, compared to 34% in the first nine months of fiscal 2004. The decline in operating margin percentage in the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004 is primarily the result of a 41% increase in research and development and selling, general and administrative expenses during the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004, mainly related to increased investment in new integrated circuit products and technology research, development and marketing initiatives to support multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products including CDMA2000 1xEV-DO, WCDMA and HSDPA.

      QTL Segment. QTL revenues for the first nine months of fiscal 2005 were $1.34 billion, compared to $1.18 billion for the first nine months of fiscal 2004. QTL’s earnings before taxes for the first nine months of fiscal 2005 were $1.21 billion, compared to $1.08 billion for the first nine months of fiscal 2004. QTL’s operating margin percentage was 90% in the first nine months of fiscal 2005, compared to 92% in the first nine months of fiscal 2004. The increase in both revenues and earnings before taxes primarily resulted from a $258 million increase in royalties reported to us by our external licensees, partially offset by the effect of using estimates to record royalty revenue in the first nine months of fiscal 2004. Royalties reported to us by external licensees were $1.20 billion in the first nine months of fiscal 2005, compared to $939 million in the first nine months of fiscal 2004. The increase in royalties reported to us by external licensees was primarily due to an increase in sales of CDMA products by licensees, resulting from higher worldwide demand for CDMA products at higher average selling prices due primarily to the growth of higher priced WCDMA sales and shifts in the geographic distribution of sales of CDMA products. Revenues from amortization of license fees were $52 million in the first nine months of fiscal 2005, compared to $45 million in the first nine months of fiscal 2004. During the first nine months of fiscal 2005 and 2004, license fee revenue included $3 million and $4 million, respectively, related to equity received as license fees. Other revenues were comprised of intersegment royalties.

      QWI Segment. QWI revenues for the first nine months of fiscal 2005 were $473 million, compared with $417 million for the first nine months of fiscal 2004. Revenues increased primarily due to a $30 million increase in QIS revenue and a $29 million increase in QWBS revenue. The increase in QIS revenue is primarily attributed to a $34 million increase in fees related to our expanded BREW customer base and products. The increase in QWBS revenue is primarily attributable to a $20 million increase in equipment revenue, net of an $18 million decrease in

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amortization of deferred revenues related to historical equipment sales, and a $9 million increase in messaging revenue as a result of a larger installed base. QWBS shipped approximately 35,800 satellite-based systems and 45,000 terrestrial-based systems during the first nine months of fiscal 2005, compared to approximately 29,600 satellite-based systems and 5,100 terrestrial-based systems in the first nine months of fiscal 2004.

     QWI’s earnings before taxes for the first nine months of fiscal 2005 were $37 million, compared to $7 million for the first nine months of fiscal 2004. QWI’s operating margin percentage was 7% in the first nine months of fiscal 2005, compared to 2% in the first nine months of fiscal 2004. The increases in QWI earnings before taxes and operating margin percentage was primarily due to a $30 million increase in QIS gross margin largely resulting from the increase in fees related to our expanded BREW customer base and products.

      QSI Segment. QSI’s earnings before taxes from continuing operations for the first nine months of fiscal 2005 were $37 million, compared to losses before taxes from continuing operations of $42 million for the first nine months of fiscal 2004. During the first nine months of fiscal 2005, QSI recorded $98 million in realized gains on marketable securities and other investments, compared to $11 million for the first nine months of fiscal 2004. Equity in losses of investees decreased by $30 million primarily due to a decrease in losses incurred by Inquam during the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004, of which our share was $26 million for the first nine months of fiscal 2005 as compared to $51 million for the first nine months of fiscal 2004. These improvements in QSI’s earnings before taxes from continuing operations were partially offset by a $27 million increase in MediaFLO operating expenses and an $11 million decrease in interest income that resulted from the prepayment of the Pegaso debt facility in the first quarter of fiscal 2004.

Liquidity and Capital Resources

     Cash and cash equivalents and marketable securities were $7.9 billion at June 26, 2005, an increase of $229 million from September 28, 2004. The increase was primarily the result of $1.7 billion in cash provided by operating activities and $236 million in net proceeds from the issuance of common stock under our stock option and employee stock purchase plans, partially offset by $953 million in repurchases of our common stock under our stock repurchase program, $438 million in capital expenditures, $377 million in dividends paid and $189 million invested in other entities and acquisitions.

     On March 8, 2005, we authorized the expenditure of up to $2 billion to repurchase shares of our stock. Through July 19, 2005, we repurchased approximately 27,083,000 shares of our common stock at a net aggregate cost of $953 million. In connection with this stock repurchase program, we sold two put options, with expiration dates of September 6, 2005 and December 7, 2005, that may require us to repurchase 11,500,000 shares at a net cost of $389 million (net of the premiums received). At July 19, 2005, $659 million remains authorized for repurchases under our stock repurchase program, which does not have an expiration date.

     On March 8, 2005, we announced an increase in the dividend rate on our common stock from $0.07 to $0.09 per share. On July 7, 2005, we announced a cash dividend of $0.09 per share on our common stock, payable on September 23, 2005 to stockholders of record as of August 26, 2005.

     Accounts receivable increased by 25% during the third quarter of fiscal 2005. Days sales outstanding, on a consolidated basis, were 41 days at June 26, 2005, compared to 32 days at March 27, 2005. The increases in accounts receivable and days sales outstanding were primarily due to the contractual timing of cash receipts for royalty receivables, some of which are paid semi-annually.

     We believe our current cash and cash equivalents, marketable securities and cash generated from operations will satisfy our expected working and other capital requirements for the foreseeable future based on current business plans, including acquisitions, investments in other companies and other assets to support the growth of our business, financing for customers of CDMA infrastructure products in accordance with the agreements with Ericsson, financing under agreements with CDMA telecommunications operators, other commitments, the payment of dividends and possible additional stock repurchases. We started construction of two facilities in San Diego, California in fiscal 2003, totaling approximately one million additional square feet, to meet the requirements projected in our business plan. The remaining cost of these new facilities is expected to be approximately $144 million through fiscal 2007. In October 2004, we announced our plans to expand our current Network Operations Center in Las Vegas, Nevada, which uses GPS and other technologies to track freight transportation and shipping nationwide. We expect the cost of this expansion will be approximately $52 million through fiscal 2007.

     We intend to continue our strategic investment activities to promote the worldwide adoption of CDMA products and the growth of CDMA-based wireless data and wireless Internet products. As part of these investment activities,

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we may provide financing to facilitate the marketing and sale of CDMA equipment by authorized suppliers. In the event additional needs or uses for cash arise, we may raise additional funds from a combination of sources including potential debt and equity issuance.

Contractual Obligations

     We have no significant contractual obligations not fully recorded on our Consolidated Balance Sheets or fully disclosed in the Notes to our Condensed Consolidated Financial Statements. We have no off-balance sheet arrangements as defined in S-K 303(a)(4)(ii).

     At June 26, 2005, our outstanding contractual obligations included (in millions):

Contractual Obligations
Payments Due By Period

     Additional information regarding our financial commitments at June 26, 2005 is provided in the Notes to our Condensed Consolidated Financial Statements. See “Notes to Condensed Consolidated Financial Statements, Note 2 – Composition of Certain Financial Statement Items, Finance Receivables, Note 3 – Investments in Other Entities and Note 7 – Commitments and Contingencies.”

Future Accounting Requirements

     In December 2004, the Financial Accounting Standards Board (FASB) issued revised statement No. 123 (FAS 123R), “Share-Based Payment,” which requires companies to expense the estimated fair value of employee stock options and similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the compliance dates for FAS 123R. In accordance with the new rule, the accounting provisions of FAS 123R will be effective for us beginning the first quarter of fiscal 2006. We will adopt the provisions of FAS 123R using a modified prospective application. Under modified prospective application, FAS 123R, which provides certain changes to the method for valuing share-based compensation among other changes, will apply to new awards and to awards that are outstanding on the effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for which the requisite service had not been rendered as of the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At June 26, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that we expect to record during fiscal 2006 was approximately $401 million before income taxes. We will incur additional expense during fiscal 2006 related to new awards granted during the remainder of fiscal 2005 and fiscal 2006 that cannot yet be quantified. We are in the process of determining how the guidance regarding valuing share-based compensation as prescribed in FAS 123R will be applied to valuing share-based awards granted after the effective date and the impact that the recognition of compensation expense related to such awards will have on our financial statements.

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RISK FACTORS

     You should consider each of the following factors as well as the other information in this Quarterly Report in evaluating our business and our prospects. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 26, 2004, including our financial statements and the related notes.

Risks Related to Our Businesses

If CDMA technology is not widely deployed, our revenues may not grow as anticipated.

     We focus our business primarily on developing, patenting and commercializing CDMA technology for wireless telecommunications applications. Other digital wireless communications technologies, particularly GSM technology, have been more widely deployed than CDMA technology. If CDMA technology does not become the preferred wireless communications industry standard in the countries where our products and those of our customers and licensees are sold, or if wireless operators do not select CDMA for their networks or update their current networks to any CDMA-based third generation technology, our business and financial results could suffer.

     To increase our revenues and market share in future periods, we are dependent upon the commercial deployment of third generation (3G) wireless communications equipment, products and services based on our CDMA technology. Although network operators have commercially deployed CDMA2000 1X and WCDMA, we cannot predict the timing or success of further commercial deployments of CDMA2000 1X, WCDMA or other CDMA systems. If existing deployments are not commercially successful, or if new commercial deployments of CDMA2000 1X, WCDMA or other CDMA systems are delayed or unsuccessful, our business and financial results may be harmed. In addition, our business could be harmed if network operators deploy competing technologies or switch existing networks from CDMA to GSM or if network operators introduce new technologies. For example, a limited number of operators have started testing OFDMA technology, a multi-carrier transmission technique not based on CDMA technology, that divides the available spectrum into many carriers, with each carrier being modulated at a low data rate relative to the combined rate for all carriers. Although we have hundreds of issued or pending patents relating to applications of GPRS, EDGE, OFDM, OFDMA and MIMO (multi in, multi out), there can be no assurance that our patent portfolio in these areas would be as valuable as our CDMA portfolio.

     Our business and the deployment of CDMA technology are dependent on the success of our customers and licensees. Our customers and licensees may incur lower operating margins on CDMA-based products than on products using alternative technologies due to greater competition in the CDMA-based market, lack of product improvements or other factors. If CDMA phones and/or infrastructure manufacturers exit the CDMA market, the deployment of CDMA technology could be negatively affected, and our business could suffer.

      Our three largest customers as of June 26, 2005 accounted for 39% and 40% of consolidated revenues in the first nine months of fiscal 2005 and 2004, respectively, and 40% and 44% of consolidated revenues in fiscal 2004 and 2003, respectively. The loss of any one of our major customers or any reduction in the demand for devices utilizing our CDMA technology could reduce our revenues and harm our ability to achieve or sustain desired levels of operating results.

      QCT Segment. The loss of any one of our QCT segment’s significant customers or the delay, even if only temporary, or cancellation of significant orders from any of these customers would reduce our revenues in the period of the cancellation or deferral and could harm our ability to achieve or sustain desired levels of profitability. Accordingly, unless and until our QCT segment diversifies and expands its customer base, our future success will significantly depend upon the timing and size of future purchase orders, if any, from these customers. Factors that may impact the size and timing of orders from customers of our QCT segment include, among others, the following:

	•		the product requirements of these customers;
	•		the financial and operational success of these customers;
	•		the success of these customers’ products that incorporate our products;
	•		value added features which drive replacement rates;
	•		shortages of key products and components;