UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


(Mark One)
   
(Mark One)
[X]þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 25, 2005
OR
   
o For the fiscal year ended September 28, 2003
OR
[]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________ .

Commission file number 0-19528

QUALCOMM Incorporated
(Exact name of registrant as specified in its charter)

   
Delaware
95-3685934
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization) 95-3685934
(I.R.S. Employer
Identification No.)
   
5775 Morehouse Drive
San Diego, California
92121-1714
(Address of principal executive offices) 
92121-1714
(Zip Code)

Registrant’s telephone number, including area code: (858) 587-1121

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001$0.0001 par value
(Title of Class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YESþ NOo
YES [X]  NO [  ]




     State     Indicate by check mark whether the aggregate market valueregistrant is a shell company (as defined in Rule 12b-2 of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Exchange Act).þ Yeso No

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 28, 200325, 2005 was $28,304,176,988.$56,518,904,679.*

     The number of shares outstanding of the registrant’s common stock was 800,070,8971,644,187,545 as of November 3, 2003.

October 31, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 20042006 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended September 28, 2003.


25, 2005.

* Excludes the Common Stock held by executive officers, directors and stockholders whose ownership exceeds 5% of the Common Stock outstanding at March 28, 2003.25, 2005. This calculation does not reflect a determination that such persons are affiliates for any other purposes.

 


TABLE OF CONTENTS

PART I
Item 1. Business
Overview
Wireless Telecommunications Industry Overview
The Evolution of Wireless Standards
Operating Segments
Research and Development
Sales and Marketing
Competition
Patents, Trademarks and Trade Secrets
Employees
Available Information
Executive Officers
Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
EXHIBIT 2.5
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


QUALCOMM INCORPORATED
Form 10-K
For the Fiscal Year Ended September 28, 200325, 2005
Index

     
    Page
  
Item 1.Business  
Item 1.1
    1
    46
    57
    79
   1214
   1314
   1315
   1517
   1817
   1817
   18
   19
Item 2.  33
Item 3.3  3334
Item 4.  35
PART II  
Item 5. 
Item 5. 36
Item 6.  38
Item 7.  39
Item 7A.  5754
Item 8.  5956
Item 9.  6056
Item 9A.  6056
PART IIIItem 9B.56
  
Item 10. 
Item 10. 6157
Item 11.  6157
Item 12.  6157
Item 13.  6157
Item 14.  6157
PART IV  
Item 15. 
Item 15. 6258
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

 


TRADEMARKS AND TRADE NAMES

     QUALCOMM®, QUALCOMM CDMA University®, QUALCOMM Wireless Business Solutions®SolutionsÒ, OmniTRACS®, OmniOne®OmniOneÒ, GlobalTRACS™, TrailerTRACS®, TruckMAIL™, OmniExpress®, QConnect™, T2™, T2Untethered™, EutelTRACS™, Eudora®, QCP-®Ò, QCT®QCT-Ò, MSM™, Secure MSM™, CMX™, CSM™, MSM3000®MSM6250Ô, MSM5000™MSM6275™, MSM5100™MSM6280™, MSM5500™, MSM6000™, MSM6050™, MSM6100™, MSM6150™, MSM6200™, MSM6250™, MSM6300™, MSM6500™MSM6500Ô, MSM6550™, MSM6700™, MSM6800™, CSM5000®, CSM6700™MSM7500™, CSM6800™ gpsOne™, SnapTrack®radioOneÒ, BREW®SnapTrackÒ, BREWÒ, BREW SDK®SDKÒ, BINARY RUNTIME ENVIRONMENT FOR WIRELESS®WIRELESSÒ, Launchpad™MediaFLO™, QCHAT®FLO™, QPoint™, QConcert™, QTunes™, Qtv™, Q3Dimension™, QCamera™, QCamcorder™, Qvideophone™, deliveryOne™, uiOne™, iMoD™, and WIRELESS KNOWLEDGE®QCHAT® are trademarks and/or service marks of QUALCOMM Incorporated. QUALCOMM, QUALCOMM Wireless Business Solutions, QWBS, QUALCOMM CDMA Technologies, QCT, QUALCOMM Technology Licensing, QTL, QUALCOMM Wireless Systems, QWS, QUALCOMM Wireless & Internet, QUALCOMM Wireless & Internet Group, QWI, QUALCOMM Internet Services, QIS, QUALCOMM Government Technologies, QGOV, QUALCOMM MEMS Technologies, QMT, QUALCOMM Technologies and Ventures, QUALCOMM Global Development, QUALCOMM Digital Media, QDM, QUALCOMM Internet Services, QIS, QUALCOMM Consumer Products, QCP,Global Trading, QGT, QUALCOMM Strategic Initiatives, QSI, andELATA, Iridigm, MediaFLO USA, Trigenix, Spike, SnapTrack are trade names of QUALCOMM Incorporated.

     cdmaOne® is a trademark of the CDMA Development Group, Inc. CDMA2000® is a registered trademark and certification mark of the Telecommunications Industry Association. Globalstar™ isand Globalstar® are a trademark and service mark, respectively, of Globalstar, L.P., and Globalstar® is a trademark of Loral Qualcomm Satellite Services, Inc.

L.L.C.

     All other trademarks, service marks and/or trade names appearing in this document are the property of their respective holders.

 


     In this document, the words “we,” “our,” “ours” and “us” refer only to QUALCOMM Incorporated and not any other person or entity.

PART I

Item 1. Business

     This Annual Report (including the following section regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Annual Report. Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements.

     Although forward-looking statements in this Annual Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Annual Report. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects. Our consolidated financial data includes SnapTrack, Inc. (SnapTrack), Vésper Holding Ltd. (Vésper Holding) and other consolidated subsidiaries.

     We were incorporated in 1985 under the laws of the state of California. In 1991, we reincorporated in the state of Delaware. We operate and report using a 52-53 week fiscal year ending the last Sunday in September. Our 52 week52-week fiscal years consist of four equal quarters of 13 weeks each, and our 53 week53-week fiscal years consist of three 13 week13-week fiscal quarters and one 14 week14-week fiscal quarter. The financial results for our 53 week53-week fiscal years and our 14 week14-week fiscal quarters will not be exactly comparable to our 52 week52-week fiscal years and our 13 week13-week fiscal quarters. For presentation purposes, allEach of the fiscal periods presented or discussed in this report have been presented as ending onyears ended September 30. For example, our 2003 fiscal year ended on25, 2005, September 26, 2004 and September 28, 2003 but we present our 2003 fiscal year as ending on September 30, 2003.include 52 weeks.

Overview

     In 1989, we publicly introduced the concept that a digital communication technique called CDMA could be commercially successful in wireless communication applications. CDMA stands for Code Division Multiple Access and is one of the three main technologies currently used in digital wireless communications networks. CDMA and the two other main digital wireless communications technologies, TDMA (which stands for Time Division Multiple Access) and GSM (which is a form of TDMA and stands for Global System for Mobile Communications) are the digital technologies used to transmit a wireless phone user’s voice or data over radio waves using the wireless phone operator’s network. CDMA works by converting speech into digital information, which is then transmitted in the form of a radio signal over the phone network. These digital wireless phone networks are complete phone systems comprised primarily of base stations, or “cells,” which are geographically placed throughout a service or coverage area. Once communication between a wireless phone user and a base station is established, the system detects the movement of the wireless phone user and the communication is handed off to another base station, or cell, as the wireless phone user moves throughout the service area.

     Because we led, and continue to lead, the development and commercialization of CDMA technology, we own significant intellectual property, including patents, patent applications and trade secrets, thatportions of which we license to other companies and integrate intoimplement in our own products. The wireless communications industry generally recognizes that a company seeking to develop, manufacture and/or sell products that use CDMA technology will require a patent license from us.

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     There are currently fourseveral versions of CDMA technology recognized worldwide as public wirelesscellular standards. The first version, known as cdmaOne, is currentlya second generation (2G) cellular technology that was first commercially deployed in use by most CDMA-based mobile phone networks. Newerthe mid-1990s. The other subsequent versions of CDMA which also enable the rapid communication of data as well as voice, are popularly referred to as third generation or 3G technologies. These versions of CDMA are(3G) technologies known commonly throughout the wireless industry as:

  CDMA2000, including 1X and 1xEV-DO (where DO refers to Data Optimized) and 1xEV-DV (where DV refers to Data and Voice);
 
  Wideband CDMA (WCDMA) or, also known as Universal Mobile Telecommunications Systems (UMTS), and;including High Speed Download Packet Access (HSDPA) and High Speed Uplink Packet Access (HSUPA); and
 
  CDMA Time Division SynchronousDuplex (TDD), of which there are currently two versions, Time Division Duplex CDMA (TD-CDMA) and Time Division Synchronous-CDMA (TD-SCDMA).

     CDMA2000 and WCDMA are deployed today in commercial mobile phone networks throughout the world. In addition to increasing voice capacity, these 3G CDMA technologies enable greater data capacity at higher data rates.
     Our revenues.revenues.We generate revenues by licensing portions of our CDMA technologyintellectual property to other manufacturers of CDMA products (such as wireless phones and the hardware required to establish and operate a CDMA wireless network). Revenues are generated through licensing fees and royalties on CDMA-based products sold by our licensees. We also sell products and services, which include the following, all of which are described in greater detail below:

  CDMA-based integrated circuits (also known as chips) and the related software used in wireless phones (also known as subscriber units and handsets) and wireless networks;
Radio Frequency and Power Management chips used in wireless phones and sold in conjunction with our CDMA-based integrated circuits;
 
  Messaging and other services and related equipment and software used by transportation and other companies to communicate with and track their equipment fleets;
 
  Software products and services related to BREW (which stands for Binary Runtime Environment for Wireless), a package of products that enable software developers to create applications, or programs, to run onand deliver content for mobile phones. BREW includesoffers software products and services to increase the functionality and appeal of wireless devices, including uiOne for customized user interfaces for mobile phones, porting tools and technical assistance for device manufacturers, and the deliveryOne suite of products which includes the Content Delivery System, the BREW DistributionDelivery System (BDS) that allows for over-the-air distribution of applications to mobile phones, and coordinates billing and payment for wireless operators;the uiOne Delivery System; and
 
  Software and hardware development services.

     We make strategic investments to promote the development of new CDMA products as well as the adoption of CDMA technology by more mobile phone service providers. We also continue to provide products and services to service providers and other customers of Globalstar L.P.,LLC, a company that operates a worldwide, low-Earth-orbit satellite-based telecommunications system.

     Our engineering resources.We have significant engineering resources, including engineers with substantial expertise in CDMA technology.and other technologies. Using these engineering resources, we expect to continue to develop new versions of CDMA, developand new technologies that use CDMA, develop alternative technologies for certain specialized applications (including multicast), participate in the formulation of new wireless telecommunications standards that use CDMAand technologies and assist in deploying wireless voice and data communications networks around the world.

     Our integrated circuits business.We develop and sellsupply CDMA-based integrated circuits and system software for use in wireless voice and data communications, multimedia functions and global positioning. Our integrated circuit products and software are used in wireless devices, particularly phones, data cards, and infrastructure equipment. The wireless networksintegrated circuits include the baseband Mobile Station Modem (MSM), Radio Frequency (RF) and Power Management (PM) devices, as well as the system software embedded within our integrated circuit products to control the phone and the integrated circuit functionality. Our wireless phone integrated circuits and software perform voice and data communication, multimedia and global positioning systems (GPS).functions, conversion between RF and baseband signals and PM. Our infrastructure equipment integrated circuits related products include bothprovide the integrated circuits for wireless phones andcore baseband CDMA modem functionality in the equipment used to operate the wireless phone network.operator’s equipment. Because of our broad and unique experience in designing and developing CDMA-based products, we not only design the baseband integrated circuit, but we also design the entire supporting system.system as well, including the RF devices, PM devices and accompanying software products. This approach enables us to

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optimize the performance of the wireless phone itself with improved product features, as well as the integration and performance of the network system. Our design of the entire system also allows CDMA systems and devices manufactured by our customers to come to market faster. We provide our integrated circuits and related system software, including reference designs and tools, to many of the world’s leading wireless phone and infrastructure equipment manufacturers. We plan to add additional features and capabilities to our future integrated circuit products to help our customers reduce the costs and size of their products and to simplify our customers’ design processes. We also design and create multimode and multiband integrated circuits incorporating other wireless standards for global roaming markets. In addition, we will continue to provide high quality support to enable our customers to reduce the time required to design their products and bring their products to market faster.

     Our asset tracking and messaging business.We design, manufacture and sell equipment and provide satellite and terrestrial-based two-way data messaging and position reporting services to transportation companies, private fleets, and construction equipment fleets and other enterprise companies throughout parts of the world. These products permit our customers to track the location of their vehicles or other assets and to communicate with them en route. These products and services use commercially available satellite and land-based mobile phone technologies

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wireless terrestrial-based networks to permit this communication. Our customers use these products to communicate with drivers, monitor vehicle location and performance and provide automated driver logs, fuel tax reporting, security and enhanced customer service.services. Our products, which collect and transmit this data, are also integrated with our customers’ operations software, such as dispatch, payroll and accounting, so our customers can better manage their information and operations.

Using our asset tracking and messaging infrastructure, we also provide a managed wireless data service, QConnect, to other service providers. For example, we provide the QConnect service to CardioNet, a provider of outpatient cardiac telemetry technology services, where we manage the wireless data service connectivity between CardioNet mobile monitoring devices and the CardioNet Monitoring Center.

     Our phone software and related services business.We provide our BREW (Binary Runtime Environment for Wireless) productproducts and services to wireless network operators, handset manufacturers and application developersdevelopers. We support the development and support for developing and deliveringdelivery of over-the-air wireless applications and services. The BREW productproducts and services include the BREW SDK (softwaresoftware development kit)kit (SDK) for developers, the BREW applications platform (i.e. software programs) and interface tools for device manufacturers, the uiOne customized user interface product and services, and the BREWdeliveryOne Content Distribution System that enables wireless network operators to getdistribute content and applications from developers to the market, and coordinate the billing and payment process. The BREW platform is a software application that provides an open, standard platform for wireless devices, which means that BREW can be made to interface with many software applications, including those developed by others. We make the BREW SDK available, free of charge, to any qualified person or company interested in developing a new productsoftware application for wireless communications. BREW leverages the capabilities available in integrated circuits and system software, enabling our customers to develop feature-rich applications and content while reducing memory and maximizing system performance of the wireless phone itself. In addition to CDMA2000, BREW can be used on wireless phones and other devices that support other wireless technologies, other than CDMA, such as GSM/GPRS (GeneralGSM, General Packet Radio System)System (GPRS), Enhanced Data Rates for GSM Evolution (EDGE) and WCDMA.

We also provide QChat, which enables push-to-chat functionality on CDMA-based wireless devices, and QPoint, which enables operators to offer enhanced 911 (E911) wireless emergency and other location-based applications and services.

     Subscriber growth.growth.In October 2003,June 2005, EMC World Cellular Information Service (EMC), a researcher and publisher of wireless industry market intelligence, forecast that there will be 1.42.2 billion mobile phone users, also referred to as subscribers, by the end of this calendar year and that the figure will grow to 2.2nearly 3.2 billion globally by the end of 2007. Wireless networks based on cdmaOne,2010. In April 2005, In-Stat/MDR, a provider of research, assessments and market forecasts of semiconductor and advanced communications equipment and services, published a report estimating that CDMA2000 and WCDMA will capture the versionlargest market share in terms of CDMA currently in usenumber of subscribers by most CDMA-based mobile telephone networks, and CDMA2000 have been commercially deployed in 60 countries around the world.2009.
     The CDMA Development Group (CDG) is an international consortium of companies who havethat joined together to lead the adoption and evolution of CDMA wireless systems around the world. CDG reports subscriber information which includes 2G cdmaOne and 3G CDMA2000. According to the CDG, there were more than 164 millionwireless networks based on both cdmaOne and CDMA2000 have been commercially deployed in 73 countries around the world. As reported by CDG, worldwide CDMA subscribers in June 2003. In June 2003, the CDG reported that overgrew by 27% during the year ended June 2003, CDMA2005, to more than 270 million, including nearly 186 million 3G CDMA2000 subscribers grew 29% worldwide.and approximately 84 million 2G cdmaOne subscribers.
     CDMA is the leading mobile phone technology in North America with market share of 48%47% at June 20032005 according to EMC.the CDG. As reported by the CDG, the North America is the largest CDMA market with nearly 69has more than 100 million subscribers at June 16, 2003,2005, representing annual growth of 24%17%. In the Asian Pacific market, the largest and fastest-growing region for CDMA, carriersCDMA

3


operators added nearly 18more than 27 million subscribers during the year ended June 2003,2005, bringing the total number of CDMA subscribers in this region to over 63116 million, an increase of 39%31% over the prior year. In January 2002, China Unicom launched its nationwide CDMA network, and in October 2003,as of September 2005, China Unicom announced that it had more than 16nearly 32 million CDMA subscribers. CDMA is outpacing GSM in India, adding 1.2 million new users in July 2003 and capturing the largest share of new subscribers for any wireless technology. In May 2003, Reliance Infocomm launched its nationwide CDMA network in India, and Reliance Infocomm had approximately 4 million subscribers as of the end of September 2003. In Latin America and the Caribbean, the number of CDMA subscribers grew by 23% over41% during the year ended June 2003,2005, reaching nearly 30more than 49 million in 20 countries.

through 41 CDMA operators.

     Next generation technologies.We have already developedThe primary 3G standards commonly referred to throughout the wireless industry are CDMA2000, WCDMA, and deployed the next generation of our CDMA technology, or what is being called 3G (third generation). Our 3G technology,TDD which includes TD-CDMA and TD-SCDMA. CDMA2000 1X, was first deployed commercially in October 2000 in South Korea. The first commercial deployment of WCDMA was in Japan in October 2001. Another 3G technology, TD-SCDMA, is being considered for launch in China. Within the CDMA2000 family, the higher speed CDMA2000 lxEV-DO was first deployed commercially in January 2002 in South Korea where 22 million, or approximately 67%,and has been commercially deployed by 19 operators worldwide as of August 2005. CDMA2000 lxEV-DO continues to evolve with CDMA2000 lxEV-DO Revision A and future enhancements, which will allow operators to introduce voice over Internet protocol, multi-megabit-per-second speeds, multimedia and broadcast capabilities in the nation’s total mobile service users were using this technology bycoming years.
     According to data from a large portion of operators around the endworld through September 2005:
3G subscribers to wireless operators’ services grew to at least 213 million worldwide;
There are at least 159 commercial 3G operators;
South Korea has over 35 million CDMA2000 subscribers;
There are at least 15 million lxEV-DO subscribers, including over 11 million in South Korea; and
In the United States, there are 17 operators that have commercially deployed CDMA2000 1X, making CDMA2000 IX the first 3G technology to be commercially available in North America.
     As of September 2003,2005, nearly 700 different models of CDMA2000 handsets are being sold across all markets, according to public reports made available at 3Gtoday.com. Todaywww.cdg.org. Based on data from a large portion of operators around the world, there are 59 commercial 3G operatorsat least 35 million WCDMA subscribers as of September 2005, including nearly 19 million in Japan with the remainder primarily located in 31 countries. In the United States there are eleven operators that have commercially deployed CDMA2000 1X: Verizon Wireless, Sprint PCS, Leap Wireless, Metro PCS, US Cellular, Kiwi PCS, Alltel, Midwest Wireless, Centennial Wireless, Cellular SouthEurope. The WCDMA family includes HSDPA, which is in trial phase, HSUPA and Monet Mobile, making CDMA2000 1X the first 3G technology to be commercially available in North America. In October 2003, more than 350 CDMA2000 user devices are being sold across all markets today, according to public reports made available at 3Gtoday.com.

other future enhancements with increasing capability and data speeds.

     Further investments.We continue to invest heavily in research and development focused on extendingin a variety of ways, to grow our earnings and extend the market for CDMA-basedour products and services.
     We continue to develop and commercialize third generation CDMA-based technologies, such as CDMA2000 1X, 1xEV-DO, Scalable Bandwidth EV-DO, WCDMA, HSDPA and HSUPA. These technologies support more efficient voice communications, broadband access to the Internet, multimedia services, delay sensitive applications (including voice over Internet protocol, video telephony, push-to-talk and multiplayer gaming) and other revenue-generating services, in turn accelerating the growth of CDMA. At the same time, we are developingworking to fulfill the growing demand for affordable, voice-centric CDMA phones within the emerging entry-level market through various efforts including the introduction of Single Chip (SC) solutions, streamlined test and commercializing CDMAcertification processes and the aggregation of device procurements. With regards to our EV-DO technology, we have improved its value, performance and productseconomics through the integration of several enhancements, and several leading manufacturers are planning to support high-speed wireless Internet accesssell laptop PCs with embedded EV-DO by the end of 2005.
     We also continue to develop and commercialize multimode, multiband and multinetwork products that can use cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV, GSM/embody technologies such as GSM, GPRS, EDGE, Bluetooth, Wireless Local Area Network (WLAN)Fidelity (Wi-Fi), WCDMA, BREW and GPS position location technologies.

     We are devoting significant research and development resources to developing high-speed wireless dataUniversal Serial Bus (USB), Forward Link Only (FLO), Orthogonal Frequency Division Multiplexing (OFDM), Global System for Mobile Communications-Mobile Application Port (GSM-MAP), Interim Standard 41 (IS-41) and Internet access products usingProtocol-based (IP-based) core networks. We continue to support multiple mobile client software environments in our CDMA technology, including efforts to meetmultimedia and exceed the standards for 3G

3


products set by the International Telecommunications Union (ITU). CDMA wireless phone network operators that have integrated new features,convergence chipsets, such as Internet access, GPS position locationBREW, Java, Windows Mobile, PalmOS and advanced multimedia capabilities likeLinux.

     We continue to develop on our own, and with our partners, new innovations that are integrated into our product portfolio to further expand the market and enhance the value of our products and services. These products and features include BREW, uiOne, deliveryOne, OmniOne, gpsOne, QChat, Qtunes, QConcert, Qtv, Q3Dimension, Qcamera, Qcamcorder, QVideophone, Secure MSM, compact media extension (CMX), mobile display digital photosinterface (MDDI), next-generation voice codec (4GV), Platinum Multicasting and video clips, intoMediaFLO. At the same time, we are very active within several standards bodies, such as 3rd Generation Partnership Project (3GPP), 3rd Generation Partnership Project 2 (3GPP2), Institute for Electrical and Electronic Engineers (IEEE) and Open Mobile Alliance (OMA), to ensure these innovations are (1) universally implemented to support economies of scale and (2) interoperable with existing and future mobile communication services to preserve ongoing investments. These innovations are expected to enable our customers to improve the performance or value of their products made possible by our 3G CDMA2000 1X technology have experiencedexisting services, offer these services more affordably, and introduce new revenue-generating services well ahead of their competition. CDMA network service providers also benefit from these innovations through increased numbers of subscribers, handset replacements and increased revenues. Our 1xEV-DO technology also permits CDMA wireless network providers to separately process voice transmissions and data transmissions, allowing them to optimize each type of transmission. We believe the transfer rate of 1xEV-DO will satisfy the demand for high-speed, cost-effective, fixed and mobile alternatives for Internet access, competing with digital subscriber line, cable and satellite networks. As of today, two wireless phone operators in South Korea, SK Telecom (SKT) and Korea Telecom Freetel Co., Ltd. (KTF), have commercially deployed our CDMA2000 1xEV-DO technology. Vésper in Brazil and Monet Mobile in the United States have also launched CDMA2000 1xEV-DO. Verizon Wireless deployed CDMA2000 1xEV-DO in Washington, D.C. and in San Diego, California on October 1, 2003. KDDI has announced that it will start its 1xEV-DO-based service in Japan on November 28, 2003.annual revenues per user.

4


     Wireless Local Area Networks (WLAN), such as Wi-Fi, (Wireless Fidelity), are complementary to Wide Area Networks (WAN), such as CDMA2000 and WCDMA. They both provide affordable high-speed wireless access to the World Wide Web.Internet. The high-speed data air link and limited coverage ofoffered by Wi-Fi is well suited for private networks (e.g., enterprises, campuses and homes) and certain public “hot spots” (e.g., airports, conference halls and coffee shops) where data usage is expected to be high in a limited portable and stationary environment,environment; whereas, 3G CDMA networks are ideally suited for geographically diverse voice and data coverage (e.g., cities, highways and neighborhoods) and in environments where public access to the Wi-Fi network is blocked due to a firewall (e.g., a client’s enterprise). Because wireless operators are looking to use Wi-Fi to extend their coverage indoors and include Wi-Fi services in their monthly billing structure, we have begun developing our own core chip for handling Wi-Fi services based on 802.11b and plan toWe may incorporate itthis OFDM-based standard into our future multimode 3G CDMA chips.

chipsets as we continue to identify and integrate other complementary wireless technologies into our chipsets.

     We are also developing our MediaFLO Media Distribution System (MDS) and OFDM-based FLO technology to optimize the low cost delivery of multimedia content to multiple wireless subscribers simultaneously, otherwise known as mediacasting. As part of the standardization of FLO technology, the FLO Forum (www.floforum.org) was established in fiscal 2005. To date, 24 members have joined the FLO Forum, including leaders from across the mobile content distribution industry. Our subsidiary, MediaFLO USA, Inc. (MediaFLO USA), plans to deploy and operate a nationwide mediacast network based on our FLO technology. MediaFLO USA will use nationwide 700 MHz spectrum for which we hold licenses to deliver high-quality video and audio programming to wireless subscribers. Additionally, MediaFLO USA plans to procure and distribute content which we will make available wholesale to our wireless operator customers. The MediaFLO USA network will require access to third generation networks (CDMA or WCDMA) operated by our wireless operator customers for activities such as subscription management. We believe that the service provided by MediaFLO USA will serve to complement many of the wireless operators’ third generation network offerings.
     Consistent with our strategic approach over the past fifteen years, we intend to continue our active support of CDMA-based systemstechnologies, products and the technologies and features CDMA permits in ordernetwork operations to grow our royalty revenues and integrated circuit and software revenues. We also plan to continue to broadly grant royalty-bearing licenses to our patented technologies and software applications under fair and reasonable terms and conditions that are free from unfair discrimination. From time to time, we may also make acquisitions to meet certain technology needs, to obtain development resources or to pursue new business opportunities. For example, in October 2004, we completed the acquisitions of Iridigm Display Corporation (Iridigm), a display technology company, and patents for CDMATrigenix Limited (Trigenix), a mobile user interface company. Iridigm’s display technology, known as iMoD, enables high-resolution on mobile devices, while providing lower power consumption and other wireless applications.

benefits. Our acquisition of Trigenix complements our BREW product offerings by enhancing the capabilities of our BREW uiOne user interface and providing other benefits. In August 2005, we completed the acquisition of ELATA, Ltd. (ELATA), a developer of mobile content delivery and device management software systems, which systems we have integrated into our “deliveryOne” family of BREW product offerings. In August 2005, we announced our intention to acquire Flarion Technologies, Inc. (Flarion), a developer of Orthogonal Frequency Division Multiplexing Access (OFDMA) technology. This acquisition is anticipated to close in the first half of fiscal 2006, pending regulatory approval and other customary closing conditions. Our acquisition of Flarion is intended to broaden our ability to effectively support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative for differentiating their services. The addition of Flarion’s intellectual property and engineering resources will also supplement the resources that we have already dedicated over the years towards the development of OFDM/OFDMA technologies.

     We plan to continue to make strategic investments to promote the worldwide adoption of CDMA products and services. Our strategy has been to invest in CDMA carriersoperators (also known as wireless phone operators, wireless network operators, wireless service providers or wireless service providers)operators), licensed device manufacturers and start-up companies that we believe open new markets for CDMAour technology, support the design and introduction of new CDMA-based products or possess unique capabilities or technology. Most of our strategic investments entail a high degree of risk and will not become liquid until more than one year from the date of investment, if at all. To the extent such investments become liquid and meet our strategic objectives, we attemptintend to make regular periodic sales of our interests in these investments that are recognized in investment income (expense). In some cases, we make strategic investments in early stage companies, which require us to consolidate or record our equity in losses of those companies. These losses will adversely affect our financial results until we exit from or reduce our exposure to these investments. We also provide financing to CDMA carriersoperators to facilitate the marketing and sale of CDMA equipment by licensed manufacturers. We have provided equipment financing to customers of Ericsson on a shared basis with respect to Ericsson’s sale of CDMA infrastructure equipment in Brazil, Mexico and elsewhere. In November 2001,fiscal 2004, we acquiredsold our controlling interests in two CDMA carriersoperators in Brazil (Vé(the Vésper Operating Companies). We have agreedplan to sell these two CDMA carriers, subject to certain conditions, in fiscal 2004 but will continue to fund their operations until the anticipated sale closes. We had a net cash inflow from investments in QSI in fiscal 2003 and plan to reduce the level of investment in wireless operators, other than investments in our MediaFLO USA subsidiary, from the levels of fiscal 20022003 and before.

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Giving Back.At QUALCOMM, we are not only committed to being good corporate citizens, but also good neighbors in the communities we call home. We contribute collectively as a corporation, and we participate in ways that touch people’s lives on a personal level. We encourage our employees to give their time and considerable talents to the community, and their significant volunteer efforts are evident in, for example, schools, the arts, feeding the homeless and serving on the advisory boards of not-for-profit organizations. We make donations to community causes, with a focus on programs that promote education, health and human services, and culture and the arts. Our charitable giving programs include our active and ongoing employee matching grant program, which matches a certain level of donations made by employees to qualifying organizations, and educational giving, such as engineering partnerships with universities intended to make a sustainable difference in educational systems in the various regions in which we do business. Our charitable giving and volunteer programs are based on respect for community organizations, cooperative leadership development and philanthropic creativity.

Wireless Telecommunications Industry Overview

     From the international perspective, the ITU

     The International Telecommunications Union (ITU) is the centrala telecommunication standards setting organization. The ITUorganization that is recognized as an impartial, international organization within which governments and the private sector work together to coordinate the operation of telecommunication networks and services to advance the development of international standards for communications technology. The ITU’s standardization activities foster the growth of new technologies, such as mobile telephony, mobile broadcast and themobile Internet, as well as the emerging global information infrastructure which handles a mix of voice, data and multimedia signals. The ITU develops internationally-agreed upon technical and operating standards to foster seamless interconnection of the world’s communication networknetworks and systems.their subsystems. As the world of telecommunications, information technology and media content provisiondistribution rapidly converge, the role of the ITU is to forge new recommendations that promote the interoperability of equipment and facilitate the development of advanced communication networks. The ITU’s objective is to identifyITU identifies sound technical recommendations which are then developedand develops them into internationally recognized ITU recommendations.

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standards.

     The Telecommunications Industry Association (TIA) is the leading U.S. baseda U.S.-based non-profit trade association serving the communications and informationtelecommunications technology industry. Through its worldwide activities, the TIA facilitates business development opportunities and a competitive market environment. The TIA provides a market-focused forum for its member companies, which manufacture or supply the products and services used in global communications. TheThrough its voluntary standards setting committees, the TIA facilitates the convergenceinteroperability of new communications networks whilewith the stated objective of working fortowards a competitive and innovative market environment. The TIA is a major contributor of voluntary industry standards that support global trade and commerce in communications products and systems.

     Neither

     Standards Development Organizations (SDO), including, among others, TIA and Alliance for Telecommunications Industry Solutions (ATIS) in the United States, European Telecommunications Standards Institute (ETSI), Telecommunications Technology Association (TTA) in Korea, Association of Radio Industries and Businesses (ARIB) in Japan, China Communications Standards Association (CCSA), and the Institute for Electrical and Electronic Engineers (IEEE), are non-profit voluntary standards, trade and professional associations that serve the telecommunications technology industry. Through their worldwide activities, these organizations work in conjunction with the ITU, to develop common specifications to facilitate global business development opportunities. They each provide a market-focused forum for their member companies, which manufacture or supply products and services used in global communications. They also facilitate the interoperability of new communications networks with a stated objective of working towards a competitive and innovative market environment. Each organization contributes voluntary industry standards that support global trade and commerce in communications products and systems.
     None of these bodiesorganizations have the enforcement authority or the ability to protect intellectual property rights. These bodies merelyToday, these organizations generally ask participating companies to declare whether they believe they hold patents essential for compliance with a particular standard and, if so, whether they are willing to license such patents on a royalty-free basis or on a royalty- basis onterms and conditions that are fair, reasonable and nondiscriminatory terms.

free from unfair discrimination (and, in some instances, whether the patent holder is willing to license royalty free).

     Usage of mobile phones and other types of wireless telecommunications equipment has increased dramatically in the past decade. It is estimated that there will be nearly 3.2 billion mobile subscribers worldwide by 2010, based on forecasts made by EMC as of June 2005. Growth in the market for wireless telecommunications services has traditionally been fueled by demand for voice communications. There have been several factors responsible for thisthe increasing demand for wireless voice services, including:
lower cost of wireless handsets, joined with an increasing selection of appealing mobile devices;

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lower cost of service, including flat-rate and bundled long-distance calling plans;
  an increasingly mobile workforce with increased need for wireless voice communications;
 
  a consumer base that desires to be accessible, informed and entertained within a mobile environment;
 
  lower costincreased coverage, roaming, privacy and call clarity of service, including flat-rate and bundled long-distance call pricing plans;voice transmissions;
 
  wireless networks becoming the primary communications infrastructure in developing countries due to the higher costs of and longer time required for installing wireline networks; and
 
  regulatory environments worldwide favoring increased competition in wireless telecommunications; and
increased privacy, call clarity and security of digital networks based on digital second and third generation wireless technology standards.telecommunications.

     In addition to the tremendous demand for wireless voice services, wireless service providers are increasingly focused on providing wireless data services through mobile phones, includingbroadband wireless access to the Internet, as well as multimedia entertainment, messaging, mobile commerce and position location services. These services have been aided by the development and commercialization of 3G wireless networks and 3G handsets which are capable of supporting higher data rates that incorporate an ever-increasing array of new features and functionality, such as assisted GPS-based position location, digital cameras with flash and zoom capabilities, internet browsers, email, interactive games, music and video downloads and software download capability (e.g., QUALCOMM’s BREW platform). In October 2003, International Data Corporation (IDC),March 2005, the Yankee Group, a global market intelligence and advisory firm in the technology and telecommunications industries, estimated that over onenearly 1.5 billion people will be using mobile data services by 2009 and the Internet by 2007 and over 625 millionrevenue produced from these services will be accessing the Internet through wireless networks using devices other than personal computers, such as phones.account for 21% of total service revenue worldwide. We believe the growing availability of 3G-enabled handsets capable of performing a wide variety of consumer and enterprise applications will accelerate Internet usethe demand for many wireless data services on a global basis and thus lead to an increased replacement rate inof mobile devices to those using our technology and chips. Criticalintegrated circuits. Affordable wireless broadband data connectivity is important to the adoption of wireless Internet devicesconsumer and services is high-speed data connectivity, which is drivingenterprise, and its demand will continue to drive the evolution of wireless standards. We expect that the spread of high-speed, cost-effective wireless Internet access will encourage the development of other remote supervision, position location and telematic automobile applications. However, projected growth in the number of people accessing the Internet through wireless networks and the corresponding demand for wireless data services may not be achieved.

     The adoption of wireless standards for mobile communications bywithin individual countries is generally based on economic criteria and the technology preference ofdetermined by the telecommunication service providers operating in those countries. A notable exception iscountries and, in some instances, local government regulations. Such determinations are typically based on economic criteria and the service provider’s evaluation of each technology’s ability to provide the features and functionality required for its business plan. More than a decade and a half ago, the European Community which approximately a decade ago developed regulations requiring the use of a telecommunication standard known as Global System for Mobile Communications, commonly referred to as GSM. TheGSM, a TDMA-based technology. According to EMC, the use of this second generation wireless standard has spread throughout the world and is currently is the basis for approximately 73% of the digital mobile communications in use according to EMC. Outsideuse. More than one-third of the European Community,more than 1.5 billion GSM subscribers are expected to migrate to third generation CDMA services before the markets or countries in which we do business are free to decide which standard to use based on the most economically advantageous business prospects. One exception is South Korea, which requires the useend of CDMA technology for wireless service providers.this decade.

The Evolution of Wireless Standards

     The significant growth in the use of wireless phones worldwide and demand for enhanced network functionality requires constant innovation to further improve network reliability, expand capacity and introduce new types of services. To meet these requirements, progressive generations of wireless telecommunications technology standards have evolved.

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First Generation.The first generation of wireless telecommunications, widely adopted indeployed by the late 1980s in most of the developed world, was based on analog technology. While this generation helped increaseintroduce the adoption of cellular wireless telecommunications by some business and consumer users, the technology was characterized by inherent capacity limitations, minimal or no data transfer capabilities, low security,lack of privacy, inconsistent service levels and significant power consumption.

Second Generation.As the deployment of mobile phone systems grew, the limitations of analog technology drove the development of second generation, digital-based technologies, which are the primary technology standards in use today.technologies. Second generation digital technology provided for significantly enhanced efficiency within a broadcastfixed spectrum as well as greatly increased voice capacity compared to analog systems. Second generation technologies also enabled numerous enhanced services, including paging, e-mail, and facsimile, connections to computer networks, greater privacy, lower prices, a greater number of service options and greater fraud protection. However, data services (email, fax, computer connections) were generally limited to low speed transmission rates. The three main second-generation digital cellular technologies are CDMA, called cdmaOne or IS-95A/B, a technology we developed and patented, North American TDMA, PDC (Personal Digital Cellular—a variant of North American TDMA), and GSM, also a form of TDMA.

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     Our second generation CDMA technology offers 10 to 20 times the capacity of analog systems and more than three times the capacity of TDMA- and GSM-based systems through more efficient utilization of wireless carriers’ licensed spectrum.


     Some of the advantages of CDMA technology over both analog and TDMA-TDMA and GSM-based technologies include enhanced call security, increased network capacity, network flexibility, compatibility with Internet protocols, lower power requirements, higher capacity for data and faster access to data (Internet), higher data throughput rates and easier transition to 3G networks. We are not aware of any technological advantages that GSM has over CDMA.

the benefits of roaming due to its wider worldwide deployment, and, for the near term, lower priced low-end handsets.

     Many GSM operators have deployed or are expected to deploy GPRS, adeploying 2.5G mobile packet data technology,technologies, such as a bridge technology,GPRS and some plan to deploy EDGE (Enhanced Data Rates for GSM Evolution), in areas serviced by GSM, as a bridging technology, while waitingthey wait for 3G WCDMA devices to become more readily available.available and affordable and can justify the expense of upgrading their GSM system to provide WCDMA service. We do not believe that GPRS and EDGE will be competitiveeffectively compete with 3G CDMA-based packet data services, either on a costcost/bit transmitted or performance basis although these technologies will be deployed in GSM networks.

.

Third Generation.As a result of demand for wireless networks that simultaneously carry both high speed data and voice traffic, at faster speeds has increased significantly, several 3G wireless standards have beenwere proposed to the ITU by a variety of companies and alliances.SDOs. These proposals includeincluded both CDMA- and TDMA-based technologies. A technology standard selected for 3G must efficiently support significantly increased data speeds and increased voice and data capacity, over limited spectrum bandwidth, thereby enabling new and enhanced services and applications such as mobile e-commerce, position location and mobile multimedia web browsing, including music and video downloads.

CDMA-Based 3G Technology.In May 2000, the ITU adopted the 3G standard known as IMT-2000, which encompasses five terrestrial operating modes,radio interfaces, three of them based on our CDMA intellectual property.

     The three IMT-2000 CDMA modesradio interfaces are:

 (1) CDMA2000,CDMA Multicarrier (MC). This is also known as Multi-Carrier, whichcalled MC-CDMA and CDMA2000. It includes CDMA2000 1X/1xEV-DO/1X, CDMA2000 3X, 1xEV-DO, and 1xEV-DV;
 
 (2) WCDMA, also known asCDMA Direct Spread or UMTS;(DS). This is also called WCDMA (Wideband CDMA) and UTRA-FDD (Universal Terrestrial Radio-Access Frequency Division Duplex).
 
 (3) Time Division Duplex,CDMA TDD. There are two versions of CDMA TDD: TD-CDMA, also known as TDD orUTRA-TDD (Time Division Duplex), and TD-SCDMA. Effectively TD-CDMA and TD-SCDMA are different radio interfaces, but are classified as one by the ITU.

     The

     There are two operating modesIMT-2000 radio interfaces that are not based on CDMA are UWC-136 and DECT+.

upon CDMA:

(4)TDMA Single Carrier. This is also called Universal Wireless Communication-136 (UWC-136). The main parts are based upon the TIA/EIA-136 standard for TDMA and EDGE.
(5)FDMA/TDMA. This is also called Digital Enhanced Cordless Telephone (DECT).
     The two current commercial versions of CDMA2000 areare: CDMA2000 1X and 1xEV-DO. These versions use a pair of 1.25 megahertz (MHz) channel bandwidthchannels to provide forboth voice and high-speed wireless data.data communications. CDMA2000 1X/1xEV-DO utilizes the same standard channel bandwidth as existing cdmaOne systems and, as a result, is compatible with wireless telecommunications carriers’operators’ existing network equipment, making the migration to 3G simple and affordable. We believe CDMA2000 1X provides approximately twice the voice capacity of cdmaOne and six to eight times that of TDMA-based networks. Additionally,Position location technology, accomplished through a hybrid approach that utilizes signals from both the GPS satellite constellation and CDMA cell sites, enables CDMA system operators to meet the Federal Communications Commission (FCC) mandate requiring wireless carriersoperators to implement enhanced 911 (E911) wireless emergency location services and offer other commercial location based services. In the future, the peak data ratesupdates of CDMA2000 1X and 1xEV-DO are expected to increase.further increase performance. Other enhancements, such as multicast services, higher-resolution displays, longer battery life, push-to-talk services and Quality of Service (QoS) featuresvoice over Internet protocol are expected to bebecoming available to improve the user experience.

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experience and operator profitability. The price differential between low-end third generation CDMA2000 handsets and GSM handsets is diminishing.

     Commercial deployment of CDMA2000 1X began in October 2000 in South Korea whereKorea. As of August 2005, 91 operators in 46 countries offer CDMA2000 1X services on a commercial basis to more than 22153 million subscribers (not including 1xEV-DO subscribers). Over 50 wireless equipment manufacturers currently offer CDMA2000 handsets or approximately 67%, of the nation’s total mobile service users were using this technology by the end of September 2003. Commercial deployment of CDMA2000 1X in North America, Brazil and Romania began in December 2001. KDDI commercially deployed CDMA2000 1X in Japan in April 2002 and reported more than 10 million CDMA2000 1X subscribers as of September 2003 in a press release dated September 17, 2003.modem cards.

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     Commercial deployment of CDMA2000 1xEV-DO began in January 2002 in South Korea with the introduction of SKT’s high-speed mobile multimedia and broadcast service.service called “June.” As of August 2003,September 2005, SKT and KTF reported more than 2eleven million CDMA2000 1xEV-DO subscribers worldwide, within Korea accounting for more than 65%30% of the nation’s total mobile subscriber base. Other prominent carriers such as Verizon Wireless and Sprint in the United States, KDDI in Japan, VIVO in Brazil and Telstra in Australia have deployed 1xEV-DO network equipment in numerous markets and are expanding coverage nationwide. Today, more than 80% of the CDMA market is in various stages of 1xEV-DO deployments and trials. For example, Verizon Wireless began offeringAs of August 2005, 19 operators in 13 countries offer CDMA2000 1xEV-DO services in the United States on October 1, 2003, and KDDI in Japan has announced that it will begin offering 1xEV-DO-based services on November 28, 2003. Several other operators with non-publicly announced trials are in the process of rolling out 1xEV-DO commercially over the next 18 months.

     Commercial deploymentsa commercial basis to more than 15 million subscribers. The rapid growth of CDMA2000 1xEV-DV are expected to begin in the year 2005. CDMA2000 1xEV-DV will offer mobile peak data rates equal to a version of 1xEV-DO whichsubscribers is expected to become commercially available aroundcontinue as more operators begin to offer the same time or earlier.

service and the cost of providing the wireless broadband service becomes more affordable and attractive through lower cost handsets, additional network enhancements, the embedding of the technology into laptops and increased competition between operators. Recently, three major laptop computer companies, Lenovo, Dell, and HP, have announced laptop products incorporating 1xEV-DO technology.

     The European Community hasand Cingular, a United States carrier, have focused primarily on the second modeUTRA-FDD radio interface of the IMT-2000 standard, known as WCDMA, which is based on our underlying CDMA technology. Mosttechnology (as are all of the CDMA radio interfaces of the IMT-2000 Standard). The majority of the world’s leading wireless phone and infrastructure manufacturers (more than 60) have licensed our technology for use in WCDMA products, enabling them to utilize this WCDMA mode of the 3G technology. OurThis includes the following major wireless equipment suppliers: Agilent, Alcatel, BenQ, Ericsson, Fujitsu, Hitachi, Kyocera, LG Electronics, Lucent, Panasonic, Mitsubishi, Motorola, Pantech & Curitel, NEC, Nokia, Nortel, Novatel Wireless, Samsung, Sanyo, Sharp, Siemens, Sierra Wireless and Toshiba, among others.We expect a significant growth in the WCDMA subscriber base over the next five years, mostly in Japan (led by NTT DoCoMo), Europe, China and the United States (led by Cingular); thus, we have allocated a significant amount of engineering, production and business resources to adequately support this large growth opportunity.
     The three ITU 3G CDMA licensees include Siemens, Nokia, Ericsson, Motorola, Lucent, Samsung, LG Electronics, Hitachi, NEC, Nortel, Toshiba, Sanyo, Sharp, Fujitsu, Denso, Agilent, Alcatel, Matsushita, Mitsubishi, and Kyocera, among others.

     Knowing that many GSM operators would not have access to WCDMA spectrum and most of those that do may not be ready to offer WCDMA services until 2004, we developed a soft-switch based technology called GSM1x. GSM1x allows GSM operators to begin offering revenue-generating 3G services (while preserving their existing capital investment in GSM) by overlaying the commercially proven CDMA2000 radio access network on top of their GSM network. GSM1x combines the increased voice and high-speed data capacity offered by the CDMA2000 air interface with the familiar features and services offered by the existing GSM-MAP core network. Commercial deployments of GSM1x are expected to occur within the next year.

     The TD-SCDMA mode is the least developed of the 3G CDMA alternatives. Support for the development of this version of the 3G technologies has been provided by the Chinese government, which hopes this technology will provide a path to the development of a stronger wireless industry in China.

     The three 3G CDMA wireless operating modes discussed aboveinterfaces are all based on the underlying core principles of CDMA technology; however, each has different features which some technologists believe enable a clearer migration path from the existing second generation technologies. The CDMA2000 mode enables a direct and relatively more economical conversion for current cdmaOne networks. We believeWhile the WCDMA wireless air interface does use CDMA technology, the core network has been specifically designed to be compatible with the GSM core network, which is why it also offers an economical transition from currentis expected that most GSM networks. While we believe that theoperators will migrate to WCDMA rather than to CDMA2000 mode offers a quicker path to third generation services and offers a number of technical advantages, we actively support each of these 3G CDMA modes. .We will continue to develop integrated circuits for CDMA2000 and WCDMA and expect to develop integrated circuits for all modes of the 3G standardversions based on CDMA.CDMA when commercially worthwhile. In addition, our intellectual property rights include core and primary patents utilized byessential to implementation of each of the 3G CDMA alternatives,alternative standards, and the royalty rate to be paid to us by a licenseeeach of our current 3G subscriber unit licensees for sales of its licensed 3G CDMA (regardless of whether it is CDMA2000, WCDMA, TD-CDMA or TD-SCDMA) subscriber products has not differed fromis no less than the rate that asuch licensee will pay for second-generationits licensed second generation cdmaOne subscriber products.

     These three 3G CDMA wireless operating modesversions (CDMA2000, WCDMA, TD-CDMA and TD-SCDMA) from a technological perspective require separate implementations and are not interchangeable from a technological perspective.interchangeable. While the fundamental core technologies are derived from CDMA and, in addition to other features and functionality, are covered by our patents, they each require unique infrastructure products, network design and management. However, subscriber roaming amongst systems using different air interfaces is made possible through multimode wireless devices.

Operating Segments

     Consolidated revenues from international customers as a percentage of total revenues were 78%82%, 79% and 77% in fiscal 2005, 2004 and 2003, 70% in fiscal 2002 and 65% in fiscal 2001.respectively. During fiscal 2003, 43%2005, 37% and 15%21% of our revenue was from customers and licensees based in South Korea and Japan, respectively, as compared to 37%43% and 18% during fiscal 2002,2004, respectively, and 35%45% and 22%15% during fiscal 2001,2003, respectively.

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     Risks related to our conducting business with customers and licensees outside of the United States are described in Risk Factors — “We are subject to the risks of our and our licensees conducting business outside of the United States.” Additional information regarding our operating segments is provided in the Notes to our Consolidated Financial statements. See “Notes to Consolidated Financial Statements, Note 10 Segment Information.”

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QUALCOMM CDMA Technologies Segment (QCT)

     QCT is thea leading developer and supplier of CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and GPSglobal positioning products. QCT offers software andQCT’s integrated circuits forand system software are used in wireless handsets and infrastructure equipment. These products provide customers with advanced wireless technology, enhanced component integration and interoperability, and reduced time to market. QCT provides integrated circuits and system softwareproducts are sold to many of the world’s leading wireless handset, data card and infrastructure manufacturers. ThroughIn fiscal 2003,2005, QCT has shipped more than 300approximately 151 million Mobile Station Modem (MSM)MSM integrated circuits for CDMA phoneswireless devices worldwide. QCT revenues comprised 61%58%, 52%64% and 51%63% of total consolidated revenues in fiscal 2005, 2004 and 2003, 2002 and 2001, respectively. QCT is dependent on fourThree major customers, LG Electronics, Motorola Inc. and Samsung Electronics Company, Motorola Inc., Kyocera Wireless and LG Electronics. Theconstitute a significant portion of QCT’s revenues, such that the loss of any one of these customers could potentially reduce our revenues and harm our ability to achieve or sustain acceptable levels of operating results. QCT subcontracts all of
     QCT’s integrated circuit products, including the manufacturingMSM, RF and assembly,PM devices and most of the testing, of its integrated circuits. QCT depends on a limited number of third parties to perform these functions, some of which are only available from single sources with which QCT does not have long-term contracts.

     QCT sells products to both wirelessrelated software enable phone and infrastructure manufacturers. For wireless phone manufacturers, QCT’s products include baseband and system software, radio frequency, intermediate frequency, and power management devices. These highly integrated products enable manufacturers to design very small, feature-rich handsets with longer standby and talk times that support existing cdmaOne and 3G services.services, and enable data card manufacturers to design modems that insert into laptop computers to facilitate access to the Internet via wireless networks. For wireless infrastructure manufacturers, QCT offers CDMA integrated circuits and system software that provide wireless standards-compliant processing of voice and data signals to and from wireless handsets. In addition to the key components in a wireless system, QCT provides our customers with system reference designs and development tools to assist in customizing features and user interfaces, to integrate our products with components developed by others, and to test interoperability with existing and planned networks. Together, the phone and infrastructure products and services form a complete system for the wireless communications industry. QCT is also closely aligned with manufacturers and carriersoperators in product plans, design specifications and development timelines.

     Our gpsOne wireless location feature has enabled a host of new value-added, high-precision location-based services such as friend finder, child safety, personal direction finding and mobile yellow page services, and has enabled CDMA system operators to meet the FCC’s E911 mandate. Using a hybrid approach that utilizes signals from both the GPS satellite constellation and CDMA cell sites, the gpsOne feature enhances location services availability, expands terrain coverage, accelerates the location determination process and provides better accuracy for callers, whether during emergency situations or while using GPS-enabled commercial applications. E911 deployments by CDMA carriers in the United States are well under way. Approximately fifteen million gpsOne-enabled terminals are in use today, supporting well in excess of 130 high-precision location-based services in Japan, South Korea and China.

     We have developed

     The 1xEV-DO technology is designed to provide reliable, cost-effective and always-on wireless data and Internet access to consumers. It is fully compatible with existing cdmaOne and CDMA2000 1X technologies and has been standardized as part of the CDMA2000 mode of the 3G standard. The versatility of 1xEV-DO allows the technology tocan be embedded in phones, laptop and handheld computers, and other fixed, portable and mobile devices; 1xEV-DO enablesdevices to enable manufacturers to deliver products with access to services that were previously only available through wired connections to the Internet or to enterprise networks. The 1xEV-DO technology also allows carriersoperators to leverage their current infrastructure investment and maintain compatibility with existing phone equipment. We designed and developed a complete package of products, including both infrastructure and phone integrated circuits, in support of the industry-wide movement to standardize, develop and deploy 1xEV-DO technology in CDMA2000 networks.

     Our MSM series integrated circuits are the primary integrated circuits in a CDMA wireless phone. Our Cell Site Modem (CSM) series integrated circuits are the primary integrated circuits in a wireless service provider’s base station equipment. The MSM5000, CSM5000, MSM5010, MSM5105 and MSM5100 integrated circuits and system software are the world’s first integrated circuits and software implementations of the 3G CDMA2000 standards. The MSM5000 digital baseband product is designed to support CDMA2000 1X for operation in a single 1.25 MHz channel. The CDMA2000 1X standard is fully compatible with current cdmaOne networks, allowing carriers to

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deploy 3G networks while maintaining existing coverage for all subscribers, eliminating the expense of moving to a new network. The MSM5000 provides up to a 50% increase in handset standby time and is feature- and pin-compatible with our MSM3000 integrated circuit, allowing manufacturers currently producing handsets using the MSM3000 to rapidly implement CDMA2000 1X technology in their handsets. QCT’s CSM5000 base station product is the industry’s first to support the CDMA2000 1X standard, based on IS2000 for CDMA base stations as specified by the ITU. The CSM5000 product provides carriers with up to twice the overall voice user capacity of IS-95A and IS-95B systems. The MSM5010 CDMA2000 1X chipset is an entry-level product offering improved voice capacity for applications where high-speed data rates are not required. The MSM5105 CDMA2000 1X product offers improved voice capacity and the introduction of new 3G data services for mainstream subscribers. The MSM5100 is the first CDMA2000 1X integrated circuit with advanced position location capabilities and has integrated Universal Serial Bus and Bluetooth functionality, as well as other features of the Launchpad suite including multimedia.

     The CSM5500 and MSM5500 integrated circuits offer 1xEV-DO handset and infrastructure modems for high-speed data. These products support the 1xEV-DO standard, as well as CDMA2000 1X, and offers compatibility with IS-95 A/B CDMA systems.

     QCT’s MSM6xxx family of products, incorporating radioOne technology, enables tiered products for CDMA2000 1X, 1xEV-DO, WCDMA and GSM/GPRS networks. The MSM6000 CDMA2000 1X integrated circuit is an entry-level product optimized for voice applications. The MSM6025 provides voice and limited data capabilities to support demand by carriers worldwide for lower-tier handsets that also support data services. The MSM6050 integrated circuit offers multimedia applications with optimized gpsOne for mainstream users. We currently ship MSM6100 integrated circuit and system software, a highly integrated CDMA2000 1X multimedia product enabling lower system costs for manufacturers developing handsets with advanced multimedia applications. There are in excess of 20 separate handset designs expected to come to market based on this platform in the next 12 months.

     Extending the MSM6xxx family of integrated circuits, we have also announced the development of the MSM6150 integrated circuit and system software for CDMA2000 1X and the MSM6550 integrated circuit and system software for CDMA2000 1X, 1xEV-DO and multimode GSM/GPRS. These highly integrated products address global market requirements for higher quality video and graphics performance on wireless devices. We began providing samples to customers of the MSM6300 in September 2002, a single-baseband 3G product for multimode and multiband CDMA2000/GSM/GPRS. The MSM6300 and accompanying radioOne radio frequency integrated circuits comprise the first world-phone integrated circuit enabling global roaming across wireless networks. In March 2003, Samsung was the first customer to announce its adoption of this product. In fiscal 2003, we began providing initial samples to customers of the high-capacity, high-speed MSM6500 integrated circuit and system software that supports CDMA2000 1X, CDMA2000 1xEV-DO and roaming on GSM/GPRS systems. We also announced the CSM6700 integrated circuit and the MSM6700 integrated circuit and system software supporting integrated voice and simultaneous high-speed packet data. These products for infrastructure and handset manufacturers support 1xEV-DV and 1xEV-DO standards. 1xEV-DV enables wireless carriers to provide voice and bi-directional high-speed packet data services simultaneously on a single radio frequency carrier. We also announced the CSM6800 integrated circuit and the MSM6800 integrated circuit and system software for the wireless technology standard CDMA2000 1xEV-DO to provide cost-competitive products for both infrastructure and multimedia-enabled devices.

     Leveraging our expertise in CDMA, we have developed integrated circuits for manufacturers and carriersoperators deploying the WCDMA/UMTSWCDMA version of 3G. More than 30 wireless device manufacturers have selected our WCDMA products that support GSM/GPRS, WCDMA and HSDPA, for their devices. To support near-term commercial network roll-outs, we have also completed interoperability testing with global infrastructure providers representing wireless network operators worldwide using test devices based on our integrated circuit products.
     Our MSM integrated circuit products are offered on four distinct platforms in order to address specific market segments and offer products tailored to the needs of users in those various market segments. The Value Platform addresses entry-level markets and enables voice-centric and basic data wireless phones. The Value Platform includes our Single Chip (SC) product family, the industry’s first single-chip CDMA2000 1X products targeted at lowering overall handset costs and driving the broader adoption of high-speed data services in emerging markets. We began shippingexpect to ship samples of the SC family of products in the first quarter of fiscal 2006.
     The Multimedia and Enhanced Multimedia Platforms are designed to facilitate the rapid adoption of high-speed wireless data applications. Features from the Multimedia and Enhanced Multimedia Platforms include support for multi-megapixel cameras, videotelephony, streaming multimedia, audio, 3D graphics and advanced position-location capabilities. There are more than 120 commercial devices currently available based on our CDMA2000 Multimedia Platform MSM6500 and Enhanced Multimedia Platform MSM6550 integrated circuits. More than 110 WCDMA/HSDPA devices based on Multimedia Platform MSM6250 and Enhanced Multimedia Platform MSM6275 integrated circuits are currently either in design or are commercially available. The MSM6275 was our first high performance HSDPA integrated circuit shipped to customers in the first quarter of fiscal 2005. In the first quarter of fiscal 2006, we shipped samples of our second generation HSDPA integrated circuit, the MSM6280, which supports data speeds of up to 7.2 megabits per second to enable the deployment of advanced data and multimedia services among wireless subscribers worldwide. The MSM6280 integrated circuit also integrates advanced receiver technologies for increased data throughput and network capacity.

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     The Convergence Platform enables portable business, high-fidelity entertainment, interactive 3D gaming and other advanced multimedia, connectivity and position location applications which are easily integrated to enable the convenience of wireless devices and the next generation of wireless capabilities. In fiscal 2005, we shipped samples of the MSM6200dual-CPU MSM7500 Convergence Platform single-chip product, which addresses CDMA2000 1X, CDMA2000 1xEV-DO, CDMA2000 1xEV-DO Revision A and GSM/GPRS air interfaces and incorporates popular digital electronics functionalities into wireless devices.
     Our Cell Site Modem (CSM) integrated circuit products are the primary integrated circuits in June 2002, and to date have announced that Samsung, LG Electronics and Sanyo plan to develop handsets and Option Wireless plans to develop data cards,a wireless operator’s base station equipment. In fiscal 2005, we shipped samples of the CSM6800, for CDMA2000 1xEV-DO Revision A infrastructure equipment, which are modem devices that insert into laptop computers to facilitate accessprovides a seamless migration path to the Internet vianext evolution of CDMA2000. Revision A enables rich wireless networks.multimedia services such as high-speed transfer of bandwidth-intensive files (including high-quality pictures, video and music) and interactive 3D gaming, as well as multicasting services powered by our FLO technology. The MSM6200 integrated circuitCSM6700 product is compatible with IS-95 and system software is a highly integrated system for WCDMA/UMTS/GSM and GPRS and includesCDMA2000 1X Revision A standards.
     Our gpsOne position-location technology Bluetooth connectivityis in more than 150 million gpsOne-enabled handsets sold worldwide. Enabling a range of more than 200 consumer and enterprise location-based services around the globe, gpsOne supports four modes of operation across a hostvariety of multimedia features.

     In July 2003, we began providing samplesterrains: Hybrid Mobile Station-Assisted GPS (Global Positioning System) enables a location fix whenever a call can be placed; Mobile Station-Assisted GPS provides extreme sensitivity to customersGPS signals across a broad range of environments; Mobile Station-Based GPS provides repetitive fix capabilities that are ideal for navigation, tracking and games; and Standalone GPS enables positioning in off-network scenarios. Compatible with all major air interfaces, the MSM6250 integrated circuit, for which LG ElectronicsgpsOne technology is the firstindustry’s only fully-integrated wireless baseband and GPS product, and has enabled CDMA system operators to cost-effectively meet the FCC’s E911 mandate.

     In order to provide optimized system products, we expanded our portfolio of power management integrated circuits to address all market segments. The PM6620 was announced customer,in fiscal 2005, and is designed to address cost-sensitive markets by being interfaced with MSM products from the Value Platform. The PM6630 and PM6640 were also announced in fiscal 2005, and support the Multimedia Platform of products. All three PM integrated circuits deliver enhanced multimedia applicationsperformance, time-to-market advantages and reduced power demands on wireless handsets when combined with MSM integrated circuits.
     In fiscal 2005, we announced a relationship with Philips Semiconductor, Inc. to provide support for WCDMA/UMTS/GSM/GPRS handsets. We havePhilips’ wireless local area network (WLAN) module on select MSM integrated circuits. These MSM integrated circuits will offer connectivity to WLAN networks, as well as to existing wireless networks, and will feature compatibility with 802.11b and 802.11g protocols on both CDMA2000 and WCDMA networks.
     In fiscal 2005, we also announced the planned developmentintroduction of the MSM6275 radioOneMBD1000 integrated circuit, which supports our FLO technology. Operating in the 700 MHz spectrum with an RBR1000 radio receiver, the MBD1000 will interface with integrated circuits from the Multimedia Platform for both CDMA2000 and system software, a high-performance product delivering High Speed

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Downlink Packet Access (HSDPA), a next-generation feature of the WCDMA/UMTS standard, as well as roaming on GSM and GPRS systems.

WCDMA networks.

QUALCOMM Technology Licensing Segment (QTL)

     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 (includingproducts, including, without limitation, products implementing cdmaOne, CDMA2000, 1X/1xEV-DO/1xEV-DV, TD-SCDMAWCDMA and/or the CDMA TDD standards and WCDMA) products.their derivatives. QTL generatesreceives revenue from license fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating or using our intellectual property. The licenseLicense fees are generally nonrefundable and may befixed amounts paid in one or more installments. Ongoing royalties are nonrefundable and are generally based upon a percentage of the net selling price of licensed products. Revenues generated from royalties are subject to quarterly and annual fluctuations. Fluctuations are the result of variations in product mix, product pricing and quantities of sales by our licensees and the impact of currency fluctuations associated with royalties generated from international sales. QTL revenues comprised 25%32%, 28%27% and 29%26% of total consolidated revenues in fiscal 2005, 2004 and 2003, 2002 and 2001, respectively.

QUALCOMM Wireless & Internet Segment (QWI)

     QWI revenues comprised 12%11%, 14%12% and 16%13% of total consolidated revenues in fiscal 2003, 20022005, 2004 and 2001,2003, respectively. The three segmentsdivisions aggregated into QWI are:

QUALCOMM Internet Services (QIS).

The QIS division provides technology to support and accelerate the convergencegrowth of the wireless data Internet and voice services.market. The BREW (Binary Runtime Environment for Wireless) platform is an application execution environment that provides an open platform for wireless devices, which means that BREW can

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be made to interface with many software applications, including those developed by others. The BREW platform is part of a complete package of products for wireless applications development, device configuration, application distribution, and billing and payment. The BREW platform currently leverages the capabilities available in QCT’s integrated circuits and system software, enabling development of feature-rich applications and content while reducingmaximizing memory overheadutilization and maximizing system performance. The BREW productproducts and services include the BREW SDK (software development kit) for developers, the BREW applications platform (i.e. software programs) and interface tools for device manufacturers, the uiOne customized user interface product, and the BREWdeliveryOne Content Distribution System that enables wireless network operators to getdeliver applications from developersand content to market and coordinatewhile providing settlement of the billing and payment process. ThisThe BREW platform also includes BREW extensions, such as virtual machines, browsers and other interpreters that process executable content, such as JAVA midlets (applications written using the Java language to run on JAVA 2 Micro Edition Virtual Machines within wireless mobile devices), JavaScript (a scripting language used to author instructions from execution on a device), Flash (a technology developed by Macromedia to author Scalable Vector Graphics), XHTML and HTML JavaScript and Flash. Commercial(“mark up” program languages used to author web-based content). BREW-based services enable consumers to customize their handsets by downloading applications over-the-air from an operator’s application download server.

     In November 2001,

     KTF, a leading wireless phone operator in South Korea, launched the world’s first commercial BREW-enabled applications service.service in 2001. KTF’s BREW-enabled wireless data service runs on aboth CDMA2000 1X and EV-DO high-speed data network as well as EV-DO. Nine additionalnetworks. Numerous other operators have since commercially launched BREW services, including Verizon Wireless, Alltel, US Cellular and Midwest Cellular in the US,United States, KDDI in Japan, Telstra in Australia, BellSouthTelefonica in Colombia, VIVO in Brazil, Reliance and Tata in India, and China Unicom. Additionally, Reliance, the largest CDMA carrierUnicom in India, has signed a definitive agreement to launch BREW services in the rapidly growing India wireless market.

China.

     In January 2002, we announced a multi-year licensing agreement with Nextel for QChat, a technology developed to provide a reliable method of instant connection and two-way communication between users via their mobile phones. Using QChat, users may speak with other users virtually instantaneously at the push of a button. It enables one-to-one (private) and one-to-many (group) calls over 3G CDMA networks. The technology also allows over-the-air upgrades of handset software, management of group membership by subscribers and ad-hoc creation of chat groups. It uses standard voice-over Internet protocol technologies. This meanstechnologies, thereby sending voice information in digital form over Internet protocol-based data networks (including CDMA) in discrete packets rather than the traditional circuit-switched protocols of the public switched telephone network. In addition to Nextel, we are actively pursuing QChat deployments with other carriers around the world.

QUALCOMM Wireless Business Solutions (QWBS).

     We provideThe QWBS division provides satellite and terrestrial-based two-way data messaging and position reporting services to transportation companies, private fleets, and construction equipment fleets.fleets and other enterprise companies. The satellite-based OmniTRACS mobile

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communications system was first introduced in the United States in 1988. Through September 2003,2005, we have shipped nearly 489,000 OmniTRACS TruckMAIL, OmniExpress, GlobalTRACS and LINQover 566,000 satellite-based mobile communications systems (OmniTRACS, EutelTRACS and TruckMAIL) and over 85,000 terrestrial-based mobile communications systems (OmniExpress, T2 Untethered TrailerTRACS and GlobalTRACS), which currently operate in over 39 countries. Message transmission and position tracking for the OmniTRACS and TruckMAIL systems are provided by use of leased Ku-band and C-band transponders on commercially available geostationary earth orbit satellites. The OmniExpress, T2 Untethered TrailerTRACS, GlobalTRACS and LINQOmniOne systems use wireless digital terrestrial networks for messaging transmission, and the GPS constellation for position tracking. These mobile communications systems help transportation companies, private fleets and construction equipment fleets improve the utilization of assets and increase efficiency and safety by improving communications between drivers, machines and dispatchers. System features include status updates, load and pick-up reports, position reports at regular intervals, and vehicle and driving performance information.

     In the United States and Mexico, we manufacture and sell OmniTRACS, TruckMAIL, OmniExpress, T2 Untethered TrailerTRACS and GlobalTRACS mobile communications equipment, andsell related software packages and provide ongoing messaging and maintenance services. We have sold OmniTRACS, TruckMAIL and OmniExpress system productssystems for use by private trucking fleets, service vans, marine vessels, trains, federal emergency vehicles, and for oil and gas pipeline control and monitoring sites. In fiscal 2003, we announced and began shipping ourOur GlobalTRACS system is sold to the construction equipment industry, providing wireless access to equipment operating data and location, regardless of equipment type or manufacturer. Message transmissions for operations in the United States are formatted and processed at our Network Management Center in San Diego, California, with a fully-redundant backup Network Management Center located in Las Vegas, Nevada. We estimate the Network Management Center currently processes over sevennine million messages and position reports per day.

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     Recently


     In fiscal 2004, we began shipping T2 Untethered TrailerTRACS for private fleets and for-hire carriers. The T2 Untethered TrailerTRACS product is an advanced, stand-alone wireless system that provides rapid-status visibility into trailer locations and operational events and vehicle position reporting for improved fleet utilization and security. Features include sophisticated on-board hardware, advanced power management, complete network services, cargo and door sensors and data integration capabilities using state-of-the-art, multimode communications. We recently announced the availability of two new applications, the QUALCOMM Hours of Service (HOS) and Automated Arrival & Departure (AA&D) applications. The QUALCOMM HOS application is a management tool that helps fleet managers optimize dispatch assignments by providing driver authentication, wireless panic buttonavailability information. AA&D gives fleet managers information needed to monitor delivery schedules, recognize inefficiencies, improve on-time performance and tamper detection features, three new security enhancements for the OmniTRACS systemprevent detention billing disputes.
     In addition to help customers meet increased homeland security needs and to help deter cargo theft. We announced OmniOne, a new enterprise application for BREW-enabled CDMA handsets that facilitates mobile worker assignments and tracking status updates for numerous industries, including transportation and logistics, utilities and service fleets. We also announced our agreement with CardioNet, a provider of outpatient cardiac telemetry technology and services, in which we will utilize our QUALCOMM QConnect service to provide connectivity between the CardioNet mobile monitoring devices and the CardioNet Monitoring Center.

     Outside of the United States, Mexico and Europe, we work with telecommunications companies and carriers to establish the OmniTRACS system concept and products in foreign markets. The OmniTRACS system is currently operating throughout Europe and in the Middle East, Argentina, Brazil, Canada, Mexico, China, Japan and South Korea. Internationally,Outside of the United States, Mexico and Europe, we work with distributors or through joint ventures to provide the OmniTRACS service and products in foreign markets. We generate revenues from the OmniTRACS system through license fees, sales of network products and terminals, and messaging and service fees. Service providers that operate network management centers for a region under our granted licenses provide OmniTRACS messaging services. We also run

QUALCOMM Wireless Business Solutions Europe, B.V., a Netherlands subsidiary, that brings mobile communications products and messaging services to the European market. In September 2003, this subsidiary acquired certain assets of Alcatel Mobicom, a competitor of QWBS in Europe.

Government Technologies (QGOV).The QGOV division (formerly known as QUALCOMM Digital Media, (QDM)

     The QDM division is comprised of the Government Systems and Digital Cinema businesses.

     The Government Systems businessor QDM) provides development, hardware and analytical expertise to United States Governmentgovernment (USG) agencies involving wireless communications technologies. We have developed, aproduced and shipped second generation CDMA Type 1 secure wireless terrestrial phonephones for the USG the QSec-800, that operatesoperate in enhanced security modes (referred to as Type 1) and incorporatesincorporate end-to-end encryption. DuringIn fiscal 2003, QSec-800 phones were2005, QGOV adapted, integrated and shipped CDMA2000 1X deployable base stations to the USG. In fiscal 2003, the next generation Type 1 secure phone development was launched with USG funding. Additionally, OmniTRACS products and services are being marketed and soldused for USG worldwide applications.

     We develop technologiesapplications and were sold to support the processing, transmission and managementUSG during fiscal 2005. Based on the percentage of content forQGOV revenues to our total consolidated revenues, the USG is not a variety of media applications, including the delivery of digitized motion pictures. In fiscal 2002, we released an end-to-end Digital Cinema System product which combines our expertise in advanced image compression, electronic security, network management and integrated circuit design to provide the secure delivery of digitized motion pictures to theatres worldwide. In May 2000, we entered into a strategic alliance with Technicolor Digital Cinema, Inc. (Technicolor) and formed a joint venture, Technicolor Digital Cinema, LLC (TDC), in which we owned a 20% interest. The joint venture has marketed the QUALCOMM Digital Cinema System and worked with the motion

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picture industry as a technology enabler and service provider while supporting open standards for the digital delivery of motion pictures. In August 2003, we jointly announced with Thomson, the parent company of Technicolor, that we sold our equity interest in TDC to Thomson, a move that results in sole Thomson ownership of the venture. As part of the sale, Technicolor has acquired exclusive rights to manufacture, sell and service the multi-screen Theatre Management System, a key component of the Digital Cinema System. This sale arrangement does not preclude us from continuing to develop and market core digital cinema products and technologies, including decoder modules, encoders and conditional access systems that are based on our compression and decryption technology.

major customer.

QUALCOMM Strategic Initiatives Segment (QSI)

     We make strategic investments to promote the worldwide adoption of CDMA products and services for wireless voice and Internet data communications, including CDMA carriers,operators, licensed device manufacturers and companies that support the design and introduction of new CDMA-based products or possess unique capabilities or technology. We make strategic investments in early stage companies and, from time to time, venture funds to support the adoption of CDMA and the use of the wireless Internet. We also provide financing to CDMA wireless operators to facilitate the marketing and sale of CDMA equipment by licensed manufacturers. In November 2001, we acquired controlling interests in two CDMA carriersoperators in Brazil (Vésper Operating Companies). We have agreed to sellsold these two CDMA carriers, subject to certain conditions,operators in fiscal 2004 but will continue to fund their operations until the anticipated sale closes.2004. We have a significant equity investment in Inquam Limited (Inquam). Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, primarily in Romania and Portugal.
     Our MediaFLO USA subsidiary, a wireless multimedia operator, is expected to begin commercial operations in latter 2006. MediaFLO USA will offer a nationwide mediacast network based on our FLO (Forward Link Only) technology and MediaFLO MDS (Media Distribution System) as a shared resource for wireless operators and their customers within the United States.We are developing our MediaFLO MDS and FLO technology to optimize the low cost delivery of multimedia content to multiple wireless subscribers simultaneously. The MDS will provide wireless network operators the ability to enhance their multimedia service offering capabilities via efficient scheduling and delivery of multimedia content. Wireless network operators can utilize the MDS with their current unicast networks and with multicast networks, which are soon to be available, operating on CDMA2000 1xEV-DO or WCDMA. The MDS is not air interface specific and thus can be utilized by CDMA2000, WCDMA and FLO technology operators alike. FLO is a multicast air interface technology specifically designed for markets where dedicated spectrum is available and where regulations permit high-power transmission, thereby reducing the primary intentnumber of deploying CDMA-based technology. QSI revenues comprised 3%towers and 4% of total consolidated revenues in fiscal 2003related infrastructure required to provide market coverage. MediaFLO MDS and 2002, respectively, primarily resulting fromFLO technology are complementary to existing wireless networks because interactive services are supported within the consolidation of Vésper Holding. QSI did not generate revenues in fiscal 2001.

Other Businesses

QUALCOMM Consumer Products (QCP)

     In February 2000,mobile device using the CDMA2000 1X, 1xEV-DO or WCDMA wireless link. Furthermore, the MediaFLO MDS can seamlessly integrate multicasting services provided over 3G operator networks with such services provided over a stand-alone FLO network.

     MediaFLO USA plans to use nationwide 700 MHz spectrum for which we soldhold licenses and will be procuring and distributing content which we will make available wholesale to our terrestrial-based CDMA wireless consumer phone business, including our phone inventory, manufacturing equipmentoperator customers. Distribution, marketing, billing and customer commitments,relationships are expected to Kyocera Wireless (Kyocera). As partremain services provided by our wireless

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operator customers. Effective as of the agreement with Kyocera,beginning of fiscal 2005, we formedpresented the operating results of MediaFLO USA in the QSI segment. We are evaluating a subsidiary that had a substantial number of employees from the former QUALCOMM Consumer Products businesscorporate structuring options, including distributing our ownership interest in MediaFLO USA to provide services to Kyocera onour stockholders in a cost-plus basis to support Kyocera’s phone business. This arrangement expired in February 2003, and Kyocera offered employment to substantially all employees of the subsidiary. During fiscal 2003, 2002 and 2001, revenues from this arrangement were $39 million, $105 million and $107 million, respectively, and earnings before taxes were not material.

spin-off transaction.

Other Businesses
QUALCOMM Wireless Systems (QWS)

     Under now-terminated contracts with Globalstar L.P. (Globalstar), we designed, developed and manufactured subscriber. The QWS division sells products and ground communications systems utilizing CDMA technologyprovides services under new commercial agreements to Globalstar LLC (New Globalstar) and provided contract development services.its service providers and other customers. New Globalstar was formed to design, construct and operateoperates a worldwide, low-Earth-orbit satellite-based telecommunications system (thesystem. We received membership interests in New Globalstar System). We currently holdin fiscal 2004 as a result of its emergence from bankruptcy related to our claims as a creditor. On October 5, 2004, we received an approximate 6.3%additional ownership interest in New Globalstar through certain limited partnerships and other indirect interests.

     On January 16, 2001, Globalstar announced that, in order to have sufficient funds availableas partial consideration for the continued progress of its marketing and service activities, it had suspended indefinitely principal and interest payments on all of its debt, including its vendor financing obligations. Globalstar also announced its intent to restructure its debt. Globalstar filed for Chapter 11 bankruptcy protection during fiscal 2002. On April 25, 2003, the U.S. Bankruptcy Court in Delaware approved the sale of Globalstar’s assets tomobile phones. At September 25, 2005, we held an approximate 6.7% interest in New Globalstar in our QSI segment.

QUALCOMM MEMS Technologies (QMT).QMT is developing display technology for the full range of consumer-targeted mobile products. QMT’s iMoD technology, based on a new company to be controlled by ICO Global Communications (Holdings) Limited (ICO), however ICO has indicated as of October 2003 that it does not believe it will complete the acquisition. Globalstar has opened negotiationsmicro-electro-mechanical-systems (MEMS) structure combined with other parties with respect to an acquisition of Globalstar’s assets.

     We continuethin film optics, is expected to provide servicessubstantial performance, power consumption and sell productscost benefits as compared to Globalstar service providerscurrent display technologies. We expect the iMoD product to deliver a vivid and other customers involvedrealistic display image quality that can withstand extreme temperatures and be viewed in virtually any environment, including bright sunlight. Displays have become a key factor in the overall power consumption of wireless devices, with the Globalstar System. In addition, we areincreasing use of vibrant color screens and multimedia applications that generate rapidly changing images. The iMoD product is expected to offer significantly lower power consumption than existing display products, thereby extending the battery life of wireless devices. With the inclusion of color displays in negotiations with potential acquirersall types of wireless phones, including models at the low end of the market, the cost of the display has become an even more significant factor in the overall cost of the handset. An iMoD display should cost less to provide productsmanufacture than a comparable liquid crystal display because it requires fewer components and services to the new operating company.processing steps, thus enabling advanced multimedia capabilities on all tiers of mobile devices.

Research and Development

     The wireless telecommunications industry is characterized by rapid technological change, requiring a continuous effort to enhance existing products and develop new products and technologies. Our research and development team

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has a strong and proven track record of innovation in wireless communications technologies. Our research and development expenditures in fiscal 2003, 20022005, 2004 and 20012003 totaled approximately $523 million, $452$1.01 billion, $720 million and $415$523 million, respectively. Research and development expenditures in fiscal 2003, 20022005, 2004 and 20012003 were primarily related to integrated circuit product and other initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO/1xEV-DV,1xEV-DO, WCDMA, HSDPA, GSM/GPRS, WLAN, WCDMAGPRS/EDGE and radioOneOFDMA, and the development of our FLO technology, MediaFLO MDS and iMoD display products using MEMS technology.

     In fiscal 2005, we opened six research and development centers in California, India, Taiwan and the United Kingdom. The centers support our global CDMA development activities and ongoing efforts to advance CDMA technologies. We intendcontinue to use our substantial engineering resources and expertise to develop new technologies, applications and services and make them available to licensees to help grow the wireless telecommunications market and generate new or expanded licensing opportunities. In addition to internally sponsored research and development, we perform contract research and development for various government agencies and commercial contractors.

Sales and Marketing

     QCT markets and sells products in the United States through a sales force based in San Diego, California, and internationally through a direct sales force based in South Korea, Japan, China, Taiwan, Germany and the United Kingdom. QCT’s sales and marketing strategy is to achieve design wins with technology leaders in our targeted markets by, among other things, providing high performance products combined with superior field application and engineering support.

     The QIS division of QWI develops and sells business-to-business products and services to companies worldwide. The sales and marketing team is headquartered in San Diego with offices worldwide. The QIS sales and marketing strategy is to enter into contracts with companies in target markets by providing comprehensive technology and services to help them provide next-generation wireless data services that combine wireless Internet, data and voice capabilities.

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     The QWBS division of QWI markets and sells products through a sales force, partnerships and distributors based in the United States, Europe, the Middle East, Argentina, Brazil, Canada, China, Japan, South Korea and Mexico. QWBS’sQWBS’ sales and marketing strategy is to enter into contracts with companies in our target markets by providing high-value wireless fleet management products and services to the transportation, and logistics and construction equipment industries.

     Marketing activities include participation in technical conferences and trade shows, development of business cases, competitive analyses and other marketing collateral publication of customer deployments, new productand programs. Corporate Marketing provides company information on products, strategies and educational articles intechnology to industry journals, maintenance ofanalysts and publications which are also supported on our World Wide Web site and direct marketing to prospective customers and prospective licensees.Internet website. We also developed and maintain a World Wide Web sitean Internet website (www.3Gtoday.com) dedicated to highlighting commercial 3G wireless services and products around the world.
     Our CDMA Development Center in China is a 36,000 square foot facility in Beijing in what is popularly known as ‘China’s“China’s Silicon Valley. The center provides training, support and equipment testing services primarily to manufacturers and mobile carriers and software developers for BREWoperators in China, as well as supporting research and development of 3G wireless standards based on CDMA. The center houses ourthe QUALCOMM CDMA University which offers classroom and hands-on training programs on CDMA2000 and WCDMA. The center also offers a highly-integrated test program designed to enable time and cost savings when bringing products to market. The center and its staff are focused on providing China with the resources to enable the most timely development of its mobile communications industry using our technologies and applications, such as cdmaOne, CDMA2000 1X/1xEV-DO, gpsOneGSM1x and the BREW platform.gpsOne. The center also supports the transfer of certain hardware and software technologies for product development and manufacturing to licensed manufacturers, as well as network implementationdesign and optimization methods to carriersoperators and government bodies in China.

Competition

     Competition in the wireless telecommunications industry in the United States and throughout the world continues to increase at a rapid pace as businesses and foreign governments realize the market potential of telecommunications products and services. ManyWe have facilitated competition in the CDMA market by licensing a large number of thesemanufacturers. Although we have attained a major position in the industry, many of our current and potential competitors may have advantages over us, including:

  longer operating histories and presence in key markets;
 
  greater name recognition;
 
  access to larger customer bases; and
 
  greater sales and marketing, manufacturing, distribution, technical and other resources than we have.

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     As a result of these and other factors, our competitors may be more successful than us.

     These competitors may have more established relationships and greater technical, marketing, sales and distribution capabilities and greater access to channels in markets not currently deploying wireless communications technology or markets primarily deploying 2G wireless communications technology. These competitors also have established or may establish financial or strategic relationships among themselves or with our existing or potential customers, resellers or other third parties. These relationships may affect customers’ decisions to purchase products or license technology from us.us or to use alternative technologies. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share to our detriment. In addition, many of these companies are licensees of our technology and have established market positions, trade names, trademarks, patents, copyrights, intellectual property rights and substantial technological capabilities. We may face competition throughout the world with new technologies and services introduced in the future as additional competitors enter the market place for products based on 3G standards. Although we intend to employ relativelycontinuously develop improvements to existing technologies, as well as potential new technologies, there willmay be a continuing competitive threat from even newer technologies that may render our technologies obsolete.companies introducing alternative versions of wireless technologies. We also expect that the price we charge for our products and services may continue to decline as competition intensifies.

QUALCOMM CDMA Technologies Segment (QCT)QCT Segment.

The markets in which our QCT segment operates are intensely competitive. QCT competes worldwide with a number of United States and international manufacturers.semiconductor designers and manufacturers in the United States and internationally. As a result of the trend toward global expansion by foreign and domestic competitors and technological and public policy changes, we anticipate that additional competitors will enter this market. We believe that the principal competitive factors for CDMA integrated circuit providers to our addressed

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markets are product performance, level of integration, quality, compliance with industry standards, price, time to market, system cost, design and engineering capabilities, new product innovation and customer support. The specific bases on which we compete against alternative CDMA integrated circuit providers vary by product platform. We also compete against alternative wireless communications technologies including, but not limited to, GSM/GPRS,GPRS/EDGE, TDMA and analog.

     QCT’s current competitors include major semiconductor companies such as Freescale, Infineon, NEC, Philips, STMicroelectronics, Texas Instruments STMicroelectronics,and VIA Telecom, NEC, Infineon and Philips, as well as major telecommunication equipment companies such as Ericsson, Matsushita, Motorola, Nokia Ericsson and Matsushita. In addition, QCT faces competition from the in-house development efforts of many of our key customers, including Samsung.Samsung, who design their own integrated circuits and software for certain products. QCT also faces competition from some start-up ventures.

     Our competitors may devote a significantly greater amount of their financial, technical, marketing and other resources to aggressively market competitive telecommunications systems or to develop and adopt competitive digital cellular technologies, and those efforts may materially and adversely affect QCT. Moreover, competitors may offer more attractive product pricing or financing terms than we do as a means of gaining access to the wireless telecommunications markets.

     We have entered into licensing agreements with certain companies, including Philips,EoNex Technologies, Infineon, Lucent, Motorola, Lucent,NEC, Philips, Texas Instruments and VIA Telecom, PrairieComm, NEC, EoNex Technologies and Infineon.Telecom. These licenses permit the licensees to manufacture CDMA-based integrated circuits using certain of our intellectual property for sale to CDMA-based phone manufacturers. In exchange for granting the licenses, we are entitled to receive license fees, royalties (payable(determined as a percentage of the selling price of the integrated circuits) and/or royalty-free cross-licenses, which allow us to use these companies’ CDMA and, in some cases, non-CDMA intellectual property for specified purposes. In every case, the phone manufacturers’ sales of CDMA-based phones are subject to the payment of royalties to us on the products into which the integrated circuits are incorporated in accordance with the manufacturers’ separate licensing arrangements with us. We license our CDMA intellectual property to the competitors of our QCT segment to support the deployment of CDMA-based systems and technologies worldwide in order to grow our royalty revenues from customers licensed to sell CDMA phones and equipment. We believe that, if the use of CDMA expandsbased systems expand sufficiently, QCT’s business will also grow, even if we lose market share. Also, our QTL segment will receive royalties from sales of CDMA integrated circuits by certain competitors of QCT. To date, most CDMAOnecdmaOne and CDMA2000 phone manufacturer licensees have elected to purchase their CDMA-based integrated circuits from us.

QUALCOMM Technology LicensingQTL Segment (QTL)

.As part of our strategy to generate new and ongoing licensing revenues, significant resources are allocated to develop leading edge technology for the telecommunications industry. In addition to licensing manufacturers of subscriber and network equipment, we have made licenses to our essential CDMA patents available to competitors of our QCT segment. We face competition in the development of intellectual property for next-generationfuture generations of digital wireless communications technology and services. There are no guarantees that our technologies will continue to be adopted or we will be able to secure patents for our technology to subsequently

14


license. Furthermore, there are no guarantees that existing systems and applications cannot or will not be replaced by competitors’ technologies, thereby jeopardizing our existing royalty and licensing revenues.

     On a worldwide basis, we currently compete primarily with two digital wireless telecommunications technologies, TDMA and GSM/GPRS. TDMA has been deployed primarily in the United States and Latin America. Variations of TDMA have also been deployed in other countries, such as PDC (Personal Digital Cellular) in Japan and PAS (Personal Access System) in China. GSM has been extensively utilized in Europe, much of Asia other than Japan and Korea, and certain other markets. To date, GSM has been more widely adopted than CDMA, and, althoughhowever, CDMA technology hastechnologies have been proposedadopted for all third generation wireless systems, there can be no assurance that wireless communications service providers will select CDMA for their networks or update to any CDMA-based third generation technology. WCDMA, a technology designed as an alternative to CDMA2000, is currently in the standardization process and has been adopted by several European, Japanese and United States carriers. We expect that, although limited systems have been placed in service (e.g., the largest WCDMA system is that of NTT DoCoMo in Japan with one million subscribers as of September 30, 2003 according to NTT DoCoMo’s October 1, 2003 press release), widespread and standardized WCDMA networks will not begin operation until 2004 or later, given that the WCDMA standard and interoperability testing is not yet complete.systems. In addition, many GSM operators have deployed or are expected to deploy GPRS, a packet data technology, as a 2.5G bridge technology, and some GSM operators plan to deploy EDGE, while waiting for third generation WCDMA to become available and/or more cost effective for their system. We believe that our CDMA patent portfolio is applicable to all CDMA systems. However, we cannot assure you that the wireless communications industry will widely adopt 3G standardsA limited number of operators have started testing OFDMA technology, a multi-carrier transmission technique not based on CDMA technology, or 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. We have invested in the development of our CDMA patents will be determinedown OFDMA technology and intellectual property and have recently entered into an agreement to be applicable to future standards beyond the 3G standards.

purchase Flarion, a major developer and patent holder of OFDMA technology.

QUALCOMM Wireless & Internet Segment (QWI)QWI Segment.

Existing competitors of our QWBS division offering alternatives to our OmniTRACS, TruckMAIL, OmniExpress, GlobalTRACS, QConnect, EutelTRACS and LINQ system products are aggressively pricing their products and services and could continue to do so in the future. In addition, theseour domestic markets, we face over ten key competitors to our OmniTRACS, TruckMAIL, OmniExpress, T2 Untethered TrailerTRACS, QConnect and OmniOne products and services, as well as over six key competitors to our GlobalTRACS system. Internationally, we face several key competitors each in Europe and Mexico. These competitors are offering new value-added

16


products and services similar in many cases to our existing or developing technologies. Emergence of new competitors, particularly those offering low cost terrestrial-based products and current as well as future satellite-based systems, may impact margins and intensify competition in new markets. Similarly, some original equipment manufacturers of trucks and truck components are beginning to offer built-in, on-board communications and position location reporting systems that may impact our margins and intensify competition in our current and new markets.

     Competitors to

     We have numerous competitors for each of our BREW platformproducts and services. These competitors are continuing to develop their products with a focus on client, provisioning, user interface, content distribution, and billing products and services. These competitorsCompetitors are attempting to offer value added products and services similar, in many cases, to our existing or developing BREW technologies. In some cases, competitors are continuing to explicitly attempt to displace only certain components or areas of the greater BREW offering, such as only the runtime client/device environment portion of BREW. In addition, certain competitors in the computing industry and device manufacturing spaceindustries are now beginning to more aggressively attempt to replicate the entire BREW system offering that includes both runtime device environments and billing/distribution systems. Similarly, some carriersoperators are creating internally developeddeveloping their own solutions by piecing together several components or are being pressured by governments to adopt alternatives to our productsboth internal and services.external components. Emergence of these and other new competitors may adversely impact our margins and market share.

Patents, Trademarks and Trade Secrets

     We rely on a combination of patents, copyrights, trade secrets, trademarks and proprietary information to maintain and enhance our competitive position. We have been granted more than 1,0001,540 United States patents and have over 1,7002,500 patent applications pending in the United States. The vast majority of such patents and patent applications relate to our CDMA digital wireless communications technology. We also have and will continue to actively file for patent protection outside the United States and have received numerous CDMA patents with broad coverage throughout most of the world, including China, Japan, South Korea, Europe, Brazil, India and elsewhere.

     The standards bodies and the ITU have been informed that we hold essential intellectual property rights for theall 3G standards that are based on CDMA. We have committed to the ITU to license our essential patents for these CDMA standards on a fair and reasonable basis free from unfair discrimination.

     Under our CDMA license agreements, licensees are generally required to pay us a non-refundable license fee as well as ongoing royalties based on a percentage of the net selling price of CDMA subscriber, infrastructure, test and integrated circuits products. License fees are paid in one or more installments, while royalties generally continue throughout the life of the licensed patents. Our CDMA license agreements generally provide cross-licenses to us rights to use certain of our licensees’ technology and intellectual property rights to manufacture and sell certain CDMA products, (e.g.e.g., CDMA application specific integrated circuits or ASICs,(ASICs) and related software, subscriber units and/or infrastructure equipment).equipment. In most cases, our use of our licensees’ technology and intellectual property is royalty free. However, under some of the licenses, if we incorporate certain of the licensed technology or intellectual property into certain of our products, we are obligated to pay royalties on the sale of such products. For a limited period of time, Motorola isUnder their existing agreements with us, two entities were entitled subject to the terms of their license agreement, to share in a percentage of certain third-party subscriber unit royalties paid by licensees to us. For a limited period of time, the Korean Electronics Telecommunications Research Institute is entitled, subject to the terms of a development agreement with us, to share in a percentage of subscriber and infrastructure royalties paid by certain South Korean licenseesroyalty revenues that we receive from third parties for salestheir sale of certain CDMA products sold solely for useproducts. Our sharing obligation under one of these arrangements expired in South Korea.

15


fiscal 2005, and the other sharing obligation will expire in fiscal 2006.

     As part of our strategy to generate licensing revenues and support worldwide adoption of our CDMA technology, we license to other companies, including the competitors of our QCT segment, the rights to design, manufacture and sell products utilizing certain portions of our CDMA technology. The following table lists the majority ofintellectual property. Our current publicly-announced CDMA licensees are listed on our current CDMA licensees:

16


Internet website (www.qualcomm.com).
Subscriber
AL Communications Co., Ltd.
Alps Electric Co., Ltd.
Ambit Microsystems Corporation
Appeal Telecom Co., Ltd.
Axesstel, Inc.
Axio Wireless, Inc.
Beijing Telecommunications Equipment Factory
Bellwave, Inc.
Benq Corporation
Casio Computer Co., Ltd.
CEC Telecom Co., Ltd.
Compal Electronics, Inc.
Curitel Communications, Inc.
Cyberlane Inc.
Dalian Daxian Group Co., Ltd.
Dalian Huanyu Mobile Technological Co., Ltd.
Datang Telecom Technology Co., Ltd.
Denso Corporation
eAnywhere Tech, Inc.
Eastern Communications Co., Ltd.
ERON Technologies Corporation
ETRONICS Corporation
Fujitsu Limited
Garmin Corporation
Giga Telecom, Inc.
Glenayre Electronics, Inc.
Growell Telecom Co., Ltd.
GTRAN Wireless, Inc.
Guangzhou Southern Hi-Tech Co., Ltd.
Haier Group Company
Handspring, Inc.
High Tech Computer Corporation
Hisense Group Co., Ltd.
Hitachi Kokusai Electric Inc.
Hitachi, Ltd.
Huawei Technologies Co., Ltd.
Hyundai Syscomm, Inc.
INTERCUBE Co., Ltd.
Inventec Appliances Corp.
Kenwood Corporation
Koninklijke Philips Electronics N.V
Konka Group Co., Ltd.
KTF Technologies Inc.
Kyocera Corporation
Langchao Electronic Information Industry Group Corp.
Legend Mobile Communications Technology Ltd.
LG Electronics
Lucent Technologies Inc.
Matsushita Electronic Components Co., Ltd.
Maxon Telecom Co., Ltd.
Mitsubishi Electric Corporation
Mobile System Technologies, Inc.
Modottel Co., Ltd.
Motorola, Inc.
NEC Corporation
NG Industrial Ltd.
Ningbo Bird Co., Ltd.
NOKIA Corporation
Novatel Wireless Inc.
Option NV SA
Panasonic Mobile Communications Co., Ltd.
Pantech Co., Ltd.
Research In Motion Limited
Samsung Electronics Co.
Sanyo Electric Co., Ltd.
Seiko Instruments Inc.
Sejin Electron Inc.
SHARP Corporation
Siemens Aktiengesellschaft
Sierra Wireless, Inc.
SK Telecom Co., Ltd.
Sony Corporation
Synertek, Inc.
-Sewon Telecom Ltd.
-Telson Electronics Co., Ltd.
-Wide Telecom Co., Ltd.
TCL Corporation
Telefonaktiebolaget LM Ericsson
Teleion Wireless, Inc.
Telular Corporation
Tellus Technology Inc.
Telson Information & Communications Co., Ltd.
Toshiba Corporation
Uniden Corporation
United Computer & Telecommunication, Inc.
Wavecom S.A.
Westech Korea, Inc.
Wherify Wireless, Inc.
Xiamen Overseas Chinese Electronic Co., Ltd.
ZTE Corporation
Infrastructure
Airvana, Inc.
AirWalk Communications, Inc.
Alcatel SA
Alps Electric Co., Ltd.
Axio Wireless, Inc.
Beijing Telecommunications Equipment Factory
Cisco Systems, Inc.
Contela, Inc.
Dalian Huanyu Mobile Technological Co., Ltd.
Datang Telecom Technology Co., Ltd.
Eastern Communications Co., Ltd.
Fujitsu Limited
Great Dragon Information Technology Corporation Ltd.
Guangzhou Jinpeng Group Co., Ltd.
Hitachi Kokusai Electric Inc.
Hitachi, Ltd.
Huawei Technologies Co., Ltd.
Hyundai Syscomm, Inc.
interWAVE Advanced Communications, Inc.
Kisan Telecom Co., Ltd.
LG Electronics
Lucent Technologies Inc.
Mitsubishi Electric Corporation
Motorola, Inc.
NEC Corporation
NOKIA Corporation
Nortel Networks Limited
Panasonic Mobile Communications Co., Ltd.
Panasonic Mobile Communications Co., Ltd.
Samsung Electronics Co.
Siemens Aktiengesellschaft
Telefonaktiebolaget LM Ericsson
ZTE Corporation
ASICs
Agere Systems Inc.
EoNex Technologies, Inc.
Infineon Technologies AG
Koninklijke Philips Electronics N.V
Lucent Technologies Inc.
Motorola, Inc.
NEC Corporation
PrairieComm Incorporated
Texas Instruments Incorporated
VIA Telecom, Inc.
Test Equipment
Acterna Corporation
Advantest Corporation
Agilent Technologies, Inc.
Allen Telecom Inc.
Ando Electric Co., Ltd.
Anritsu Corporation
Comarco Wireless Technologies, Inc.
Hewlett-Packard Company
IFR Systems, Inc.
Japan Radio Co., Ltd.
LCC International, Inc.
Mobens Co., Ltd.
Motorola, Inc.
Panasonic Mobile Communications Co., Ltd.
Racal Instruments Limited
Rohde & Schwarz GmbH & Co. KG
Rotadata Limited
Sage Instruments
Spirent Communications, Inc.
Tektronix, Inc.
Telefonaktiebolaget LM Ericsson
UbiNetics Holdings plc
Willtek Corporation
Non-Standard Systems
SOMA Networks, Inc.
Cable and Repeaters
EC Telecom Inc.
EMS Technologies, Inc.
Transcept, Inc.
United Computer & Telecommunication, Inc.
Research & Development
Chunghwa Telecom Laboratories


17


Employees

Employees
     As of September 30, 2003,25, 2005, we employed approximately 7,4009,300 full-time, part-time and temporary employees.

Available Information During fiscal 2005, the number of employees increased by approximately 300 from acquisitions and 1,400 primarily from increases in engineering resources.

Available Information
     Our Internet address is www.qualcomm.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.Securities and Exchange Commission (SEC). Our SEC reports can be accessed through the investor relations section of our Web site. Internet website.

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The information found on our Web siteInternet website is not part of this or any other report we file with or furnish to the SEC.

Executive Officers

     The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room located at 450 Fifth Street NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains electronic versions of our reports on its website at www.sec.gov.

Executive Officers
     Our executive officers and their ages as of September 30, 200325, 2005 are as follows:

     Irwin Mark Jacobs, age 69,71, one of the founders of the Company, has served as Chairman of the Board of Directors andsince July 1985. He also served as Chief Executive Officer of the Company since it began operations infrom July 1985. He served as the Company’s president prior1985 to May 1992. Before joining the Company, Dr. Jacobs was executive vice president and a director of M/A-COM. From October 1968 to April 1985, Dr. Jacobs held various executive positions at LINKABIT (M/A-COM LINKABIT after August 1980), a company he co-founded. During most of his period of service with LINKABIT, Dr. Jacobs was chairman, president and chief executive officer and was at all times a director.June 2005. Dr. Jacobs received his B.E.E.B.S. degree in Electrical Engineering from Cornell University and his M.S. and Sc.D. degrees from the Massachusetts Institute of Technology. Dr. Irwin Jacobs is a memberthe father of the National AcademyDr. Paul Jacobs, our Chief Executive Officer, and Jeffrey A. Jacobs, President of Engineering and the American Academy of Arts and Sciences and was awarded the National Medal of Technology in 1994.

     Anthony S. Thornley, age 57, was appointed President in February 2002 and Chief Operating Officer of the Company in July 2001. He served as Chief Financial Officer from March 1994 to February 2002 and as Executive Vice President from November 1997 to July 2001. Prior to joining the Company, he was with Nortel, a telecommunications equipment manufacturer, for sixteen years in various financial and information systems management positions, including Vice President Finance and IS, Public Networks, Vice President Finance NT World Trade and Corporate Controller Nortel Limited. He also worked for Coopers & Lybrand from 1970 to 1977. Mr. Thornley received his B.S. degree in Chemistry from the University of Manchester, England.

     WilliamQUALCOMM Global Development.

     Paul E. Keitel, age 50, was appointed Senior Vice President and Chief Financial Officer in February 2002. He joined the Company in 1996 and has worked in senior management roles within corporate finance, serving as Senior Vice President and Corporate Controller from 1998 through 2002. Previously, Mr. Keitel served in various senior finance roles for Nortel, a telecommunications equipment manufacturer, from 1983 until 1996. Mr. Keitel received his M.B.A. degree from Arizona State University and a B.A. degree in business administration from the University of Wisconsin.

     Steven R. Altman,Jacobs, age 42, has served as a director since June 2005 and as our Chief Executive Vice President of the CompanyOfficer since November 1997. He also has served as President of the QUALCOMM Technology Licensing division since September 1995.July 2005. He served as General Counsel of the Company from October 1989 through September 2000. He was named Vice President in December 1992, was promoted to Senior Vice President in February 1996 and was promoted to Executive Vice President in November 1997. Prior to joining the Company in October 1989, he was a business lawyer in the San Diego law firm of Gray, Cary, Ware & Freidenrich, where he specialized in intellectual property, mergers and acquisitions, securities and general corporate matters. Mr. Altman received a B.S. degree from Northern Arizona University and a J.D. from the University of San Diego.

     Roberto Padovani, age 49, was appointed Executive Vice President and Chief Technology Officer in January 2002. He joined the Company in 1986 where he has been involved in the design, development and standardization of second and third generation CDMA systems. Prior to joining QUALCOMM, Dr. Padovani was involved in the design and development of satellite communication systems, secure video systems and error-correcting coding equipment at M/A-COM LINKABIT in San Diego. Dr. Padovani received a Laureate degree from the University of Padova, Italy and M.S. and Ph.D. degrees from the University of Massachusetts, Amherst, all in electrical and computer engineering. He is a Fellow of the Institute of Electrical and Electronics Engineers.

     Paul E. Jacobs, age 40, was appointed Group President of the QUALCOMM Wireless & Internet Group infrom July 2001. He oversees the QUALCOMM Technology Licensing division, the QUALCOMM Internet Services division,

18


the QUALCOMM Wireless Business Solutions division, and the QUALCOMM Digital Media division along with Corporate Marketing, Standards and the QUALCOMM Technology and Ventures unit. He has2001 to June 2005. In addition, he served as an Executive Vice President of the Company since February 2000. He served as President of the Consumer Products division from February 19972000 to February 2000 and as Senior Vice President of the Company and Vice President and General Manager of the Consumer Products division from April 1995 to February 1997. He joined the Company in September 1990 as Senior Engineer.June 2005. Dr. Jacobs holds a B.S. degree in Electrical Engineering and Computer Science, ana M.S. degree in Electrical Engineering and a Ph.D. degree in Electrical Engineering and Computer Science from the University of California, Berkeley. Dr. Paul Jacobs is the son of Dr. Irwin Mark Jacobs, Chairman of theour Board of Directors, and Chiefthe brother of Jeffrey A. Jacobs, President of QUALCOMM Global Development.

     Steven R. Altman, age 44, has served as our President since July 2005. He served as an Executive OfficerVice President from November 1997 to June 2005 and as President of our Technology Licensing division from September 1995 to April 2005. Mr. Altman received a B.S. degree from Northern Arizona University and a J.D. from the Company.

University of San Diego.

     Sanjay K. Jha, age 40, was appointed president of42, has served as Group President, QUALCOMM CDMA Technologies (QCT) since February 2004 and as an Executive Vice President since December 2003. He was appointed President of QCT in January 2003. Dr. JhaHe served as a Senior Vice President from August 2000 to March 2002 and subsequently as Senior Vice President and General Manager of the QUALCOMM Technologies & Ventures group from July 1998 to December 2002, and in addition served as General Manager from March 2002 to December 2002. He was Vice President of Engineering from May 1997 to June 1998, and was a director of engineering from October 1996 to April 1997. He joined QUALCOMM in 1994 as a senior engineer working on Globalstar and then on Voc2. Prior to joining QUALCOMM, Dr. Jha worked in lead design engineering roles in the semiconductor industry.January 2003. Dr. Jha holds a Ph.D. in Electronic and Electrical Engineering from Strathclyde University, Scotland and a B.S. degree in Engineering from the University of Liverpool, England.

     William E. Keitel, age 52, has served as an Executive Vice President since December 2003 and as our Chief Financial Officer since February 2002. He previously served as a Senior Vice President and as our Corporate Controller from May 1999 to February 2002. Mr. Keitel received a M.B.A. from Arizona State University and a B.A. degree in Business Administration from the University of Wisconsin.
     Roberto Padovani, age 51, has served as an Executive Vice President and as our Chief Technology Officer since January 2002. He previously served as Senior Vice President from July 1996 to July 2001 and as Executive Vice President from July 2001 to January 2002 of our Corporate Research and Development. Dr. Padovani received a Laureate degree from the University of Padova, Italy and M.S. and Ph.D. degrees from the University of Massachusetts, Amherst, all in Electrical and Computer Engineering.
     Marvin Blecker, age 58, has served as President of QUALCOMM Technology Licensing (QTL) since April 2005. From November 2001 to April 2005 he served as General Manager of QTL, as well as Senior Vice President of that division from October 1995 to November 2001. He holds B.S. and M.S. degrees in Mathematics and a M.S. degree in Electrical Engineering-Systems Science from the Polytechnic Institute of Brooklyn, New York (now Polytechnic University).
     Jeffrey A. Jacobs, age 37, was appointed39, has served as President of QUALCOMM Global Development an organization responsible for proliferating CDMA throughout the world, insince May 2001. He served as Senior Vice President of Business Development from June 1999 to May 2001 and Vice President of Business Development from November 1997 to June 1999. Mr. Jacobs founded the QUALCOMM Eudora division in 1993 and served as Vice President and General Manager of the division from August 1995 to November 1997. He joined the Company in May 1986 as a market analyst and held other management positions at the Company through August 1995.2001. Mr. Jacobs holds a B.A. degree in International Economics from the University of California, Berkeley. Mr. Jeffrey Jacobs is the son of Dr. Irwin Mark Jacobs, Chairman of theour Board of Directors, and the brother of Dr. Paul E. Jacobs, a member of our Board of Directors and our Chief Executive OfficerOfficer.

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     Margaret “Peggy” L. Johnson, age 43, has served as President of the Company.

     Louis Lupin, age 48, hasQUALCOMM Internet Services (QIS) since July 2001. Prior to that time she served as Senior Vice President and General CounselManager of the CompanyQIS from September 2000 to July 2001. Ms. Johnson holds a B.S. degree in Electrical Engineering from San Diego State University.

     Louis M. Lupin, age 50, has served as a Senior Vice President and as our General Counsel since September 2000. He served as Senior Vice President, Proprietary Rights Counsel from May 1998 to September 2000, Vice President, Proprietary Rights Counsel from April 1996 to May 1998 and Senior Legal Counsel from February 1995 to April 1996. Prior to joining the Company in 1995, he was a partner with Cooley, Godward, Castro, Huddleson and Tatum where he focused on intellectual property litigation in the telecommunications, software and biotechnology industry. Mr. Lupin received his bachelor’sa B.A. degree from Swarthmore College and a J.D. from Stanford Law School.
     Daniel L. Sullivan, age 54, has served as Executive Vice President of Human Resources since August 2001. He served as Senior Vice President of Human Resources from February 1996 to July 2001. Dr. Sullivan holds a Ph.D. in Organization Communication from the University of Nebraska. He also holds B.S and M.A. degrees in Communication from Illinois State University and West Virginia University, respectively.

RISK FACTORS

     You should consider each of the following factors as well as the other information in this Annual 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 Annual Report, including our financial statements and the related notes.

Risks Related to Our Businesses

If CDMA technology isdeployment does not widely deployed,expand as anticipated, our revenues may not grow as anticipated.

     We focus our business primarily on developing, patenting and commercializing CDMA technology for wireless telecommunications applications. In addition, with the anticipated acquisition of Flarion, there will be an increased emphasis on developing, patenting and commercializing OFDMA technology. Other digital wireless communications technologies, particularly GSM technology, have been more widely deployed than CDMA technology. IfOFDMA has not been widely deployed commercially. Notwithstanding our portfolio of OFDMA/OFDM intellectual property, technology and products, 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 deployselect CDMA for their networks that utilize CDMAor update their current networks to any CDMA-based third generation technology, our business and financial results could suffer.

Further, if OFDMA technology is not adopted and deployed commercially, our anticipated investment in Flarion and OFDMA technology may not provide us a significant return on investment.

     To increase our revenues and market share in future periods, we are dependent upon the commercial deployment of 3Gthird generation (3G) wireless communications equipment, products and services based on our CDMA technology. Although

19


wireless 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 wireless network operators deploy competing technologies or switch existing networks from CDMA to GSM or if wireless network operators introduce new technologies.

A limited number of operators have started testing OFDMA technology, but there can be no assurance that OFDMA will be adopted or deployed commercially or that we will be successful in developing and marketing OFDMA products. Although we have hundreds of issued or pending patents relating to applications of GPRS, EDGE, OFDM, OFDMA and multi in, multi out (MIMO), 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 technologyour technologies are dependent on the success of our customers and licensees. Our customers and licensees may incur lower operating margins on CDMA-based products based on our technologies than on products using alternative technologies due to greater competition in the CDMA-basedrelevant market lack of product improvements or other factors. If CDMA handsetphone and/or infrastructure manufacturers exit the CDMA market, the deployment of CDMA technology could be negatively affected, and our business could suffer.

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Our fourthree largest customers as of September 30, 2003 accounted for 51%39%, 40% and 48%43% of consolidated revenues in fiscal 20032005, 2004 and 2002,2003, 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 acceptabledesired levels of operating results.

QCT SegmentSegment.

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 acceptabledesired 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;
 
  fluctuations in channel inventory levels;
 
  the success of products sold to our customers by licensed competitors;
 
  the rate of deployment of new technology by the wireless network operators and the rate of adoption of new technology by the end consumers;
 
  the extent to which certain customers successfully develop and produce CDMA-based integrated circuits and system software to meet their own needs;
 
  general economic conditions;
 
  changes in governmental regulations in countries where we or our customers currently operate or plan to operate; and
 
  widespread illness.

QTL SegmentSegment.

Our QTL segment derives royalty revenues from sales of CDMA products by our licensees. WeAlthough we have more than 130 licensees, we derive a significant portion of our royalty revenue from a limited number of licensees. Our future success depends upon the ability of our licensees to develop, introduce and deliver high volume products that achieve and sustain market acceptance. We have little or no control over the sales efforts of our licensees, and we cannot assure you that our licensees will be successful or that the demand for wireless communications devices and services offered by our licensees will continue to increase. Any reduction in the demand for or any delay in the development, introduction or delivery of wireless communications devices utilizing our CDMA technology could have a material adverse effect on our business. Reductions in the average selling price of wireless communications devices utilizing our CDMA technology, without a comparable increase in the volumes of such devices sold, could have a material adverse effect on our business. Weakness in the value of foreign currencies in which our customers’ products are sold may reduce the amount of royalties payable to us in U.S. dollars.

     Royalties under our license agreements are generally payable to us for the life of the patents that we license under our agreements. The licenses granted to and from us under a number of our license agreements include only patents that are either filed or issued prior to a certain date, and, in a small number of agreements, royalties are payable on those patents for a specified time period. As a result, there are agreements with some licensees where later patents are not licensed by or to us under our license agreements. In order to license any such later patents, we will need to extend or modify our license agreements or enter into new license agreements with such licensees. Although in the past we have amended many of our license agreements to include later patents without affecting the material terms and conditions of our license agreements, there is no assurance that we will be able to modify our license agreements in the future to license any such later patents or extend such date(s) to incorporate later patents without affecting the material terms and conditions of our license agreements with such licensees.

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     QWI Segment

     Our QIS division derives revenue primarily from software development and services revenuesChanges in financial accounting standards related to our BREW product and services and a QChat licensing agreement with Nextel. We deriveshare-based payments are expected to have a significant portioneffect on our reported results.

     The Financial Accounting Standards Board recently issued a revised standard that requires that we record compensation expense in the statement of operations for share-based payments, such as employee stock options, using the fair value method. The adoption of the new standard is expected to have a significant effect on our QIS revenuereported earnings, although it will not affect our cash flows, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the values of share-based payments. As a result, our adoption of the new standard in the first quarter of fiscal 2006 could negatively affect our stock price and our stock price volatility.
We depend upon a limited number of third party manufacturers to provide component parts, subassemblies and finished goods for our products. We are expanding our manufacturing model to purchase silicon wafers from network operators offering BREWfoundries and to contract directly with third party manufacturers for assembly and test services. The future successAny disruptions in the operations of, or the loss of, any of these third parties could harm our QIS divisionability to meet our delivery obligations to our customers and increase our cost of sales.
     Our ability to meet customer demands depends, in part, upon theon available manufacturing capacity and our ability to obtain timely and adequate delivery of network operators, wireless device manufacturersparts and developerscomponents from our suppliers. A reduction or interruption in component supply, an inability of our partners to continue the momentumreact to rapid shifts in wireless data and sustain market acceptance for quality wireless applications and services. We cannot assure you that they will be successfuldemand or will not build or buy similar capacity such that they no longer require BREW services. We also cannot assure you that the demand for BREW services will continue to increase. Any reductiona significant increase in the demand for these servicescomponent prices could have a material adverse effect on our business.business or profitability. Component shortages could adversely affect our ability and that of our customers to ship products on a timely basis and our customers’ demand for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our ability to achieve or sustain desired levels of profitability. Additionally, failure to meet customer demand in a timely manner could damage our reputation and harm our customer relationships potentially resulting in reduced market share.
QCT Segment.Die, cut from silicon wafers, are the essential components for all of our integrated circuits and a significant portion of the total integrated circuit cost. We do not own or operate foundries for the production of silicon wafers from which our integrated circuits are made. Instead, we utilize a fabless model whereby we rely on a limited number of independent third party manufacturers to perform the manufacturing and assembly, and most of the testing, of our integrated circuits. Our suppliers are also responsible for the procurement of most of the raw materials used in the production of our integrated circuits. The majority of our integrated circuits are purchased on a turnkey basis, in which our foundry partners are responsible for supplying fully assembled and tested integrated circuits. IBM, Taiwan Semiconductor Manufacturing Co. and United Microelectronics are the primary foundry partners for our family of baseband integrated circuits. Atmel, Freescale (formerly Motorola Semiconductor) and IBM are the primary foundry partners for our family of radio frequency and analog integrated circuits.
     Our fabless model provides us the flexibility to select suppliers that offer advanced process technologies to manufacture, assemble and test our integrated circuits at a competitive price. We work closely with our customers to expedite their processes for evaluating new integrated circuits from our foundry suppliers; however, in some instances, transition of integrated circuit production to a new foundry supplier may cause a temporary decline in shipments of specific integrated circuits to individual customers. To the extent that we do not have firm commitments from our manufacturers over a specific time period or in any specific quantity, our manufacturers may allocate, and in the past have allocated, capacity to the production of products for their other customers while reducing deliveries to us on short notice.
     Some of our integrated circuits products are only available from single sources, with which we do not have long-term contracts. Our reliance on a sole-source vendor primarily occurs during the start-up phase of a new product. Once a product reaches a significant volume level, we typically establish alternate suppliers for technologies that we consider critical. Our reliance on sole or limited-source vendors involves risks. These risks include possible shortages of capacity, product performance shortfalls and reduced controls over delivery schedules, manufacturing capability, quality assurance, quantity and costs. During fiscal 2004 and the first quarter of fiscal 2005, we experienced supply constraints which resulted in our inability to meet certain customer demands. These constraints substantially diminished during the second quarter of fiscal 2005 and were alleviated in the third quarter of fiscal 2005, with improvements to supply more closely aligning with our then current customer demand profile. To improve the supply and delivery of integrated circuits from our suppliers, we worked with our existing suppliers to increase available manufacturing capacity and increased and extended our firm orders to our suppliers.

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     To further enable flexibility of supply and access to potential new foundry suppliers, and in response to the complexity of our product roadmap, we began to expand our manufacturing model in fiscal 2005 to include purchasing silicon wafers directly from semiconductor manufacturing foundries. Under our expanded manufacturing model, we contract directly with third party manufacturers for assembly and test services, and we ship the final integrated circuits to our customers. We expect to increase the volume of our silicon wafer purchases directly from our foundry suppliers and to continue to purchase products on a turnkey basis. We do not have a history working with these third parties under this expanded manufacturing model, and their services and volume of activity may not be completely reliable during the ramp-up stages. We cannot guarantee that this change will not cause disruptions in our operations that could harm our ability to meet our delivery obligations to our customers or increase our cost of sales.
     In addition to the expansion of our manufacturing model, our operations may also be harmed by lengthy or recurring disruptions at any of the facilities of our manufacturers and may be harmed by disruptions in the distribution channels from our suppliers and to our customers. These disruptions may include labor strikes, work stoppages, widespread illness, terrorism, war, political unrest, fire, earthquake, flooding or other natural disasters. These disruptions could cause significant delays in shipments until we are able to shift the products from an affected manufacturer to another manufacturer. The loss of a significant third party manufacturer or the inability of a third party manufacturer to meet performance and quality specifications or delivery schedules could harm our ability to meet our delivery obligations to our customers.
     In addition, one or more of our manufacturers may obtain licenses from us to manufacture CDMA integrated circuits that compete with our products. In this event, the manufacturer could elect to allocate scarce components and manufacturing capacity to their own products and reduce deliveries to us. In the event of a loss of or a decision to change a key third party manufacturer, qualifying a new manufacturer and commencing volume production or testing could involve delay and expense, resulting in lost revenues, reduced operating margins and possible loss of customers.
We and our licensees are subject to the risks of our and our licensees’ conducting business outside the United States.

     A significant part of our strategy involves our continued pursuit of growth opportunities in a number of international markets. We market, sell and service our products internationally. We have established sales offices around the world. We willexpect to continue to expand our international sales operations and enter new international markets. This expansion will require significant management attention and financial resources to successfully develop direct and indirect international sales and support channels, and we cannot assure you that we will be successful or that our expenditures in this effort will not exceed the amount of any resulting revenues. If we are not able to maintain or increase international market demand for our products and technologies, we may not be able to maintain an acceptablea desired rate of growth in our business.

     Our international customers sell their products to markets throughout the world, including China, India, Japan, Korea, North America, South America and Europe. We distinguish revenues from external customers by geographic areas based on customer location. Consolidated revenues from international customers as a percentage of total revenues were 78%82%, 79% and 77% in fiscal 2005, 2004 and 2003, 70% in fiscal 2002, and 65% in fiscal 2001.respectively. Because most of our foreign sales are denominated in U.S. dollars, our products and those of our customers and licensees that are sold in U.S. dollars become less price-competitive in international markets if the value of the U.S. dollar increases relative to foreign currencies.

     In many international markets, barriers to entry are created by long-standing relationships between our potential customers and their local service providers and protective regulations, including local content and service requirements. In addition, our pursuit of international growth opportunities may require significant investments for an extended period before we realize returns, if any, on our investments. Our business could be adversely affected by a variety of uncontrollable and changing factors, including:

  unexpected changes in legal or regulatory requirements;requirements, including regulations governing the materials used in our products;
 
  difficulty in protecting or enforcing our intellectual property rights and/or contracts in a particular foreign jurisdiction;jurisdiction, including challenges to our licensing practices under such jurisdictions’ competition laws;
 
  our inability to succeed in significant foreign markets, such as China, India or India;Europe;

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  cultural differences in the conduct of business;
 
  difficulty in attracting qualified personnel and managing foreign activities;
 
  recessions in economies outside the United States;
 
  longer payment cycles for and greater difficulties collecting accounts receivable;
 
  export controls, tariffs and other trade protection measures;
 
  fluctuations in currency exchange rates;
 
  inflation and deflation;
 
  nationalization, expropriation and limitations on repatriation of cash;
 
  social, economic and political instability;
 
  natural disasters, acts of terrorism, widespread illness and war;
 
  taxation; and
 
  changes in laws and policies affecting trade, foreign investmentinvestments, licensing practices and loans.

     In addition to general risks associated with our international sales, licensing activities and operations, we are also subject to risks specific to the individual countries in which we do business. We cannot be certain that the laws and policies of any country with respect to intellectual property enforcement or licensing, issuance of wireless licenses or the adoption of standards will not be changed or be enforced in a way detrimental to our licensing program or to the sale or use of our products or technology. Declines in currency values in selected

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regions may adversely affect our operating results because our products and those of our customers and licensees may become more expensive to purchase in the countries of the affected currencies. During fiscal 2003, 43%2005, 37% and 15%21% of our revenues were from customers and licensees based in South Korea and Japan, respectively, as compared to 37%43% and 18%, respectively, during fiscal 2002, respectively,2004, and 35%45% and 22%15% during fiscal 2001,2003, respectively. These customers based in South Korea and Japan sell their products to markets worldwide, including Japan, South Korea, North America, South America and Europe. A significant downturn in the economies of Asian countries where many of our customers and licensees are located, particularly the economies of South Korea and Japan, or the economies of the major markets they serve would materially harm our business.

     The wireless markets in China and India, among others, represent significant growth opportunities for us. In January 2002,If wireless carriers in China Unicom launched its nationwide CDMA network, and China Unicom had approximately 16 million CDMA subscribers in October 2003. In May 2003, Reliance Infocomm launched its nationwide CDMA network inor India, and Reliance Infocomm had approximately 4 million subscribers as of the end of September 2003. If China Unicom or Reliance Infocomm or the governments of China or India, make technology deployment or other decisions that result in actions that are adverse to the expansion of CDMA technologies in China or India, our business could be harmed.

     We are subject to risks in certain global markets in which wireless operators provide subsidies on phone sales to their customers. Increases in phone prices that negatively impact phone sales can result from changes in regulatory policies related to phone subsidies. Limitations or changes in policy on phone subsidies in South Korea, Japan, China and other countries may have additional negative impacts on our revenues.

     We expect that royalty revenues derived from international licensees based upon sales of their products outside of the United States will continue to represent a significant portion of our total revenues in the future. RevenuesOur royalty revenues from international licensees are denominated in U.S. dollars. However, toTo the extent that such licensees’ sales to their customersproducts are not denominatedsold in U.S. dollars,foreign currencies, any royalties that we receivederive as a result of such sales are subject to fluctuations in currency exchange rates. In addition, if the effective price of products sold by our customers were to increase as a result of fluctuations in the exchange rate of the relevant currencies, demand for the products could fall, which in turn would reduce our royalty revenues.

Currency fluctuations could negatively affect future product sales or royalty revenue, harm our ability to collect receivables, or increase the U.S. dollar cost of the activities of our foreign subsidiaries and international strategic investments.

     We are exposed to risk from fluctuations in currencies, which may change over time as our business practices evolve, that could impact our operating results, liquidity and financial condition. We operate and invest globally.

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Adverse movements in currency exchange rates may negatively affect our business due to a number of situations, including the following:

  Assets or liabilities of our consolidated subsidiaries and our foreign investees that are not denominated in the functional currency of those entities are subject to the effects of currency fluctuations, which may affect our reported earnings. Our exposure to foreign currencies may increase as we expand into new markets.
 
  Investments in our consolidated foreign subsidiaries and in other foreign entities that use the local currency as the functional currency may decline in value as a result of declines in local currency values.
 
  Certain of our revenues, such as royalty revenues, are derived from licensee or customer sales that are denominated in foreign currencies. If these revenues are not subject to foreign exchange hedging transactions, weakening of currency values in selected regions could adversely affect our anticipated revenues and cash flows.
We may engage in foreign exchange hedging transactions that could affect our cash flows and earnings because they may require the payment of structuring fees, and they may limit the U.S. dollar value of royalties from licensees’ sales that are denominated in foreign currencies.
Our trade receivables are generally United StatesU. S. dollar denominated. Any significant changeincrease in the value of the dollar against our customers’ or licensees’ functional currencies could result in an increase in our customers’ or licensees’ cash flow requirements and could consequently affect our ability to sell products and collect receivables.
Foreign CDMA wireless operators to whom we have provided financing may be unable to pay their debts to us, which are denominated in U.S. dollars, from revenues generated by their projects, which are denominated in local currencies.
 
  Strengthening of currency values in selected regions may adversely affect our operating results because the activities of our foreign subsidiaries may become more expensive in U.S. dollars.
 
  Strengthening of currency values in selected regions may adversely affect our cash flows and investment results because strategic investment obligations denominated in foreign currencies may become more expensive, and the U.S. dollar cost of equity in losses of foreign investees may increase.

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Foreign exchange hedging transactions could affect our cash flows and earnings because they may require the payment of structuring fees and they may limit the U.S. dollar value of royalties from licensees’ sales that are denominated in foreign currencies.

Because we have made significant investments in and loans to CDMA wireless operators, our financial condition may be harmed if those CDMA wireless operators are not successful.

     We have provided significant funding to CDMA wireless operators to promote the worldwide adoption of CDMA products and services. Due to financial and competitive challenges facing CDMA wireless operators, we cannot assure you that our investments will generate financial returns or that they will result in increased adoption or continued use of CDMA technologies. Domestic and international CDMA wireless operators to whom we have provided financing have limited operating histories, are faced with significant capital requirements, are highly leveraged and/or have limited financial resources. If these CDMA wireless operators are not successful, we may have to write down our investments in or loans to these wireless operators. Certain wireless operators to whom we have provided financing have defaulted on their obligations to us, and it is possible that others will default on their obligations to us in the future. Any such write-downs or defaults could have a material adverse effect on our financial condition and operating results. Due to currency fluctuations and international risks, foreign borrowers may become unable to pay their debts to us from revenues generated by their projects that are denominated in local currencies. Further, we may not be permitted to retain a security interest in any spectrum licenses held by foreign wireless operators that we finance. These spectrum licenses initially may constitute the primary asset of the wireless operators. The amount of financing that we have provided and that we could provide in the future is substantial. If we are unable to recover our investments in or loans to these CDMA wireless operators, our financial condition may be harmed. See “Notes to Consolidated Financial Statements, Note 2 – Marketable Securities, Note 3 – Composition of Certain Financial Statement Captions, Finance Receivables and Note 4 – Investments in Other Entities.”

We may engage in strategic transactions that could result in significant charges or management disruption and fail to enhance stockholder value.

     From time to time, we engage in strategic transactions with the goal of maximizing stockholder value. In the past we have acquired businesses, entered into joint ventures and made strategic investments in or loans to CDMA wireless operators, early stage companies, andor venture funds or incubators to support global adoption of CDMA and the use of the wireless Internet. Most of our strategic investments entail a high degree of risk and will not become liquid until more than one year from the date of investment, if at all.

We cannot assure you that our strategic investments (either those we currently hold or future investments) will generate financial returns or that they will result in increased adoption or continued use of CDMA technologies.

     We will continue to evaluate potential strategic transactions and alternatives that we believe may enhance stockholder value. These potential future transactions may include a variety of different business arrangements, including acquisitions, spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and equity or debt investments. Although our goal is to maximize stockholder value, such transactions may impair stockholder value or otherwise adversely affect our business and the trading price of our stock. Any such transaction may require us to incur non-recurring or other charges and/or to consolidate or record our equity in losses and may pose significant integration challenges and/or management and business disruptions, any of which could harm our operating results and business.

We depend upon a limited number of third party manufacturers to provide subassemblies and parts for our products. Any disruptions in the operations of, or the loss of, any of these third parties could harm our ability to meet our delivery obligations to our customers and increase our cost of sales.

     QCT Segment

     We subcontract all of the manufacturing and assembly, and most of the testing, of our integrated circuits. We depend upon a limited number of third parties to perform these functions, some of which are only available from single sources with which we do not have long-term contracts. IBM, Taiwan Semiconductor Manufacturing Co. and United Microelectronics are the primary foundry partners for our family of baseband integrated circuits. IBM, Motorola and Texas Instruments are the primary foundry partners for our family of radio frequency and analog integrated circuits. Our reliance on a sole-source vendor primarily occurs during the start-up phase of a new product. Once a new product reaches a significant volume level, we typically establish alternative suppliers for technologies that we consider critical. Our reliance on sole or limited-source vendors involves risks. These risks include possible shortages of capacity, product performance shortfalls, and reduced controls over delivery schedules, manufacturing capability, quality assurance, quantity and costs. We have no firm long-term commitments from our manufacturers to

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supply products to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order. As a result, these manufacturers may allocate, and in the past have allocated, capacity to the production of other products while reducing deliveries to us on short notice.

     Our operations may also be harmed by lengthy or recurring disruptions at any of the facilities of our manufacturers and may be harmed by disruptions in the distribution channels from our suppliers and to our customers. These disruptions may include labor strikes, work stoppages, widespread illness, terrorism, war, fire, earthquake, flooding or other natural disasters. These disruptions could cause significant delays in shipments until we are able to shift the products from an affected manufacturer to another manufacturer. The loss of a significant third-party manufacturer or the inability of a third-party manufacturer to meet performance and quality specifications or delivery schedules could harm our ability to meet our delivery obligations to our customers.

     In addition, one or more of our manufacturers may obtain licenses from us to manufacture CDMA integrated circuits that compete with our products. In this event, the manufacturer could elect to allocate scarce components and manufacturing capacity to their own products and reduce deliveries to us. In the event of a loss of or a decision to change a key third-party manufacturer, qualifying a new manufacturer and commencing volume production or testing could involve delay and expense, resulting in lost revenues, reduced operating margins and possible loss of customers.

     QWI Segment

     Several of the critical subassemblies and parts used in our QWBS division’s existing and proposed products are currently available only from third-party single or limited sources. These include items such as electronic and radio frequency components, and other sophisticated parts and subassemblies which are used in the OmniTRACS, OmniExpress and GlobalTRACS products. These third parties include companies such as Tyco International (M/A Com), Rakon, Mini-Circuits, Cambridge Tool & Mfg., Andrew Corporation, American Design, Deutsch ECD, PCI Limited, KeyTronic EMS, Seavey Engineering Associates, Symbol Technologies, Navman NZ, Thomson-Airpax Mechatronics, Eagle-Picher Industries and Sony/Ericsson. Our reliance on sole or limited source vendors involves risks. These risks include possible shortages of certain key components, product performance shortfalls, and reduced control over delivery schedules, manufacturing capability, quality and costs. In the event of a long-term supply interruption, alternate sources could be developed in a majority of the cases. The inability to obtain adequate quantities of significant compliant materials on a timely basis could have a material adverse effect on our business, operating results, liquidity and financial position.

A reduction or interruption in component supply or a significant increase in component prices could have a material adverse effect on our business or profitability.

     Our ability to meet customer demands depends, in part, on our ability to obtain timely and adequate delivery of parts and components from our suppliers and internal manufacturing capacity. We have experienced component shortages in the past, including components for our integrated circuit products, that have adversely affected our operations. Although we work closely with our suppliers to avoid these types of shortages, we may continue to encounter these problems in the future. Component shortages could adversely affect our ability and that of our customers and licensees to ship products on a timely basis and our customers’ or licensees’ demand for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our ability to achieve or sustain acceptable levels of profitability. Additionally, failure to meet customer demand in a timely manner could damage our reputation and harm our customer relationships.

Defects or errors in our products and services or in thoseproducts made by our suppliers could harm our relations with our customers and expose us to liability. Similar problems related to the products of our customers or licensees wouldcould harm our business.

     Our software and integrated circuit products are inherently complex and may contain defects and errors that are detected only when the products are in use. Further, because our products performand services are responsible for critical functions in our customers’ products andand/or networks, such defects or errors could have a serious impact on our customers, which could damage our reputation, harm our customer relationships and expose us to liability. Defects or impurities in our components, materials or software or those used by our customers or licensees, equipment failures or other

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difficulties could adversely affect our ability and that of our customers and licensees to ship products on a timely basis as well as customer or licensee demand for our products. Any such shipment delays or declines in demand could reduce our revenues and harm our ability to achieve or sustain acceptabledesired levels of profitability. We and our

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customers or licensees may also experience component or software failures or defects which could require significant product recalls, reworks and/or repairs which are not covered by warranty reserves and which could consume a substantial portion of the capacity of our third-party manufacturers or those of our customers or licensees. Resolving any defect or failure related issues could consume financial and/or engineering resources that could affect future product release schedules.

Additionally, a defect or failure in our products or the products of our customers or licensees could harm our reputation and/or adversely affect the growth of 3G wireless markets.

Global economic conditions that impact the wireless communications industry could negatively affect our revenues and operating results.

Global economic weaknessconditions can have wide-ranging effects on markets that we serve, particularly wireless communications equipment manufacturers and wireless network operators. The wireless communications industry recently appears to be recovering from an industry-wide recession. We cannot predict whether a recovery will continue, the rate of any such recovery, or what effects negative events, such as war, that may have adverse effects on the economy.economy or on phone inventories at CDMA equipment manufacturers and operators. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the global economy and to the wireless communications industry and create further uncertainties. Further, anRecent reports suggest that inflation could have adverse effects on the global economy and capital markets. Inflation could adversely affect our customers, including their ability to obtain financing, upgrade wireless networks and purchase our products and services, and our end consumers, by lowering their standards of living and diminishing their ability to purchase wireless devices based on our technology. Inflation could also increase our costs of raw materials and operating expenses and harm our business in other ways. Should such negative events occur, subsequent economic recovery may not benefit us in the near term. If it does not, our ability to increase or maintain our revenues and operating results may be impaired. In addition, because we intend to continue to make significant investments in research and development and to maintain extensive ongoing customer service and support capability, any decline in the rate of growth of our revenues will have a significant adverse impact on our operating results.

Our industry is subject to competition that could result in decreased demand for our products and the products of our customers and licensees and/or declining average selling prices for our licensees’ products and our products, negatively affecting our revenues and operating results.

     We currently face significant competition in our markets and expect that competition will continue. Competition in the telecommunications market is affected by various factors, including:

  comprehensiveness of products and technologies;
value added features which drive replacement rates;
 
  manufacturing capability;
 
  scalability and the ability of the system technology to meet customers’ immediate and future network requirements;
 
  product performance and quality;
 
  design and engineering capabilities;
 
  compliance with industry standards;
 
  time to market;
 
  system cost; and
 
  customer support.

     This competition may result in increased development costs and reduced average selling prices for our products and those of our customers and licensees. Reductions in the average selling price of our licensees’ products, unless offset by an increase in volumes, generally result in reduced royalties.royalties payable to us. While pricing pressures from competition may, to a large extent, be mitigated by the introduction of new features and functionality in our licensees’ products, there is no guarantee that such mitigation will occur. We anticipate that additional competitors

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will enter our markets as a result of growth opportunities in wireless telecommunications, the trend toward global expansion by foreign and domestic competitors, technological and public policy changes and relatively low barriers to entry in selected segments of the industry.

     Our competitors include companies

     Companies that promote non-CDMA technologies (e.g., GSM and WiMax) and companies that design competing CDMA integrated circuits are included amongst our competitors. Examples of such as Nokia, Motorola, Philips, Ericsson, Texas Instruments, Intel, NEC, Nortel, VIA Telecom, Samsung, Matsushita and Siemens, allcompetitors (some of whom are also our licensees with the exceptionstrategic partners of Intel.ours in other areas) include Ericsson, Freescale, Intel, NEC, Broadcom, Nokia, Samsung, Agere, Texas Instruments and VIA Telecom. With respect to our OmniTRACS, TruckMAIL, OmniExpress, GlobalTRACS, QConnect, EutelTRACS and LINQ products and services,QWBS business, our existing competitors are aggressively pricing their products and services and could continue to do so in the future. In addition, these competitors are offering new value-added products and services similar in many cases to those we have developed or are developing. Emergence of new competitors, particularly

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those offering low cost terrestrial-based products and current as well as future satellite-based systems,which may impact margins, and intensify competition in new markets. Similarly, some original equipment manufacturers of trucks and truck components are beginning to offer built-in, on-board communications and position location reporting systems that may impact our margins and intensify competition in our current and new markets. Some potential competitors of our QWBS business, if they are successful, maymarkets and harm our ability to compete in certain markets.

     Many of these current and potential competitors have advantages over us, including:

  longer operating histories and presence in key markets;
 
  greater name recognition;
 
  motivation by our customers in certain circumstances to find alternate suppliers;
 
  access to larger customer bases; and
 
  greater sales and marketing, manufacturing, distribution, technical and other resources than we have.

     As a result of these and other factors, our competitors may be more successful than us. In addition, we anticipate additional competitors will enter the market for products based on 3G standards. These competitors may have more established relationships and distribution channels in markets not currently deploying wireless communications technology. These competitors also may have established or may establish financial or strategic relationships among themselves or with our existing or potential customers, resellers or other third parties. These relationships may affect our customers’ decisions to purchase products or license technology from us. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share to our detriment.

Our operating results are subject to substantial quarterly and annual fluctuations and to market downturns.

     Our revenues, earnings and other operating results have fluctuated significantly in the past and may fluctuate significantly in the future. General economic or other conditions causing a downturn in the market for our products or technology, and in turn affecting the timing of customer orders or causing cancellations or rescheduling of orders, could also adversely affect our operating results. Moreover, our customers may change delivery schedules or cancel or reduce orders without incurring significant penalties and generally are not subject to minimum purchase requirements.

     Our future operating results will be affected by many factors, including, but not limited to: our ability to retain existing or secure anticipated customers or licensees, both domestically and internationally; our ability to develop, introduce and market new technology, products and services on a timely basis; management of inventory by us and our customers and their customers in response to shifts in market demand; changes in the mix of technology and products developed, licensed, produced and sold; seasonal customer demand; the Flarion acquisition; and other factors described elsewhere in this reportAnnual Report and in these risk factors.

Our cash investments represent a significant asset that may be subject to fluctuating or even negative returns depending upon interest rate movements and financial market conditions in fixed income and equity securities.

     These factors affecting our future operating results are difficult to forecast and could harm our quarterly or annual operating results. If our operating results fail to meet the financial guidance we provide to investors or the expectations of investment analysts or investors in any period, securities class action litigation could be brought against us and/or the market price of our common stock maycould decline.

Our stock price ismay be volatile.

     The stock market in general, and the stock prices of technology-based and wireless communications companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future as well. Factors that may have a significant impact on the market price of our stock include:

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  announcements concerning us or our competitors, including the selection of wireless communications technology by wireless operators and the timing of the roll-out of those systems;
 
  receipt of substantial orders or order cancellations for integrated circuits and system software products;
 
  quality deficiencies in services or products;
 
  announcements regarding financial developments or technological innovations;
 
  international developments, such as technology mandates, political developments or changes in economic policies;

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  lack of capital to invest in 3G networks;
 
  new commercial products;
 
  changes in recommendations of securities analysts;
 
  government regulations, including stock option accounting and tax regulations;
 
  energy blackouts;
 
  acts of terrorism and war;
 
  inflation and deflation;
 
  widespread illness;
 
  proprietary rights or product or patent litigation;litigation against us or against our customers or licensees;
 
  strategic transactions, such as acquisitions and divestitures; or
 
  rumors or allegations regarding our financial disclosures or practices.

     Our future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Shortfalls in our revenues or earnings in any given period relative to the levels expected by securities analysts could immediately, significantly and adversely affect the trading price of our common stock.

     From time to time, we may repurchase our common stock at prices that may later be higher than the fair market value of the stock.stock on the repurchase date. This could result in a loss of value for stockholders if thenew shares were reissuedare issued at lower prices.

     In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to changes in the volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources.

In addition, stock volatility may be precipitated by failure to meet earnings expectations or other factors, such as the potential uncertainty in future reported earnings created by the adoption of option expensing and the related valuation models used to determine such expense.

Our industry is subject to rapid technological change, thatand we must keep pace withmake substantial investments in new products and technologies to successfully compete.compete successfully.

     New technological innovations generally require a substantial investment before they are commercially viable. We intend to continue to make substantial investments in developing new products and technologies, and it is possible that our development efforts will not be successful and that our new technologies will not result in meaningful revenues. In particular, we intend to continue to invest significant resources in developing integrated circuit products to support multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork operation including CDMA2000 1X/1xEV-DO/1xEV-DV, GSM/and multimedia applications which encompass development of graphical display, camera and video capabilities, as well as higher computational capability and lower power on-chip computers and signal processors. While our research and development activities have resulted in inventions relating to applications of GPRS, WLAN, WCDMAEDGE, OFDM, OFDMA and GPS position location technologies.MIMO and hundreds of issued or pending patent applications, there can be no assurance that our patent portfolio in these areas would be as valuable as our CDMA portfolio. Further, if OFDMA technology is not adopted and deployed commercially, our anticipated investment in Flarion and OFDMA technology may not provide us a significant return on investment. We will also continue our significantto invest in the development efforts with respect toof our BREW applications

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development platform, providing applications developers with an open standard platform for wireless devices on which to develop their products. An open standard platform means that BREW can be made to interface with many software applications, including those developed by others. Weour MediaFLO MDS and FLO technology and our iMoD display technology. All of these new products and technologies face significant competition, and we cannot assure you that the revenues generated from these products will meet our expectations.

     The market for our products and technology is characterized by many factors, including:

  rapid technological advances and evolving industry standards;
 
  changes in customer requirements;
 
  frequent introductions of new products and enhancements; and
 
  evolving methods for transmission of buildingwireless voice and operating telecommunications systems.data communications; and
intense competition from companies with greater resources, customer relationships and distribution capabilities.

     Our future success will depend on our ability to continue to develop and introduce new products, technology and enhancements on a timely basis. Our future success will also depend on our ability to keep pace with technological developments, protect our intellectual property, satisfy varying customer requirements, price our products competitively and achieve market acceptance. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products and technology, and products and technology currently under development, obsolete and unmarketable. If we fail to anticipate or respond adequately to technological developments or customer requirements, or experience any significant delays in development,

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introduction or shipment of our products and technology in commercial quantities, demand for our products and our customers’ and licensees’ products that use our technology could decrease, and our competitive position could be damaged.

The enforcement and protection of our intellectual property rights may be expensive and could divert our valuable resources.

     We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and processes, including our patent portfolio. Policing unauthorized use of our products and technologies is difficult.difficult and time consuming. We cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully or as readily as United States laws.

We cannot be certain that the laws and policies of any country, including the United States, or the practices of any of the international standards bodies, foreign or domestic, with respect to intellectual property enforcement or licensing, issuance of wireless licenses or the adoption of standards, will not be changed in a way detrimental to our licensing program or to the sale or use of our products or technology. Any action we take to influence such potential changes could absorb significant management time and attention, which, in turn, could negatively impact our operating results.

     The vast majority of our patents and patent applications relate to our CDMA digital wireless communications technology and much of the remainder of our patents and patent applications relate to our gpsOne, BREW, OmniTRACS, Digital Cinema, Globalstarother technologies and Eudora products. Litigation may be required to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights or incur substantial unexpected operating costs. Any action we take to protectenforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.

Claims by other companies that we infringe their intellectual property or that patents on which we rely are invalid could adversely affect our business.

     From time to time, companies may assert patent, copyright and other intellectual proprietary rights toagainst our products or products using our technologies or other technologies used in our industry. These claims may result in our involvement in litigation. We may not prevail in such litigation given the complex technical issues and inherent uncertainties in intellectual property litigation. If any of our products were found to infringe on protected technology,another company’s intellectual property rights, we could be required to redesign our products or license such technologyrights and/or pay damages or other compensation to the infringed party.such other company. If we were unable to redesign our products or license protected technologysuch intellectual property rights used in our products, we could be prohibited from making and selling such products.

     In addition, as the number of competitors in our market increases and the functionality of our products is enhanced and overlaps with the products of other companies, we may become subject to claims of infringement or misappropriation of the intellectual property rights of others. Any claims, with or without merit, could be time

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consuming to address, result in costly litigation, divert the efforts of our technical and management personnel or cause product release or shipment delays, any of which could have a material adverse effect upon our operating results. In any potential dispute involving ourother companies’ patents or other intellectual property, our licensees could also become the targets of litigation. Any such litigation could severely disrupt the business of our licensees, which in turn could hurt our relations with our licensees and cause our revenues to decrease.

     A number of other companies have claimed to own patents essential to various proposed 3G CDMA standards.standards, GSM standards and implementations of OFDM and OFDMA systems. If we or other product manufacturers are required to obtain additional licenses and/or pay royalties to one or more patent holders, this could have a material adverse effect on the commercial implementation of our CDMA or multimode products and technologies, demand for our licensees’ products, and our profitability.

     Other companies or entities also may commence actions seeking to establish the invalidity of our patents. In the event that one or more of our patents are challenged, a court may invalidate the patent or determine that the patent is not enforceable, which could harm our competitive position. If any of our key patents are invalidated, or if the scope of the claims in any of these patents is limited by court decision, we could be prevented from licensing the invalidated or limited portion of our technology and our licensees may be prevented from manufacturing and selling the products that incorporate such technology without obtaining a license to use a third party’s technology.patents. Even if such a patent challenge is not successful, it could be expensive and time consuming to address, divert management attention from our business and harm our reputation.

Potential tax liabilities could adversely affect our results.

     We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our

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business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation,In such case, a material effect on our income tax provision and net income in the period or periods forin which that determination is made could result.

The high amount of capital required to obtain radio frequency licenses and deploy and expand wireless networks could slow the growth of the wireless communications industry and adversely affect our business.

     Our growth is dependent upon the increased use of wireless communications services that utilize our CDMA technology. In order to provide wireless communications services, wireless operators must obtain rights to use specific radio frequencies. The allocation of frequencies is regulated in the United States and other countries throughout the world and limited spectrum space is allocated to wireless communications services. Industry growth may be affected by the amount of capital required to: obtain licenses to use new frequencies; deploy wireless networks to offer voice and data services; and expand wireless networks to grow voice and data services. Over the last several years, the amount paid for spectrum licenses has increased significantly, particularly for frequencies used in connection with 3G technology. In addition, litigation and disputes involving prior and future spectrum auctions has delayed the expansion of wireless networks in the United States and elsewhere, and it is possible that this delay could continue for a significant amount of time. The significant cost of licenses and wireless networks and delays associated with disputes over new licenses, may slow the growth of the industry if wireless operators are unable to obtain or service the additional capital necessary to implement or expand 3G wireless networks. Our growth could be adversely affected if this occurs.

If we experience product liability claims or recalls, we may incur significant expenses and experience decreased demand for our products.

     Testing, manufacturing, marketing and use of our products and those of our licensees and customers entails the risk of product liability. Although we believe our product liability insurance will be adequate to protect against product liability claims, we cannot assure you that we will be able to continue to maintain such insurance at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. Our inability to maintain insurance at an acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our products and those of our licensees and customers and harm our future operating results. Furthermore, not all losses associated with alleged product failure are insurable. In addition, a product liability claim or recall, whether against us, our licensees or customers, could harm our reputation and result in decreased demand for our products.

If wireless phones pose safety risks, we may be subject to new regulations, and demand for our products and those of our licensees and customers may decrease.

     Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of wireless phones, which would decrease demand for our products and those of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless phones. In addition, interest groups

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have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. ThereConcerns have also may be somebeen expressed over the possibility of safety risks due to a lack of attention associated with the use of wireless phones while driving. Concerns over these safety risks and the effect of anyAny legislation that may be adopted in response to these risksexpressions of concern could reduce demand for our products and those of our licensees and customers in the United States as well as foreign countries.

Our QWBS business depends on the availability of satellite and other networks for our OmniTRACS, EutelTRACS, OmniExpress, LINQ, GlobalTRACS and QConnect systems and other communications products.networks.

     Our OmniTRACS system currently operates in the United States market on leased Ku-band satellite transponders. Our primary data satellite transponder and position reporting satellite transponder lease runs through October 20062012 and includes transponder and satellite protection (back-up capacity in the event of a transponder or satellite failure). Based on system capacity analysis,, which we believe that thewill provide sufficient transponder capacity for our United States OmniTRACS operations will not require additional transponder capacity through 2004. We believe that in the event additional transponder capacity would be required in fiscal 2004 or in future years, additional capacity will be available on acceptable terms. However, we cannot assure you that we will be able to acquire additional transponder capacity on acceptable terms in a timely

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manner.2012. A failure to maintain adequate satellite capacity wouldcould harm our business, operating results, liquidity and financial position.

     Our OmniExpress, LINQ, GlobalTRACS, QConnect and OmniOne systems are QWBS terrestrial-based products and thus rely on various wireless terrestrial communicationscommunication networks operated by third parties. We believe these terrestrial networks will be available for our products; however, we cannot assure you that these networks will continue to be available to us or that they will perform adequately for our needs. The unavailability or nonperformance of these network systems could harm our business.

Our business and operations would suffer in the event of system failures.

     Despite system redundancy, the implementation of security measures and the existence of a Disaster Recovery Plan for our internal information technology networking systems, our systems are vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure, accident or security breach that causes interruptions in our operations or to our customers’ or licensees’ operations could result in a material disruption to our business. To the extent that any disruption or security breach results in a loss or damage to our customers’ data or applications, or inappropriate disclosure of confidential information, we may incur liability as a result. In addition, we may incur additional costs to remedy the damages caused by these disruptions or security breaches.

     Message transmissions for domestic OmniTRACS, OmniExpress, GlobalTRACS, QConnect and OmniOneQWBS operations are formatted and processed at the Network Management Center in San Diego, California, which we operate, with a fully redundant backup Network Management Center located in Las Vegas, Nevada. Our Network Management Center operationsBoth centers, operated by us, are subject to system failures, which could interrupt the services and have a materialan adverse effect on our operating results.

     From time to time, we install new or upgraded business management systems. To the extent such systems fail or are not properly implemented, we may experience material disruptions to our business, delays in our external financial reporting or failures in our system of internal controls, that could have a material adverse effect on our results of operations.

We cannot provide assurance that we will continue to declare dividends at all or in any particular amounts.

     We intend to continue to pay quarterly dividends subject to continued capital availability and a determinationperiodic determinations that cash dividends continue to beare in the best interest of theour stockholders. Our dividend policyFuture dividends may be affected by, among other items, our views on potential future capital requirements, including those related to research and development, creation and expansion of sales distribution channels and investments and acquisitions, legal risks, stock repurchase programs, changes in federal income tax law and challengeschanges to our business model. Our dividend policypayments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A changereduction in our dividend policypayments could have a negative effect on our stock price.

Government regulation may adversely affect our businessbusiness..

     Our products and those of our customers and licensees are subject to various regulations, including FCC regulations in the United States and other international regulations, as well as the specifications of national, regional and international standards bodies. Changes in the regulation of our activities, including changes in the allocation of available spectrum by the United States government and other governments or exclusion or limitation of our technology or products by a government or standards body, could have a material adverse effect on our business, operating results, liquidity and financial position.

Our business and operating results will be harmed if we are unable to manage growth in our business.

     Certain of our businesses have experienced periods of rapid growth that have placed, and may continue to place, significant demands on our managerial, operational and financial resources. In order to manage this growth, we must continue to improve and expand our management, operational and financial systems and controls, including quality

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control and delivery and service capabilities. We also need to continue to expand, train and manage our employee base. We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions. We cannot assure you that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers and licensees.

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     In addition, inaccuracies in our demand forecasts, or failure of the systems used to develop the forecasts, could quickly result in either insufficient or excessive inventories and disproportionate overhead expenses. If we ineffectively manage our growth or are unsuccessful in recruiting and retaining personnel, our business and operating results will be harmed.

We may not be able to attract and retain qualified employees.

     Our future success depends largely upon the continued service of our Boardboard members, executive officers and other key management and technical personnel. Our success also depends on our ability to continue to attract, retain and motivate qualified personnel. In addition, implementing our product and business strategy requires specialized engineering and other talent, and our revenues are highly dependent on technological and product innovations. Key employees represent a significant asset, and the competition for these employees is intense in the wireless communications industry. Our fiscal 2004 plan anticipates aWe continue to anticipate significant increaseincreases in human resources, particularly in engineering, resources.through fiscal 2006. If we are unable to attract and retain the qualified employees that we need, our business may be harmed.

     We may have particular difficulty attracting and retaining key personnel in periods of poor operating performance given the significant use of incentive compensation by our competitors. We do not have employment agreements with our key management personnel and do not maintain key person life insurance on any of our personnel. The loss of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could negatively impact our ability to design, develop and commercialize our products and technology.

     Since our inception, we have used stock options and other long-term equity incentives as a fundamental component of our employee compensation packages. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of long-term vesting, encourage employees to remain with us. New regulations implemented by The NASDAQ National Market requiring shareholder approval for all stock option plans as well as new regulations implemented by the New York Stock Exchange, prohibiting member organizations from giving a proxy to vote on equity-compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future. To the extent that new regulations make it more difficult or expensiveless attractive to grant options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

     A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

     For example, any changes requiring that we record compensation expense in the statement of operations for employee stock options using the fair value method or changes in existing taxation rules related to stock options could have a significant negative effect on our reported results. Several agencies and entities are considering, and the Financial Accounting Standards Board has announced, proposals to change generally accepted accounting principles in the United States that, if implemented, would require us to record charges to earnings for employee stock option grants. This pending requirement would negatively impact our earnings. For example, recording a charge for employee stock options under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” would have reduced our net income by $260 million and $234 million for fiscal 2003 and 2002, respectively, and increased our net loss by $167 million for fiscal 2001.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

     Changing laws, regulations and standards relating to corporate governance and public disclosure including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creatingmay create uncertainty for companies such as ours. These newregarding compliance matters. New or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and ascases. As a result, their application in practice may evolve over time as

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new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.time. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to complyComplying with evolving laws, regulationsinterpretations of new or changed legal requirements may cause us to incur higher costs as we revise current practices, policies and standards,procedures, and this investment may result in increased general and administrative expenses and a diversion ofdivert management time and attention from revenue-generating activitiesrevenue generating to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may also be harmed. In addition, it has become more difficult and more expensive for us to obtain director and officer liability insurance, and we have purchased reduced coverage at substantially higher cost than in the past. Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business.

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Our stockholder rights plan, certificate of incorporation and Delaware law could adversely affect the performance of our stock.

     Our certificate of incorporation provides for cumulative voting in the election of directors. In addition, our certificate of incorporation provides for a classified board of directors and includes a provision that requires the approval of holders of at least 66 2/3% of our voting stock as a condition to a merger or certain other business transactions with, or proposed by, a holder of 15% or more of our voting stock. This approval is not required in cases where certain of our directors approve the transaction or where certain minimum price criteria and other procedural requirements are met. Our certificate of incorporation also requires the approval of holders of at least 66 2/3% of our voting stock to amend or change the provisions mentioned relating to the classified board, cumulative voting or the transaction approval. Under our bylaws, stockholders are not permitted to call special meetings of our stockholders. Finally, our certificate of incorporation provides that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting rather than by any consent in writing.

     The classified board, transaction approval, special meeting and other charter provisions may discourage certain types of transactions involving an actual or potential change in our control. These provisions may also discourage certain types of transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices and may limit our stockholders’ ability to approve transactions that they may deem to be in their best interests.

     Further, we have distributed a dividend of one right for each outstanding share of our common stock pursuant to the terms of our preferred share purchase rights plan.agreement. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our Boardboard of Directorsdirectors and may have the effect of deterring hostile takeover attempts. In addition, our Boardboard of Directorsdirectors has the authority to fix the rights and preferences of and issue shares of preferred stock. This right may have the effect of delaying or preventing a change in our control without action by our stockholders.

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Item 2. Properties

     At September 30, 2003,25, 2005, we occupied the indicated square footage in the owned or leased facilities described below (in(square footage in thousands):
             
Number     Total  
of     Square  
Buildings Location Status Footage Primary Use

 
 
 
 
 12  United States Owned  1,516  Executive and administrative offices, manufacturing, research and development, sales and marketing, service functions, and network management hub.
             
 27  United States Leased  699  Administrative offices, research and development, sales and marketing, service functions, and network management hub.
             
 9  Brazil Owned  264  Administrative offices, sales and marketing, service functions and network operating centers.
             
 33  Brazil Leased  414  Administrative offices, sales and marketing, service functions and network operating centers.
             
 5  Mexico Leased  31  Administrative offices, sales and marketing, service functions and network operating centers.
             
 2  Korea Leased  31  Administrative offices and sales and marketing.
             
 2  Japan Leased  17  Administrative offices and sales and marketing.
             
 1  Israel Leased  38  Administrative offices and research and development.
             
 1  Netherlands Leased  20  Administrative offices, sales and marketing and research and development.
             
 2  England Leased  21  Administrative offices, sales and marketing and research and development.
             
 4  China Leased  73  Administrative offices, sales and marketing and research and development.
             
 18  Other international Leased  35  Administrative offices and sales and marketing.
         
   
    Total square footage    3,159   
         
   

           
Number     Total  
of     Square  
Buildings Location Status Footage Primary Use
15 United States Owned  1,860  Executive and administrative offices, research and development, sales and marketing, service functions, manufacturing and network management hub.
           
36 United States Leased  1,232  Administrative offices, research and development, sales and marketing, service functions and network management hub.
           
7 Mexico Leased  125  Administrative offices, sales and marketing, service functions, manufacturing and network operating centers.
           
3 China Leased  83  Administrative offices, research and development, sales and marketing, service functions and network operating centers.
           
5 Korea Leased  60  Administrative offices, research and development and sales and marketing.
           
1 India Owned  56  Administrative offices, research and development and sales and marketing.
           
4 England Leased  52  Administrative offices, research and development and sales and marketing.
           
5 India Leased  41  Administrative offices, research and development and sales and marketing.
           
1 Israel Leased  38  Administrative offices, research and development and sales and marketing.
           
4 Germany Leased  22  Administrative offices, research and development and sales and marketing.
           
56 Other International Leased  146  Administrative offices, research and development and
           
          sales and marketing.
           
  Total square footage    3,715   
           
     In addition to the facilities above, we also own or lease an additional 1,333,884approximate 661,000 square feet of properties that are leased or subleased to third parties. Our leases expire at varying dates through 20122015 not including renewals that would be at our option.

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     In fiscal 2003, we began


     We started construction onof two facilities in San Diego, California in fiscal 2003, totaling approximately one million additional square feet, to meet the requirements projected in our long-term business plan. In fiscal 2005, we announced our plans to expand our backup Network Management Center in Las Vegas, which uses satellite and terrestrial-based technologies to track freight transportation and shipping nationwide, by approximately two hundred thousand square feet. We expect to place the new and expanded facilities in service starting in fiscal 2006 through fiscal 2008. We believe that our facilities will be suitable and adequate for the present purposes, and that the productive capacity in such facilities is substantially being utilized. In the future, we may need to purchase, build or lease additional facilities to meet the requirements projected in our long-term business plan.

Item 3. Legal Proceedings

Schwartz, et al v. QUALCOMM: 87 former QUALCOMM employees filed a lawsuit against us in the District Court for Boulder County, Colorado, alleging claims for intentional misrepresentation, nondisclosure and concealment, violation of C.R.S. Section 8-2-104 (obtaining workers by misrepresentation), breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, negligent misrepresentation, unjust enrichment, violation of California Labor Code Section 970, violation of California Civil Code Sections 1709-1710, rescission, violation of California Business & Professions Code Section 17200 and violation of California Civil Code Section 1575. The complaint seeks economic, emotional distress and punitive damages and unspecified

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amounts of interest. On November 29, 2001, the Court granted our motion to dismiss 17 of the plaintiffs from the lawsuit. Subsequently, the Court dismissed three other plaintiffs from the lawsuit. On November 18, 2002, the Court granted our motion to dismiss 61 of the remaining 67 plaintiffs from the lawsuit. We subsequently resolved the matters with the remaining plaintiffs. Those plaintiffs whose claims were dismissed have appealed. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the action.

Hanig et al. v. QUALCOMM, Boesel, et al v. QUALCOMM, Stone et al v. QUALCOMM, Ortiz et al v. QUALCOMM, Shannon et al. v. QUALCOMM, Deshon et al v. QUALCOMM, Earnhart et al. v. QUALCOMM.These cases were filed in San Diego County Superior Court by over 100 former employees, alleging claims for declaratory relief, breach of contract, intentional/negligent fraud, concealment, rescission, specific performance, work, labor and services, breach of the implied covenant of good faith and fair dealing, violation of California Business & Professions Code Section 17200 and unjust enrichment, claiming that they were entitled to full vesting of unvested stock options as a result of the sale of our infrastructure business to Ericsson in 1999. We have answered the complaints, which have been consolidated. Although there can be no assurance that an unfavorable outcome of the dispute would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the action.

GTE Wireless Incorporated (GTE) v. QUALCOMM:On June 29, 1999, GTE filed an action against us in the United States District Court for the Eastern District of Virginia seeking damages and injunctive relief and asserting that wireless telephones sold by us infringe a single patent allegedly owned by GTE. On September 15, 1999, the Court granted our motion to transfer the action to the United States District Court for the Southern District of California. On February 14, 2002, the District Court granted our motion for summary judgment that our products did not infringe GTE’s asserted patent and denied GTE’s motion seeking summary judgment of infringement. On July 14, 2003, GTE and we entered into a settlement agreement dismissing all claims and counterclaims with prejudice.

     Durante, et al v. QUALCOMM:QUALCOMM: On February 2, 2000, three former employees filed a putative class action against us, ostensibly on behalf of themselves and those former employees of ours whose employment was terminated in April 1999. Virtually all of the purported class of plaintiffs received severance packages at the time of the termination of their employment, in exchange for a release of claims, other than federalalleging unlawful age discrimination claims, against us. The complaint was filed in California Superior Courttheir selection for layoff in 1999, and for the County of Los Angeles and purports to state ten causes of action including breach of contract, age discrimination, violation of Labor Code Section 200, violation of Labor Code Section 970, unfair business practices, intentional infliction of emotional distress, unjust enrichment, breach of the covenant of good faith and fair dealing, declaratory relief and undue influence. The complaint seeks an order accelerating all unvested stock options for the members of the class, plus economic and liquidatedseeking monetary damages of an unspecified amount. On June 27, 2000, the case was ordered transferred from Los Angeles County Superior Court to San Diego County Superior Court. On July 3, 2000, we removed the case to the United States District Court for the Southern District of California, and discovery commenced. On May 29, 2001, the Court dismissed all plaintiffs’ claims except for claims arising under the federal Age Discrimination in Employment Act. On July 16, 2001, the Court granted conditional class certification on the remaining claims, to be revisited by the Court at the end of the discovery period. On April 15, 2003, the Court granted our summary judgment motions as to all remaining class members’ disparate impact claims.based thereon. On June 18, 2003, the Court ordered decertification of the class and dismissed theall remaining claims of the opt-in plaintiffs without prejudice. Plaintiffs have filed an appeal.plaintiffs. On August 1, 2005, the Ninth Circuit Court of Appeals upheld the judgment in our favor. On June 20, 2003, 76 of the opt-in plaintiffs filed, anbut did not serve, a new action in Federal District Court for the Southern District of California,same court, alleging violations of the Age Discrimination in Employment Act as a result of their layoffs in 1999. To date, the complaint hasAll plaintiffs have now dismissed all remaining claims in exchange for our agreement not been served. Although there can be no assurance that an unfavorable outcome of these disputes would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the actions.

to seek litigation costs against them.

     Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM, Inc. and SnapTrack:SnapTrack, Inc.: On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. (Zoltar) filed suit against us and SnapTrack, Inc. (Snaptrack), a QUALCOMM wholly-owned subsidiary, in the United States District Court for the Northern District of California seeking monetary damages and injunctive relief and allegingbased on the alleged infringement of three patents. On August 27, 2001,Following a verdict and finding of no infringement of Zoltar’s patent claims, the Court entered a judgment in our and Snaptrack’s favor on Zoltar’s complaint and awarded us and SnapTrack our costs of suit. Zoltar filed an amended complaint adding Sprint Corp. as a named defendantnotice of appeal, and narrowing certain infringement claims againstwe and SnapTrack filed a responsive notice and us. Since then, Zoltar hasmotion to dismiss. Zoltar’s appeal was dismissed Sprint Corp. asand the issue of reaching a defendant. On September 23, 2002,final judgment on issues aside from non-infringement is pending before the court denied Zoltar’s motion for summary judgment that the accused products infringe. Since then, the court has denied a second motion for summary judgment

34


by Zoltar and denied summary judgment motions by us with leave to renew the motions at trial. The court is also considering further claim construction and will consider further evidence on invalidity prior to trial. Trial is currently set for February 24, 2004. Although there can be no assurance that an unfavorable outcome of this dispute would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and will vigorously defend the action.

district court.

     Texas Instruments:QUALCOMM Incorporated v. Maxim Integrated Products, Inc.:On July 25, 2003,December 2, 2002, we filed an action in Delaware Superiorthe United States District Court for the Southern District of California against Texas Instruments Incorporated for breachMaxim alleging infringement of a patent portfolio license agreement between the parties,three patents and seeking monetary damages and other relief.injunctive relief based thereon. We 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 us, alleging antitrust violations, patent misuse and unfair competition seeking monetary damages and injunctive relief based thereon. On September 23, 2003, Texas InstrumentsMay 5, 2004, the Court granted Maxim’s motion that no indirect infringement arose in connection with defendants’ sales of certain products to certain of our licensees. A motion we made 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 our 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 us in the New York State Supreme Court, County of New York, seeking monetary damages based on the claim that we 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 us 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 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 Delaware Chancerythe United States District Court for the District of New Jersey against us alleging breachviolations of the same agreement,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 other relief. Although there can be no assurance thatinjunctive relief based thereon. Discovery has commenced in the actions.
QUALCOMM Incorporated v. Broadcom Corporation:On July 11, 2005, we filed an unfavorable outcomeaction 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 action brought by Texas Instruments would not have a material adverse effect on our operating results, liquiditypractice of either the GSM or financial position, we believe the claims are without merit802.11 standards, and will vigorously defendseeking monetary damages and injunctive relief based thereon. On September 23, 2005, Broadcom answered and counterclaimed, alleging infringement of six patents. Discovery has yet to begin in the action.

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QUALCOMM Incorporated v. Broadcom Corporation:On October 14, 2005, we filed an action in the United States District Court for the Southern District of California against Broadcom alleging infringement of two patents, each of which relates to video encoding and decoding for high-end multimedia processing, and seeking monetary damages and injunctive relief based thereon. Broadcom has yet to answer.
Other:We have been named, along with many other manufacturers of wireless phones, wireless operators and industry-related organizations, as a defendant in purported class action lawsuits, (Inincluding In re Wireless Telephone Frequency Emissions Products Liability Litigation, United States District Court for the District of Maryland),Maryland, and in several individually filed actions, seeking personal injury, economic and/or punitivemonetary damages arising out of ourits sale of cellular phones. On March 5, 2003, the Court granted the defendantsdefendants’ motions to dismiss five of the consolidated cases (Pinney, Gimpleson, Gillian, Farina and Naquin) on the grounds that the claims were preempted by federal law. On April 2, 2003,March 21, 2005, the plaintiffs filed a notice4th Circuit Court of appeal of this orderAppeals reversed the ruling by the District Court and ordered the Court’s order denying remand.cases remanded to state court. All remaining cases filed against us 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,cases.
     On October 28, 2005, it was reported that six telecommunications companies (Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the judge responsible forEuropean Commission, alleging that we violated European Union competition law in our WCDMA licensing practices. To date, we have not been formally served with the multi-district litigation proceedings recently made such a ruling (which was upheld on appeal) in another case to which we are not a party.complaints.
     Although there can be no assurance that an unfavorable outcomeoutcomes in any of these and other disputesthe foregoing matters would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims made by other parties are without merit and will vigorously defend the actions.

We have not recorded any accrual for contingent liability associated with the legal proceedings described above based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. We are engaged in numerous other legal actions arising in the ordinary course of ourits business and believe that the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position. In addition, some matters that have previously been disclosed may no longer be described because of rulings in the case, settlements, changes in our business or other developments rendering them, in our judgment, no longer material to our operating results, liquidity or financial position.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders during the quarter ended September 30, 2003.

25, 2005.

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PART II

PART II
Item 5. Market for Registrant’s Common Equity, and Related Stockholder Matters

and Issuer Purchases of Equity Securities

     On July 13, 2004, we announced a two-for-one stock split in the form of a stock dividend. Stock was distributed on August 13, 2004 to stockholders of record as of July 23, 2004. All references in this Annual Report to number of shares and per share amounts reflect the stock split.
Market Information.Information
Our common stock is traded on the NASDAQ National Market under the symbol “QCOM.” The following table sets forth the range of high and low sales prices on the National Market of the common stock for the periods indicated, as reported by NASDAQ. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
          
   High ($) Low ($)
   
 
Fiscal 2002
        
 First Quarter  62.49   38.31 
 Second Quarter  53.34   31.03 
 Third Quarter  40.35   24.49 
 Fourth Quarter  31.39   23.21 
Fiscal 2003
        
 First Quarter  42.89   27.33 
 Second Quarter  39.95   32.63 
 Third Quarter  38.18   29.58 
 Fourth Quarter  46.05   34.33 

         
  High ($) Low ($)
Fiscal 2004
        
First quarter  26.82   20.50 
Second quarter  32.64   26.40 
Third quarter  35.03   30.90 
Fourth quarter  41.17   33.66 
         
Fiscal 2005
        
First quarter  44.99   37.71 
Second quarter  44.91   33.99 
Third quarter  38.52   32.08 
Fourth quarter  44.92   32.98 
     As of November 3, 2003,October 31, 2005, there were 10,32410,595 holders of record of our common stock. On November 3, 2003,October 31, 2005, the last sale price reported on the NASDAQ National Market for our common stock was $48.25$39.76 per share.

Dividends
     On February 11, 2003, we committed up to $1 billion to repurchase shares of our common stock over a two year period. During fiscal 2003, we bought 4,915,000 shares at a net aggregate cost of $158 million.

     On February 11, 2003, we announced our first common stock dividend of $0.05 per share. On July 16, 2003,March 2, 2004, we announced an increase in our quarterly dividend from $0.05$0.035 to $0.07$0.050 per share on our common stock. On July 13, 2004, we announced an increase in our quarterly dividend from $0.050 to $0.070 per share on our common stock. On March 8, 2005, we announced an increase in our quarterly dividend from $0.070 to $0.090 per share on our common stock. Cash dividends announced in fiscal 20032004 and 2005 were as follows (in thousands,millions, except per share data):

              
   Fiscal 2003
   
   Per Share Total Cumulative
   
 
 
First Quarter $  $  $ 
Second Quarter $0.05   39,461   39,461 
Third Quarter $0.05   39,546   79,007 
Fourth Quarter $0.07   55,769   134,776 
   
   
     
 Total $0.17  $134,776     
   
   
     

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          Cumulative 
  Per Share  Total  by Fiscal Year 
Fiscal 2004
            
First quarter $0.07  (1) $112  $112 
Second quarter  0.05   81   193 
Third quarter    (2)     193 
Fourth quarter  0.07   114  $307 
           
Total $0.19  $307     
           
Fiscal 2005
            
First quarter $0.07  $115  $115 
Second quarter  0.07   115   230 
Third quarter  0.09   147   377 
Fourth quarter  0.09   147  $524 
           
Total $0.32  $524     
           
(1)In the first quarter of fiscal 2004, we announced two dividends of $0.035 per share which were paid in the first and second quarters of fiscal 2004.
(2)We paid a dividend of $0.05 per share in the third quarter of fiscal 2004 that had been announced in the second quarter of fiscal 2004.
     On October 8, 2003,10, 2005, we announced a cash dividend of $0.07$0.09 per share on our common stock, payable on December 26, 2003January 4, 2006 to stockholders of record at the closeas of business on November 28, 2003.December 7, 2005. We intend to continue to pay quarterly dividends subject to continued capital availability and a determinationperiodic determinations that cash dividends continue to beare in the best interests of theour stockholders. Our dividend policyFuture dividends may be affected by, among other items, our views on potential future capital requirements, including those relating to research and development, creation and expansion of sales distribution channels and investments and acquisitions, legal risks, stock repurchase programs, changes in federal income tax law and challengeschanges to our business model.

Employee

Stock Options

     Our stock option plans are part of a broad-based, long-term retention program that is intended to attract and retain talented employees and directors and align stockholder and employee interests.

     Pursuant to our 2001 Stock Option Plan (2001 Plan), we may grant options to selected employees, directors and consultants to purchase shares of our common stock at a price not less than the fair market value of the stock at the date of grant. The 2001 Plan provides for the grant of both incentive stock options and non-qualified stock options. Generally, options outstanding vest over periods not exceeding sixfive years and are exercisable for up to ten10 years from

36


the grant date. We also may grant options pursuant to our 2001 Non-Employee Directors’ Stock Option Plan (the 2001 Directors’ Plan). This plan provides for non-qualified stock options to be granted to non-employee directors at an exercise price of not less than fair market value of the stock at the date of grant, vesting over periods not exceeding five years and exercisable for up to ten10 years from the grant date. The Board of Directors may terminate the 2001 Plan and/or the 2001 Directors’ Plan at any time though it must, nevertheless, honor any stock options previously granted pursuant to the plans.

     Additional information regarding our stock option plans and plan activity for fiscal 2003, 20022005, 2004 and 20012003 is provided in our consolidated financial statements. Seestatements in this Annual Report in “Notes to Consolidated Financial Statements, Note 8 Employee Benefit Plans.Plans” and in our 2006 Proxy Statement under the heading “Equity Compensation Plan Information.

Issuer Purchases of Equity Compensation Plans Approved by Stockholders

     Information aboutSecurities

     On March 8, 2005, we authorized the repurchase of up to $2 billion of the Company’s common stock with no expiration date. During fiscal 2005, we repurchased and retired 27,083,000 shares of our equity compensation planscommon stock for $953 million. In connection with this stock repurchase program, we have two put options outstanding at September 30, 200325, 2005, with expiration dates of December 7, 2005 and March 21, 2006, that were either approved or not approved bymay require us to repurchase 11,500,000 shares for $411 million (net of the option premiums received). At September 25, 2005, $636 million remained authorized for repurchases under our stockholders was as follows (number of shares in thousands):
             
  Number of Weighted Number of
  Shares to be Average Shares
  Issued Upon Exercise Remaining
  Exercise of Price of Available for
  Outstanding Outstanding Future
Plan Category Options Options Issuance

 
 
 
Equity compensation plans approved by stockholders(a)
  106,150  $34.66   21,744 
Equity compensation plans not approved by stockholders(b)
  336  $2.03   66 
   
       
 
Total  106,486  $34.56   21,810 
   
       
 

(a)Consists of six plans: our 1991 Stock Option Plan, 2001 Stock Option Plan, 1998 Non-Employee Directors’ Stock Option Plan, 2001 Non-Employee Directors’ Stock Option Plan, 2001 Employee Stock Purchase Plan and the Executive Retirement Matching Contribution Plan.
(b)Consists of two plans: our 1996 Non-Qualified Employee Stock Purchase Plan and the SnapTrack, Inc. 1995 Stock Option Plan. See “Notes to Consolidated Financial Statements, Note 8 – Employee Benefit Plans.”

stock repurchase program.

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Item 6. Selected Consolidated Financial Data

     The following balance sheet data and statements of operations data for the five years ended September 25, 2005, September 26, 2004, September 28, 2003, September 29, 2002 and September 30, 20032001 were derived from our audited consolidated financial statements. Consolidated balance sheets at September 30, 200325, 2005 and 2002September 26, 2004 and the related consolidated statements of operations and of cash flows for each of the three years in the period ended September 30,fiscal 2005, 2004 and 2003 and notes thereto appear elsewhere herein. The data should be read in conjunction with the annual consolidated financial statements, related notes and other financial information appearing elsewhere herein.
                      
   Years Ended September 30 (1)
   
   2003 2002 2001 2000 1999
   
 
 
 
 
   (in thousands except per share data)
Statement of Operations Data:
                    
Revenues $3,970,636  $3,039,560  $2,679,786  $3,196,780  $3,937,299 
   
   
   
   
   
 
Operating income  1,310,235   673,268   38,687   722,638   405,140 
   
   
   
   
   
 
Income (loss) before accounting change  827,441   359,677   (560,141)  622,146   200,879 
Accounting changes, net of tax        (17,937)      
   
   
   
   
   
 
Net income (loss) $827,441  $359,677  $(578,078) $622,146  $200,879 
   
   
   
   
   
 
Basic earnings (loss) per common share (2):                    
 Income (loss) before accounting change $1.05  $0.47  $(0.74) $0.87  $0.34 
 Accounting change, net of tax        (0.02)      
   
   
   
   
   
 
 Net income (loss) $1.05  $0.47  $(0.76) $0.87  $0.34 
   
   
   
   
   
 
Diluted earnings (loss) per common share (2):                    
 Income (loss) before accounting change $1.01  $0.44  $(0.74) $0.79  $0.31 
 Accounting change, net of tax        (0.02)      
   
   
   
   
   
 
 Net income (loss) $1.01  $0.44  $(0.76) $0.79  $0.31 
   
   
   
   
   
 
Cash dividends per share $0.17  $  $  $  $ 
   
   
   
   
   
 
Shares used in earnings per share calculations (2):                    
 Basic  789,586   770,887   755,969   717,205   594,714 
 Diluted  817,755   809,329   755,969   800,121   649,889 
Pro forma effect of change in accounting principle (3):                    
 Net income             $595,116  $209,062 
 Net earnings per common share - basic             $0.83  $0.35 
 Net earnings per common share - diluted             $0.75  $0.32 
Balance Sheet Data:
                    
Cash, cash equivalents and marketable securities $5,371,751  $3,199,512  $2,580,512  $2,520,914  $1,684,926 
Total assets  8,822,436   6,506,048   5,669,733   6,014,917   4,534,950 
Long-term debt  123,302   94,288   235   266   795 
Company-obligated mandatorily redeemable Trust Convertible Preferred Securities of a subsidiary trust holding solely debt securities of the Company              659,555 
Total stockholders’ equity $7,598,572  $5,391,956  $4,812,415  $5,468,263  $2,871,755 

                     
  Years Ended (1) 
  September 25,  September 26,  September 28,  September 29,  September 30, 
  2005  2004 (2)(5)  2003 (2)  2002 (2)  2001 (1)(3) 
  (in millions, except per share data) 
Statement of Operations Data:
                    
                     
Revenues $5,673  $4,880  $3,847  $2,915  $2,680 
                
                     
Operating income  2,386   2,129   1,573   840   39 
                
Income (loss) from continuing operations before accounting change  2,143   1,725   1,029   525   (560)
Discontinued operations, net of tax     (5)  (202)  (165)   
Accounting changes, net of tax              (18)
                
Net income (loss) $2,143  $1,720  $827  $360  $(578)
                
Basic earnings (loss) per common share (4):                    
Income (loss) from continuing operations before accounting change $1.31  $1.07  $0.65  $0.34  $(0.37)
Discontinued operations, net of tax     (0.01)  (0.13)  (0.11)   
Accounting change, net of tax              (0.01)
                
Net income (loss) $1.31  $1.06  $0.52  $0.23  $(0.38)
                
Diluted earnings (loss) per common share (4):                    
Income (loss) from continuing operations before accounting change $1.26  $1.03  $0.63  $0.32  $(0.37)
Discontinued operations, net of tax        (0.12)  (0.10)   
Accounting change, net of tax              (0.01)
                
Net income (loss) $1.26  $1.03  $0.51  $0.22  $(0.38)
                
Dividends per share announced $0.320  $0.190  $0.085       
                
Shares used in earnings per share calculations (4):                    
Basic  1,638   1,616   1,579   1,542   1,512 
Diluted  1,694   1,675   1,636   1,619   1,512 
                     
Balance Sheet Data:
                    
                     
Cash, cash equivalents and marketable securities $8,681  $7,635  $5,372  $3,200  $2,581 
Total assets  12,479   10,820   8,822   6,506   5,670 
Long-term debt        123   94    
Total stockholders’ equity  11,119   9,664   7,598   5,392   4,812 
(1) Our fiscal year ends on the last Sunday in September. As a result, fiscal 2001 includesincluded 53 weeks.
 
(2)(2)During fiscal 2004, we sold our consolidated subsidiaries, the Vésper Operating Companies and TowerCo, and returned personal mobile service (SMP) licenses to Anatel, the telecommunications regulatory agency in Brazil. The results of operations, including gains and losses realized on the sales transactions and the SMP licenses, are presented as discontinued operations.
(3)During fiscal 2001, we accounted for our investment in the Vésper Operating Companies under the equity method of accounting and recorded $150 million in equity in losses of those entities in income (loss) from continuing operations before accounting change.
(4) We effected a two-for-one stock split in May 1999 and a four-for-one stock split in December 1999.August 2004. All references to number of shares and per share amounts have been restated to reflect thesethis stock splits.split.
 
(3)(5) Prior to the fourth quarter of fiscal 2004, we recorded royalty revenues from certain licensees based on our estimates of royalties during the period they were earned. Starting in the fourth quarter of fiscal 2004, we began recognizing royalty revenues solely based on royalties reported by licensees during the quarter. The pro formachange in the timing of recognizing royalty revenue was made prospectively and had the initial one-time effect of changereducing royalty revenues recorded in accounting principle reflects the impactfourth quarter of SAB 101 on previously reported results assuming it had beenfiscal 2004. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in effect in those periods.this Annual Report for more information.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     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 Annual Report.
Overview
Recent Highlights
     Revenues for fiscal 2005 were $5.67 billion, with net income of $2.14 billion. 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 213 million worldwide through September 2005, including at least 15 million 1xEV-DO subscribers and at least 35 million WCDMA subscribers, according to data from a large portion of the wireless operators around the world.
CDMA-based handset shipments by manufacturers to wireless operators during the period July 2004 through June 2005 totaled approximately 182 million units at an average selling price of approximately $215 based on reports in fiscal 2005 by our licensees.
The ratio of WCDMA reported royalties to total reported royalties grew from approximately 26% reported in the fourth quarter of fiscal 2004 to approximately 41% reported in the fourth quarter of fiscal 2005.
Through October 2005, six manufacturers in China have been added, at our standard worldwide WCDMA royalty rates, to the more than 60 companies that have licensed our WCDMA patent portfolio.
During fiscal 2005, we shipped approximately 151 million Mobile Station Modem (MSM) integrated circuits for CDMA-based phones and data modules (nearly all of which were 3G, including CDMA2000 1X, 1xEV-DO and WCDMA) compared to approximately 137 million MSM integrated circuits in the prior fiscal year. During fiscal 2005, seven new customers selected our WCDMA (UMTS) MSM integrated circuits for their WCDMA phone products bringing the total number of WCDMA customers to 32, 16 of which have been publicly announced.
As of September 2005, 56 wireless operators were offering BREW services in 29 countries, including customers acquired related to the ELATA acquisition. As reported in June 2005, BREW publishers and developers have earned more than $350 million to date from the sale of wireless applications and services developed for the BREW service. Through September 2005, three operators, including ALLTEL, have entered into agreements to license our uiOne user interface technology.
During fiscal 2005, we continued to invest in new emerging technologies through strategic acquisitions and research and development. We completed four acquisitions this year, including Iridigm, Trigenix, Spike and ELATA, and announced our intent to acquire Flarion. Each of these acquisitions provides us complementary or expanded offerings to our existing technologies.
During the fourth quarter of fiscal 2005, MediaFLO conducted the first live, over-the-air demonstration of FLO technology. The demonstration featured over-the-air delivery and viewing of multiple channels of high quality (QVGA) wireless multimedia content, both streaming video and multicast packet data, on a wireless handset.
Our consolidated financial data includes SnapTrack, Inc., Vésper Holding Ltd.Business and other consolidated subsidiaries.

Overview

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 fromfor 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, revenues, research and development and selling, general and administrative amortization of acquisition-related intangible assets, and asset impairment charges.expenses.

39

     Our


     We conduct business primarily through four reportable segments. These segments are: QUALCOMM CDMA Technologies, (QCT) segmentor 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 CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning. QCT’s integrated circuit products and software are used in wireless phones, data cards and infrastructure equipment. The wireless phone integrated circuits include the Mobile Station Modem (MSM), Radio Frequency (RF) and Power Management (PM) devices. The wireless phone integrated circuits and software perform voice and data communication, multimedia and global positioning system products.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 interface link between the operating systemsystems that controlscontrol the phone and the functionality embeddedimbedded in our integrated circuit products. QCT products are sold to many of the world’s leading wireless phone and infrastructure manufacturers. QCT revenues comprised 61%58%, 52%64% and 51%63% of total consolidated revenues in fiscal 2005, 2004 and 2003, 2002 and 2001, respectively.

     Our QUALCOMM Technology Licensing (QTL) segment

     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 (includingproducts, including, without limitation, products implementing cdmaOne, CDMA2000, 1X/1x EV-DO/1xEV-DV, TD-SCDMAWCDMA and/or the CDMA TDD standards and WCDMA) products.their derivatives. QTL receives license fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating our intellectual property. QTL revenues comprised 25%32%, 28%27% and 29%26% of total consolidated revenues in fiscal 2005, 2004 and 2003, 2002 and 2001, respectively.

     Our QUALCOMM Wireless & Internet (QWI) segment,

     QWI, which includes QUALCOMM Wireless Business Solutions (QWBS), QUALCOMM Internet Services (QIS) and QUALCOMM Digital Media (QDM)Government Technologies (QGOV), generates revenue primarily through mobile communication products and services, software and software development aimed at support and delivery of wireless applications. QWBS provides satellite and terrestrial-based two-way data messaging, and position reporting and wireless application services to transportation companies, private fleets, and construction equipment fleets.fleets and other enterprise companies. QIS provides BREW (Binary Runtime Environment for Wireless) products and services, including the BREWuiOne customizable user-interface product and servicesthe deliveryOne content distribution system, for the development and over-the-air CDMA deployment of data services on wireless devices. QIS also provides QChat whichand QPoint products and services. QChat enables virtually instantaneous push-to-talkpush-to-chat functionality on CDMACDMA-based wireless devices.devices while QPoint enables operators to offer E-911 and location-based applications and services. The QDMQGOV division is comprised of the Government Systems and Digital Cinema businesses. The Government Systems business provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies. The Digital Cinema business develops technologies to support the processing, transmission and management of content for a variety of media applications, including the delivery of digitized motion pictures. QWI revenues comprised 12%11%, 14%12% and 16%13% of total consolidated revenues in fiscal 2005, 2004 and 2003, 2002 and 2001, respectively.

     Our QUALCOMM Strategic Initiatives (QSI) segment

     QSI makes strategic investments to promote the worldwide adoption of CDMA products and services for wireless voice and Internet data communications.services. Our strategy has beenis to invest in CDMA operators, licensed device manufacturers and start-up companies that we believe open new markets for CDMA technology, support the design and introduction of new CDMA-based products or possess unique capabilities or technology to promote Internet data communications. QSI’s revenues relate primarily totechnology. Effective as of the consolidationbeginning of fiscal 2005, we present the operating results of our investmentwireless multimedia operator, MediaFLO USA, Inc. (MediaFLO USA), in Vésper Holding.the QSI revenuessegment. Our MediaFLO USA subsidiary expects to offer a nationwide mediacast network based on our FLO (Forward Link Only) technology and MediaFLO Media Distribution System (MDS), initially targeting 100 top domestic markets, with the eventual capability for broader nationwide coverage. This network is expected to be utilized as a shared resource for wireless operators and their customers within the United States starting in latter 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 and related infrastructure required to provide market coverage. MediaFLO USA plans to use nationwide 700 MHz spectrum for which we hold licenses and will be procuring and distributing content which we will make available wholesale to our wireless operator customers. Distribution, marketing, billing and customer relationships are expected to remain services provided by our wireless operator customers. We are evaluating a number of corporate structuring options, including distributing our ownership interest in MediaFLO USA to our stockholders in a spin-off transaction.
     Nonreportable segments include the QUALCOMM Wireless Systems division, which sells products that operate on the Globalstar low-Earth-orbit satellite communications system and provides related services, the QUALCOMM MEMS Technologies division, comprised 3% and 4% of total consolidated revenues in fiscal 2003 and 2002, respectively. QSI did not generate revenues in 2001.

     Global economic weakness can have wide-ranging effects on marketsthe Iridigm business, a display technology company that we serve, particularly wireless communications equipment manufacturers and network operators. The wireless communications industry recently appears to be recovering from an industry-wide recession. We cannot predict whether a recovery will continue, the rate of such recovery, or what effects negative events, such as war, may have on the economy. Further, an economic recovery may not benefit usacquired in the near term. If it does not, our ability to increase or maintain our revenuesfirst quarter of fiscal 2005, and operating results may be impaired. To increase our revenues and market share in future periods, we are dependentother product initiatives.

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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. Many 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 data rates, thereby supporting more minutes of use and data intensive applications like multimedia.
As of October 2005, 87 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 that the WCDMA market will continue to expand as operators transition their subscribers to WCDMA devices on these WCDMA networks.
We expect that volume increases and growing competition among WCDMA phone manufacturers and WCDMA integrated circuit suppliers will help decrease WCDMA phone prices significantly and drive growth of WCDMA phone sales worldwide.
We expect that growing demand for advanced 3G phones and devices will continue to drive the need for increased multimedia MSM functionality. To meet this market need, we intend to continue to invest significant resources toward multimedia functionality.
We expect growing demand for low end phones to continue and have invested resources for single chip solutions which combine the baseband, radio frequency and power management chips into one package. We believe lower component counts and further integration will 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-based products, we still face significant competition from GSM-based products in this market.
We also expect growing demand for high end, multimedia phones with added functionality and capability at a high price point.
The expiration of royalty-sharing obligations under two agreements, one in fiscal 2005 and the other in fiscal 2006, will contribute to an increase in our royalty revenues in fiscal 2006 and beyond.
We will continue our development efforts with respect to our BREW applications development platform, our new MediaFLO Multimedia Distribution System (MDS) and FLO technology for low cost delivery of multimedia content to multiple subscribers simultaneously and our iMoD display technology.
     We are dependent upon the adoption and commercial deployment of 3G wireless communications equipment, products and services based on our CDMA technology. Although network operators have commercially deployed CDMA2000 1X, we cannot predict the timing or success of other commercial deployments. If existing deployments are not commercially successful, or if new commercial deployments of CDMA2000 1X are delayed or unsuccessful,technology to increase our businessrevenues and financial results may be harmed.

market share. We currentlycontinue to face significant competition in our marketsfrom non-CDMA technologies, as well as competition from companies offering other CDMA-based products. Recent reports suggest that inflation could have adverse effects on the global economy and expect that competition will continue. This competition may result in reduced average selling prices for our products and those of our customers and licensees. Reductions in the average selling price of our licensees’ products generally result in reduced average royalties. While pricing pressures resulting from competition may,capital markets. You should also refer to a large extent, be mitigated by the introduction of new features and functionality in our licensees’ products, there is no guarantee that such mitigation will occur.

     We will continue to expand our international sales operations and enter new international markets. This expansion will require significant management attention and financial resources to successfully develop direct and indirect international sales and support channels, and we cannot assure you that we will be successful or that our expendituresRisk Factors included in this effort will not exceed the amountAnnual Report for further discussion of any resulting revenues. If we are not ablethese and other risks related to maintain or increase international market demand for our products and technologies, then we may not be able to maintain an acceptable rate of growth in our business.

Revenue Concentrations
     Revenues from customers in South Korea, Japan and the United States comprised 37%, 21% and Japan comprised 43%, 22% and 15%18%, respectively, of total consolidated revenues in fiscal 2003,2005 as compared to 37%43%, 30%,18% and 18%21%, respectively, in fiscal 2002,2004, and 35%45%, 35%15% and 22%23%, respectively, in fiscal 2001.2003. We distinguish revenue from external customers by geographic areas based on customer location. The increaseRevenues from customers in Japan increased as a percentage of total revenues, from 15% in fiscal 2003 to 18% in fiscal 2004 and 21% in fiscal 2005, due primarily to increased royalties reported by licensees in Japan resulting from the growth of CDMA2000 and WCDMA in Japan as well as their success in exporting products worldwide. Combined revenues from customers in South Korea and the United States decreased as a percentage of the total isrevenues, from 68% in fiscal 2003 to 64% in fiscal 2004 and 55% in fiscal 2005, due primarily attributed to higher chipset sales to phone manufacturers in South Korea who have leading CDMA market share in South Korea and worldwide. The decreaseincreases in revenues from customersmanufacturers of CDMA and WDCMA products in the United Statesother regions such as China, Japan and Japan, as a percentage of the total, is primarily attributed to overall increases in revenues in geographic regions other than the United States and Japan.Western Europe.

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Critical Accounting Policies and Estimates

     Our discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an on-goingongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, adequacy of allowances for doubtful accounts, valuation of intangible assets and investments, income taxes, and litigation. We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the following significant accounting policies and assumptions may involve a higher degree of judgment and complexity than others.

Revenue RecognitionRecognition.

We derive revenue principally from sales of integrated circuit products, from royalties and license fees for our intellectual property, from messaging and other services and related hardware sales and from software development and licensing and related services, and from license fees for intellectual property.services. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves judgments and estimates that we believe are reasonable, but it is possible that actual results may differ from our estimates.

     In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements” which we adopted in the fourth quarter of fiscal 2001 and applied retroactively to the first quarter of fiscal 2001. We recognized $44 million, $66 million and $95 million during fiscal 2003, 2002 and 2001, respectively, in operating income related to revenue and expense that were recognized in prior years.

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     In November 2002, the Emerging Issues Task Force (EITF) issued Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” which we adopted in the fourth quarter of fiscal 2003. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. Beginning with the adoption of SAB 101 until the fourth quarter of fiscal 2003, we recognized revenues and expenses from sales of certain satellite and terrestrial-based two-way data messaging and position reporting hardware and related software products by our QWBS division ratably over the shorter of the estimated useful life of the hardware product or the expected messaging service period, which is typically five years. SAB 101 required the ratable recognition of these sales because the messaging service was considered integral to the functionality of the hardware and software. Because EITF Issue No. 00-21 does not require the deferral of revenue when an undelivered element is considered integral to the functionality of a delivered element and because EITF Issue No. 00-21 otherwise requires separate unit accounting, we began recognizing revenues and expenses from such sales starting in the fourth quarter of fiscal 2003 at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later. We have elected to adopt EITF Issue No. 00-21 prospectively for revenue arrangements entered into after the third quarter of fiscal 2003, rather than reporting the change in accounting as a cumulative-effect adjustment. As a result, during the fourth quarter of fiscal 2003, we recognized certain revenue and related cost of sales for QWBS equipment sales upon shipment, while continuing to amortize unearned revenue and cost of sales, with an $11 million gross margin effect, for units shipped in prior periods. Deferred revenues and expenses related to the historical QWBS sales that will continue to be amortized in future periods were $183 million and $102 million, respectively, at September 30, 2003. Gross margin related to these prior sales is expected to be recognized as follows: $37 million in fiscal 2004, $24 million in fiscal 2005, $13 million in fiscal 2006, $6 million in fiscal 2007 and $1 million in fiscal 2008.

     We license rights 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 (includingproducts, including, without limitation, products implementing cdmaOne, CDMA2000, 1X/1x EV-DO/1xEV-DV, TD-SCDMAWCDMA and/or the CDMA TDD standards and WCDMA) products.their derivatives. Licensees typically pay a non-refundable license fee in one or more installments and on-goingongoing royalties based on their sales of products incorporating or using our licensed intellectual property. License fees are generally recognized over the estimated period of future benefit to the average licensee, typically five to seven years. We recognizeearn royalties on such licensed CDMA products sold worldwide by our licensees at the time that the licensees’ sales occur. Our licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter, and, in some instances, although royalties are reported quarterly, payment is on a semi-annual basis. During the periods preceding the fourth quarter of fiscal 2004, we estimated and recorded the royalty revenue asrevenues 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 cancould be made.

     Revenues from sales of our CDMA-based integrated circuits are recognized at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later. Revenues from providing services are Not all royalties earned were recorded when earned. Revenues from long-term contracts are generally recognized using the percentage-of-completion method of accounting, based on costs incurred compared with total estimated costs. The percentage-of-completion method relies on estimatesestimates.

     In the fourth quarter of total contract revenuefiscal 2004, we determined that, due to escalating and costs. Revenueschanging business trends, we no longer had the ability to reliably estimate royalty revenues from the Estimated Licensees. These escalating and profit are subjectchanging trends included the commercial launches and global expansion of WCDMA networks, changes in market share among licensees due to revisions as the contract progresses to completion. Revisions in profit estimates are charged or credited to incomeincreased global competition, and increased variability in the periodintegrated circuit and finished product inventories of licensees. Starting in which the facts that give rise tofourth quarter of fiscal 2004, we began recognizing royalty revenues solely based on royalties reported by licensees during the revision become known. If actual contract costs are greater than expected, reduction of contract profit would be required. Billings on uncompleted contractsquarter. The change in excess of incurred cost and accrued profits are classified as unearned revenue. Estimated contract losses are recognized when determined. If substantive uncertainty related to customer acceptance exists or the contract’s duration is relatively short, we use the completed-contract method.

     Revenues from software license fees are recognized when all of the following criteria are met: the written agreement is executed; the software is delivered; the license fee is fixed and determinable; collectibility of the license fee is probable; and if applicable, when vendor-specific objective evidence exists to allocate the total license fee to elements of multiple-element arrangements, including post-contract customer support. When contracts contain multiple elements wherein vendor-specific objective evidence exists for all undelivered elements, we recognize revenue for the delivered elements and defer revenue for the fair value of the undelivered elements until the remaining obligations have been satisfied. If vendor-specific objective evidence does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until remaining obligations have been satisfied, or if the only undelivered element is post-contract customer support, revenue is recognized ratably over the support period. Significant judgments and estimates are made in connection with the recognition of software license revenue, including assessments of collectibility and the fair values of deliverable elements. The amount or timing of our software licenserecognizing royalty revenue may differ as a resultwas made prospectively and had the initial one-time effect of changesreducing royalty revenues recorded in these judgments or estimates.

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     Unearned revenue consists primarilythe fourth quarter of fees related to software products and license fees for intellectual property for which delivery is not yet complete and to hardware products sales with a continuing service obligation.

Allowances for Doubtful Accounts

     We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider the following factors when determining if collection of a fee is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. If we have no previous experience with the customer, we typically obtain reports from various credit organizations to ensure that the customer has a history of paying its creditors. We may also request financial information, including financial statements or other documents (e.g., bank statements) to ensure that the customer has the means of making payment. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

     We also maintain allowances for doubtful accounts for estimated losses resulting from the inability of entities we have financed to make required payments. We evaluate the adequacy of allowances for doubtful finance and note receivables based on analyses of the financed entities’ credit-worthiness, current economic trends or market conditions, review of the entities’ current and projected financial and operational information, and consideration of the fair value of collateral to be received, if applicable. From time to time, we may consider third party evaluations, valuation reports or advice from investment banks. If the financial condition of the financed entities were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

fiscal 2004.

Valuation of Intangible Assets and InvestmentsInvestments.

Our business acquisitions typically result in the recording of goodwill and other intangible assets, and the recorded values of those assets may become impaired in the future. As of September 25, 2005, our goodwill and intangible assets, net of accumulated amortization, were $571 million and $237 million, respectively. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We assess potential impairments to intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our acquired businesses, market conditions and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use are consistent with our internal planning. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge on all or a portion of our goodwill and intangible assets. Furthermore, we cannot predict the occurrence of future impairment-triggering events nor the impact such events might have on our reported asset values. Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets associated with our acquired businesses is impaired. Any resulting impairment loss could have an adverse impact on our results of operations.

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     We hold minority strategic investments in publicly-traded companies whose share prices may be highly volatile. These investments, which are recorded at fair value with increases or decreases generally recorded through stockholders’ equity as other comprehensive income or loss, totaled $1.16 billion at September 25, 2005. We record impairment charges when we believe an investment has experienced a decline that is other than temporary. The determination that a decline is other than temporary is subjective and influenced by many factors. Future adverse changes in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. When assessing a publicly-traded investment for an other-than-temporary decline in value, we consider such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the performance of the investee’s stock price in relation to the stock price of its competitors within the industry and the market in general and analyst recommendations. We also review the financial statements of the investee to determine if the investee is experiencing financial difficulties. Any resultingIn the event our judgments change as to other-than-temporary declines in value, we may record an impairment loss which could have an adverse impact on our results of operations.

During fiscal 2005, 2004 and 2003, we recorded $12 million, $12 million and $100 million, respectively, in other-than-temporary losses on our minority investments in publicly-traded companies.

     We hold minority strategic investments in private companies whose values are difficult to determine. These investments totaled $122 million at September 25, 2005. We record impairment charges when we believe an investment has experienced a decline that is other than temporary. The determination that a decline is other than temporary is subjective and influenced by many factors. Future adverse changes in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. When assessing investments in private companies for an other-than temporaryother-than-temporary decline in value, we consider such factors as, among other things, the share price from the investee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’s revenue and cost trends, the liquidity and cash position, including its cash burn rate and market acceptance of the investee’s products and services. From time to time, we may consider third party evaluations, valuation reports or advice from investment banks. We also consider new products/services that the investee may have forthcoming, any significant news that has been released specific to the

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investee or the investee’s competitors and/or industry and the outlook of the overall industry in which the investee operates. Any resultingIn the event our judgments change as to other-than temporary declines in value, we may record an impairment loss which could have an adverse impact on our results of operations.

During fiscal 2005 and 2003, we recorded $1 million and $28 million, respectively, in other than temporary losses on our investments in private companies. Such losses were not significant in fiscal 2004.

Income TaxesTaxes.

Our income tax provision isreturns are based on calculations and assumptions that will beare subject to examination by the Internal Revenue Service and other tax authorities. WeWhile we believe we have appropriate support for the positions taken on our tax returns, we regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. ShouldAs part of our assessment of potential adjustments to our tax returns, we increase our current tax liability to the actual results differ fromextent an adjustment would result in a cash tax payment or decrease our estimates, wedeferred tax assets to the extent an adjustment would have tonot result in a cash tax payment. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to thea revision become known. Tax lawAlthough we believe that the estimates and rate changesassumptions supporting our assessments are reasonable, adjustments could be materially different from those which are reflected in thehistorical income tax provisionprovisions and recorded assets and liabilities.

     We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. As of September 25, 2005, gross deferred tax assets were $937 million. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period inwithin which such changes are enacted.

     We reversed approximately $1.1 billion ofthe underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance on substantially all ofagainst our United States deferred tax assets during fiscal 2003 as a credit to stockholders’ equity. We now believe thatwhich could result in an increase in our effective tax rate and an adverse impact on operating results.

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     As of September 25, 2005, we will more likely than not have sufficient taxable income after stock option deductions to utilize our deferred tax assets. We continue to provide a valuation allowance on substantially all of our foreignhad gross deferred tax assets because of uncertainty regarding their realization due$301 million related to a history of losses from operations.

capital loss carry forwards. We can only use our capital losses and capital loss carrybacks or carryforwards to offset capital gains. WeBased upon our assessments of projected future capital gains and losses and related tax planning strategies, we expect that our future capital gains will not be sufficient to utilize all the capital losses that we have incurred through fiscal 2002. Beginning in fiscal 2003,2005. Therefore, we have provided a valuation allowance in the amount of $62 million for new deferred tax assets related to capital loss items through our statementthe portion of operations. We expect that any additional capital losses in future years will also require the provision of awe do not expect to utilize. Adjustments to our valuation allowance through the statementbased on changes to our forecast of operations, if we are unable to generate sufficient futurecapital losses and capital gains to utilize these additional capital losses through our tax planning strategies. If capital losses are utilized and any portion ofreflected in the valuation allowanceperiod the change is removed, the release would be accounted for as a reduction of the income tax provision.

made.

     We consider the operating earnings of certain non-United States subsidiaries to be indefinitely invested outside the United States. No provision has been made for United States federal and state, or foreign taxes that may result from future remittances of undistributed earnings of foreign subsidiaries.subsidiaries, the cumulative amount of which is approximately $1.2 billion as of September 25, 2005. Should we repatriate foreign earnings, we would have to adjust the income tax provision in the period in which the decision to repatriate earnings of foreign subsidiaries is made.

On October 22, 2004, the American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into law. The Jobs Creation Act created a temporary incentive for corporations in the United States to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. In the fourth quarter of fiscal 2005, we repatriated approximately $0.5 billion of foreign earnings qualifying under the Jobs Creation Act and recorded a related expense of approximately $35 million for federal and state income tax liabilities. The distribution does not change our intention to indefinitely reinvest earnings of certain foreign subsidiaries outside the United States.

LitigationLitigation.

We are currently involved in certain legal proceedings. Although there can be no assurance that unfavorable outcomes in any of these matters would not have a material adverse effect on our operating results, liquidity or financial position, we believe the claims are without merit and intend to vigorously defend the actions. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. We have not recorded any accrual for contingent liability associated with our legal proceedings based on our belief that a liability, while possible, is not probable. Further, any possible range of loss cannot be estimated at this time. Revisions in our estimates of the potential liability could materially impact our results of operations.

Licensing

     We grant licenses

Acquisitions
     In October 2004, we completed the acquisitions of Iridigm Display Corporation (Iridigm), a display technology company, for a total of approximately $160 million in cash and the exchange of stock options with an estimated aggregate fair value of approximately $17 million, and Trigenix Limited (Trigenix), a mobile user interface company for approximately $33 million in cash. The convergence of consumer electronics products, including cameras, MP3 players, camcorders, GPS receivers and game consoles into wireless devices is driving the increased adoption of 3G CDMA. Iridigm’s display technology, known as iMoD, enables advanced, high-resolution multimedia capabilities on all tiers of mobile devices, while providing substantial performance, power consumption and cost benefits, as compared to useother alternative display technologies. Our acquisition of Iridigm is intended to accelerate the time-to-market for Iridigm’s display technology, which fits our intellectual property portfolio, which includes certain patent rights essentialoverall strategy of rapidly increasing the capability of wireless devices while driving down cost, size and power consumption. In addition to and/or useful inhaving a better display, operators and device manufacturers need a secure and modular approach for customizing their phone user interfaces so they can brand and differentiate their handsets. Our acquisition of Trigenix complements our BREW offering by adding Trigenix’s user interface development tools, enhancing the manufacture and sale of CDMA (including cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV, TD-SCDMA and WCDMA) products. Licensees typically pay a non-refundable license fee in one or more installments and on-going royalties based on their sales of products incorporating our intellectual property. License fees are recognized over the estimated period of future benefit to the average licensee, typically five to seven years. We earn royalties on CDMA products sold worldwide by our licensees in the period that the licensees’ sales occur. Our licensees, however, do not report and pay royalties owed until the subsequent quarter and, in some instances, payment is on a semi-annual basis. Therefore, we estimate the royalty revenues from certain licensees (the Estimated Licensees) in the current quarter when reasonable estimates of such amounts can be made. Not all royalties earned are estimated. Royalties for licensees for which we have minimal history and certain licensees that do not buy our integrated circuit products are recorded one quarter in arrears when they are reported to us by those licensees. Estimates of royalty revenues for the Estimated Licensees are based on analysescapabilities of our salesBREW uiOne user interface and accelerating the time-to-market for new user interface features, such as multi-perspective window display technology.
     In August 2005, we completed the acquisition of integrated circuitsELATA, Ltd. (ELATA), a developer of mobile content delivery and device management software systems, for a total of approximately $57 million in cash. Our acquisition of ELATA will enable us to our Estimated Licensees, historical royalty data by Estimated Licensee, the relationship between the timing of our sales of integrated circuitsoffer a unified mobile content delivery system to our Estimated Licenseesoperators who desire an enhanced framework for managing, delivering and our Estimated Licensees’ sales of CDMA products, average sales price forecasts, and current market and economic trends. Once royalty reports are received from themarketing rich wireless content. The ELATA single service delivery

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Estimated Licensees,

framework, which leverages open standards interfaces to ensure interoperability and retain backward compatibility, is platform-agnostic and will allow operators to consolidate the variance between such reportsdelivery of all of their content services without having to change their device portfolio. This acquisition will also expand our presence in Europe by enabling us to offer European operators a content delivery system that can be easily integrated with their existing core network and business systems. The ELATA single service delivery framework has become part of our family of BREW product offerings and is being marketed under the estimate is recorded in royalty revenue in the period the reports are received. The recognitionbrand name deliveryOne.
     In August 2005, we announced our intention to acquire Flarion Technologies, Inc. (Flarion), a developer of this variance in most cases lags the royalty estimate by one quarter.

     The following table summarizes royalty related data for fiscal 2003, 2002 and 2001 (in millions):

             
  Fiscal Year
  
  2003 2002 2001
  
 
 
Components of royalty revenues
            
Estimate at end of prior year* $150  $122  $100 
Royalties reported in first quarter related to prior year estimate  167   146   133 
   
   
   
 
Variance included in current year revenues  17   24   33 
Other royalties reported in current year  670   551   506 
Estimate at year end  151   150   122 
   
   
   
 
Total royalty revenues from licensees $838  $725  $661 
   
   
   
 

* This amount is the estimate for the fourth quarterOFDMA technology. Upon completion of the previous fiscal year.

     For example, for fiscal 2002, we estimated royalties of $150 million from the Estimated Licensees for the fourth quarter of fiscal 2002. The actual royalties reported to us by the Estimated Licensees, on a one quarter lag basis, during the first quarter of fiscal 2003 were $167 million. The variance of $17 million was recorded in royalty revenuesacquisition, which is anticipated in the first quarterhalf of fiscal 2003. Therefore, total royalty revenues from licensees for fiscal 20032006, pending regulatory approval and other customary closing conditions, we estimate that we will pay approximately $545 million in consideration, consisting of $838approximately $272 million included: 1)in shares of QUALCOMM stock, $235 million in cash, and the varianceexchange of $17Flarion’s existing vested options and warrants with a fair value of approximately $38 million. Upon achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of this transaction, we may issue additional aggregate consideration of $205 million, 2) other royalties reported during fiscal 2003consisting of $670approximately $173 million payable in cash to Flarion stockholders and 3) the estimate made$32 million in the fourth quartershares of fiscal 2003 of $151 million based upon Estimated Licensees’ estimated sales during the fourth quarter of fiscal 2003,QUALCOMM stock, which we believe will be reported byissued to Flarion option holders and warrant holders upon or following the Estimated Licensees inexercise of such options and warrants. Our acquisition of Flarion is intended to broaden our ability to effectively support operators who may prefer an OFDMA or a hybrid OFDM/CDMA/WCDMA network alternative for differentiating their services. The addition of Flarion’s intellectual property and engineering resources will also supplement the first quarterresources that we have already dedicated over the years towards the development of fiscal 2004.

OFDM/OFDMA technologies.

Strategic Investments and Financing

in our QSI Segment

     Our QSI segment makes strategic investments to promote the worldwide adoption of CDMA products and services forservices. QSI segment assets totaled $442 million at September 25, 2005, compared to $400 million at September 26, 2004. Our MediaFLO USA subsidiary, a wireless voice and Internet data communications. In general, wemultimedia operator, is expected to begin commercial operations in latter 2006. We also enter into strategic relationships with CDMA wireless operators and developers of innovative technologies or products for the wireless communications industry. As part of the agreement to sell our infrastructure equipment business to Ericsson in 1999, we have provided equipment financing to customers of Ericsson on a shared basis with respect to Ericsson’s sale of CDMA infrastructure. Due to financial and competitive challenges facing CDMA wireless operators, we cannot assure you that our investments in or loans to these operators will generate financial returns or that they will result in increased adoption or continued use of CDMA technologies. Domestic and international CDMA wireless operators to whom we have provided financingfunding have limited operating histories, are faced with significant capital requirements and are highly leveraged and/or have limited financial resources. If these CDMA wireless operators are not successful, we may have to write down our investments in or loans to these wireless operators.

     Our QSI segment maintains strategic holdings of various issuers and types. These securities include available-for-saleinvestments in marketable equity securities and derivative investments that are recorded on the balance sheet at fair value.classified as available-for-sale. We strategically invest in companies in the high-technology industry and typically do not attempt to reduce or eliminate our exposure to market risks in these investments. Available-for-sale equity securities and derivative investments recorded at fair value subject us to equity price risk. The fair values of these strategic investments are subject to substantial quarterly and annual fluctuations and to significant market price volatility. Our strategic investments in specific companies and industry segments may vary over time, and changes in concentrations may affect price volatility. In general, our investments in available-for-sale equity securities and derivative investments suffered significant decreases in market value during the last three years. Downward fluctuations and market trends could further adversely affect our operating results. In addition, the realizable value of these securities and derivative investmentsinstruments is subject to market and other conditions.

     QSI also makes strategic investments in privately held companies, including early stage companies and venture funds. These investments are comprised of equity investments, recorded at cost or under the equity method, but theand warrants that are recorded at fair value or at cost. The recorded values of these investments may be written down due to changes in the companies’ conditions or prospects. These strategic investments are inherently risky as the market for the technologies or products the investees are developing may never materialize. As a result, we could

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lose all or a portion of our investments in these companies, which could negatively affect our financial position and operating results. Most of these strategic investments will not become liquid until more than one year from the date of investment, if at all. To the extent such investments become liquid and meet strategic and price objectives, we may sell the investments and recognize the realized gain (loss) in investment income (expense).

     We regularly monitor and evaluate the realizable value of our investments in both marketable and private securities. If events and circumstances indicate that a decline in the value of these assets has occurred and is other than temporary, we will record a charge to investment income (expense). During fiscal 2003, 2002 and 2001, we recognized $138 million, $230 million and $198 million, respectively, in charges related to other-than-temporary losses on marketable and private securities. In some cases, we make strategic investments that require us to consolidate or record our equity in the losses of early stage companies. The consolidation of these losses can adversely affect our financial results until we exit from or reduce our exposure to the investments.

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     From time to time, we may accept an equity interest


     Key developments in our strategic investments during fiscal 2005 included our ongoing investment in our MediaFLO USA subsidiary, a licensee as consideration for a portion or all of the license fee payable under our CDMA license agreement. We record license fee revenue based on the fair value of the equity instruments received, if determinable. The measurement date for determination of fair value is the earlier of the date at which a performance commitment is made or the date at which the performance is complete. The evaluation procedures used to determine fair value include, but are not limited to, examining the current market price for the shares if the licensee is publicly traded, examining recent rounds of financing and the licensee’s business plan if not publicly traded, and performing other due diligence procedures. This equity program does not affect the licensees’ obligations to pay royalties under their CDMA license agreements. The amount of cash consideration and the timing of revenue recognition vary depending on the terms of each agreement. As of September 30, 2003, ten licensees have participated in this program. We recognized $5 million, $6 million and $7 million of revenue in fiscal 2003, 2002 and 2001, respectively, related to equity received as consideration for license fees.

Vésper Holding, Ltd.

     In fiscal 1999, we acquired an ownership interest in Vésper São Paulo S.A. and Vésper S.A. (the Vésper Operating Companies or collectively, Vésper). The Vésper Operating Companies were formed by a consortium of investors to provide fixed wireless and wireline telephone servicesslow down in the northern, northeast and eastern regionsrate of Brazil and in the state of São Paulo. In addition, we extended long-term financing to Vésper in fiscal 2000. In November 2001, we consummated a series of transactions resulting in an overall financial restructuring (the Restructuring) of the Vésper Operating Companies, which resulted in our obtaining a controlling financial interest in Vésper.

     Pursuant to the Restructuring, we invested $266 million, and VeloCom, Inc. (VeloCom) invested $80 million, in a newly formed holding company called Vésper Holding, Ltd. (Vésper Holding). Vésper Holding acquired certain liabilities of the Vésper Operating Companies from their vendors for $135 million and the issuance of warrants to purchase an approximate 7% interest in Vésper Holding, and the vendors released in full any claims that they might have against us, VeloCom, Vésper, its direct and indirect parent companies and other related parties arising from or related to the acquired liabilities. In a series of related transactions, Vésper Holding agreed to contribute the acquired liabilities to the Vésper Operating Companies in exchange for equity securities and to cancel the contributed liabilities.

     On November 29, 2001, we forgave $119 million under our debt facility with VeloCom. We also converted our remaining $56 million convertible promissory note into equity securities of VeloCom in conjunction with our acquisition of Vésper Holding. The conversion increased our equity interest in VeloCom to 49.9%. We used the equity method to account forstrategic investment, including our investment in VeloCom. On July 2, 2003, we transferred to VeloCom all of our equity interestInquam, and realized gains on certain strategic investments.

Investment in VeloCom in exchange for (a) 49.9% of the shares of Vésper Holding held by VeloCom, which represented approximately 11.9% of the issued and outstanding shares of Vésper Holding, and (b) elimination of VeloCom’s minority consent rights with respect to Vésper Holding. We recorded a net loss of $7 million on the exchange resulting primarily from the recognition of cumulative translation losses, previously included in stockholders’ equity, in the statement of operations during the fourth quarter of fiscal 2003. After giving effect to the exchange, we own an approximate 83.9% direct interest in Vésper Holding and hold no continuing interest in VeloCom at September 30, 2003.

     On November 19, 2002, we won bids to acquire personal mobile service (SMP) licenses in the state of São Paulo (excluding São Paulo metro), the state of Minas Gerais, and in the Northeast region of Brazil. Approximately $8 million of the approximate $82 million purchase price for the SMP licenses was paid in December 2002. The

45


remaining Brazilian real-denominated obligation is financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation, payable in six equal annual installments starting in fiscal 2006. At September 30, 2003, the outstanding license fee obligation was approximately $111 million, having increased as a result of accrued interest and the strengthening of the Brazilian real against the U.S. dollar.

     Due to a series of adverse regulatory developments that negatively affected Vésper’s prospects, we are pursuing an expedited exit strategy whereby Vésper and/or its assets will be sold or otherwise disposed of. In accordance with this strategy, on September 25, 2003, Embratel Participações S.A. (Embratel) entered into an agreement to acquire from us for nominal consideration the Vésper Operating Companies (the Embratel sale transaction), excluding the tower and rooftop antennae assets and related property leases (Tower Sites). Concurrent with the closing, Vésper will enter into a multi-year arrangement whereby it pays a monthly fee to us to use the Tower Sites. The sum of these fees, net of certain pass through expenses, is expected to exceed $77 million over the life of the arrangement. The SMP licenses also are not included in the Embratel sale transaction, except for a right of first refusal of Embratel to purchase the SMP licenses in the event of a sale to a third party or return of the SMP licenses to Anatel, the telecommunications regulatory agency in Brazil. We are evaluating our options with respect to the SMP licenses, including a possible return of the licenses to Anatel.

     The closing of the Embratel sale transaction is contingent upon a number of events being completed prior to or concurrent with closing. The status of certain of these items follows:

Regulatory Approval. Regulatory approval from Anatel, which was requested on October 14, 2003, is required before a sale can be consummated. We anticipate a response within approximately 60 days.
Vésper Bank Forbearance. On September 15, 2003, we and Vésper entered into an agreement with local bank creditors of and lessors to Vésper (the Vésper Banks) concerning Vésper’s defaults under secured bank loans and leases with such creditors, which defaults occurred and have been continuing since May, 2003. Pursuant to this agreement, the Vésper Banks waived existing defaults and agreed to forbear from exercising any remedies under the loans and leases, including forbearing from calling for payment in full of all amounts due under such loans and leases until December 15, 2003. The Brazilian real equivalent of approximately $85 million was outstanding under such loans and leases at September 30, 2003. Notwithstanding the respective waiver and forbearance from the Vésper Banks, the Vésper Operating Companies were charged a 2% default penalty and are continuing to charge an additional 1% in interest per month on the amount in default. The bank loans and leases that are in default are presented on our balance sheet as current liabilities at September 30, 2003.
Vésper Bank Settlement and Release. The Vésper Banks also agreed to discharge all outstanding loans and leases, including default penalties and interest accrued on such amounts, settle all outstanding claims and grant a full and complete release for all obligations with respect to such loans and leases in exchange for a payment of approximately $46.6 million concurrent with the consummation of the Embratel sale transaction. Bell Canada International (BCI), a former shareholder in Vésper and a guarantor of a portion of the Vésper Banks’ outstanding loans and leases to Vésper, is expected to fund $12 million of this amount. On October 7, 2003, BCI received the requisite court order to perform its obligations under agreements in connection with payment of the $12 million settlement, as required under the liquidation laws governing BCI in Canada.
Tower Usage Agreement. In connection with the Embratel sale transaction, the Vésper Operating Companies will enter into a 10-year tower usage rights agreement, with two consecutive 5-year renewal options, to use specified amounts of space on the Tower Sites that we will retain. We will have the ability to sell some or all of our interests in the Tower Sites and assign the associated rights under this usage rights agreement.
Funding. We are required to provide $6 million in interim funding to Vésper on, or prior to, closing of the Embratel sale transaction.

     Given the uncertainty associated with the closing contingencies, we have not presented the Vésper-related assets and liabilities as “held for sale” in our September 30, 2003 balance sheet. Further, we do not expect to present Vésper’s historical operations as discontinued operations in our consolidated statements of operations in future financial statements because of our expectation of a continuing involvement in the Vésper business by way of an on-going tower usage arrangement. In the near term, prior to the close of the Embratel sale transaction, Vésper will

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continue to operate its existing fixed wireless and wireline network. Vésper will continue to undertake significant cost cutting measures to preserve the value of its core assets and existing business while reducing cash expenditures.

     As a result of adverse regulatory developments, and after an evaluation of the potential acquirers and the valuations that they may ascribe to Vésper given the regulatory situation, we recorded a $160 million impairment loss on our long-lived assets related to Vésper during the second quarter of fiscal 2003. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values at that date. At September 30, 2003, the carrying values of assets and liabilities related to Vésper totaled $265 million and $307 million, respectively.

     Assuming the requisite government approvals are received and all conditions to close are satisfied, we anticipate providing approximately $40 million to $45 million in aggregate funding (including the $6 million of interim funding) by the closing date to facilitate the Embratel sale transaction. We expect to recognize cumulative foreign currency translation losses, previously included in stockholders’ equity, as part of the gain or loss on a sale or other disposition of Vésper. We expect to record an approximate $35 million to $45 million loss if and when the transaction closes, including the cumulative foreign currency translation losses.

     We may incur additional losses related to Vésper if we are not successful in closing the sale transaction with Embratel or, in that event, if we are unable to realize the estimated fair value of Vésper’s assets upon their sale to another party or other disposition or if we are unable to effect such a sale or other disposition of Vésper and/or its assets quickly.

     Additional risks and uncertainties specific to Vésper include risks associated with:

the ability of the Vésper banks to call their loans to Vésper and exercise their rights in connection with certain lease obligations of Vésper if the Embratel sale transaction does not close by December 15, 2003;
the liquidity and value of the assets, which may be diminished prior to the close of a sale transaction or other disposal of Vésper;
continuing regulatory uncertainty and further adverse rulings, and uncertainty of success on any related legal challenges, increasing risk and reducing our ability to execute an orderly and fair market disposition;
the inability to retain key employees during the sale/disposition process;
the inability to maintain certain services, and quality of service levels during or prior to the sale/disposition that may lead to increased pressure related to regulatory compliance;
the ability of certain trade creditors with significantly delayed payments to seek immediate court induced payments which, if called, in aggregate exceed the current cash available to Vésper;
the inability to secure immediate financial relief in the form of adjustments in current key contracts and/or loan provisions that may lead to reduced valuations;
the Embratel sale transaction does not receive regulatory approval in a timely manner;
the conditions under which we would return the SMP licenses are unclear, which may result in additional costs.
following the close of the Embratel sale transaction, Vésper defaults on any of its obligations under the tower usage agreement, including making the tower usage payments;
we are unable to sell all, or any portion, of our interest in the tower assets; and
following the close of the Embratel sale transaction, we are unable to comply with our obligations to Vésper under the tower usage rights agreement or the cost of fulfilling such obligations is higher than projected.

Pegaso Telecomunicaciones, S.A. de C.V.

     We have had various financing arrangements, including a bridge loan facility, an equipment loan facility and interim and additional interim loan facilities, with Pegaso Comunicaciones y Sistemas S.A. de C.V., a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (collectively referred to as Pegaso). On September 10, 2002, Telefónica Móviles (Telefónica) acquired a 65% controlling interest in Pegaso. On October 10, 2002, Pegaso paid $82 million in full satisfaction of the interim and additional interim loans. On November 8, 2002, Pegaso paid $435 million in full satisfaction of the bridge loan facility. We used approximately $139 million of the bridge loan proceeds to purchase outstanding vendor debt owed by Pegaso to

47


other lenders. On March 31, 2003, Pegaso paid $4 million on the equipment loan facility. On June 13, 2003, Pegaso prepaid $281 million of the equipment loan facility, including accrued interest, in accordance with certain terms of the equipment loan facility. As a result of these transactions, finance receivables from Pegaso decreased by $663 million.

     At September 30, 2003, amounts outstanding, net of deferred interest, under the Pegaso equipment loan facility were $181 million, including the acquired vendor debt, as compared to $821 million outstanding under the various financing arrangements with Pegaso at September 30, 2002. The remaining equipment loan facility outstanding with Pegaso, including the acquired vendor debt, is payable quarterly starting in March 2006 through December 2008 and bears interest at the London Interbank Offered Rate (LIBOR) plus 1% through September 9, 2004, LIBOR plus 3% thereafter through September 9, 2007 and LIBOR plus 6% thereafter. We recognized $41 million, $9 million and $90 million in interest income related to the Pegaso financing arrangements during fiscal 2003, 2002 and 2001, respectively, including $23 million of deferred interest income recorded as a result of the prepayment in fiscal 2003.

     Pegaso is an early stage wireless operator facing significant competition in Mexico. Based on current information and available evidence, including the acquisition of Pegaso by Telefónica, we believe that we will ultimately be able to collect the remaining long-term financing due from Pegaso, however Pegaso may not succeed. Failure to collect our finance receivables could have a material adverse effect on our operating results and financial condition.

Inquam LtdLimited.

     InSince October 2000, we agreedand another investor (the Other Investor) have provided equity and debt funding to invest $200 million in the convertible preferred shares of Inquam Limited (Inquam) for an approximate 42% ownership interest in Inquam.. Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, with the primary intent of deploying CDMA-based technology, primarily in Europe.Romania and Portugal. We provided the final $27recorded $33 million, under this$59 million and $99 million in equity commitmentin losses of Inquam during fiscal 2005, 2004 and 2003, and had no remaining equity funding commitment at September 30, 2003.

     On March 26, 2003, we agreed to extend $25 million of bridge loan financing to Inquam. Another investor in Inquam also agreed to provide $25 million in bridge loan financing. We provided the $25 million in funding during fiscal 2003 and had no remaining commitment under the bridge loan at September 30, 2003.

     On July 14, 2003, we approved an additional $50 million investment in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investor in Inquam. No commitments related to these potential investments were in place at September 30, 2003. On September 19, 2003, we agreed, along with this other existing investor, to provide an additional $5 million each in bridge financing to enable Inquam to meet its cash flow requirements while the terms of a new equity investment are being negotiated. It is the intention of both parties that this second $10 million bridge loan will be repaid with the proceeds from the anticipated equity investment. We provided $2 million under this second bridge loan during fiscal 2003 and had a remaining funding commitment of $3 million at September 30, 2003.

     On September 22, 2003, we agreed, along with another investor in Inquam, to guarantee the payment of amounts due by Inquam under a bank credit agreement. Our maximum liability under the guarantee is limited to an amount equal to 50% of the amounts outstanding under Inquam’s credit agreement, up to a maximum of $10 million. No amounts were outstanding under the bank credit agreement as of September 30, 2003.

     We use the equity method to account for our investment in Inquam. During fiscal 2003, we recorded an $11 million other-than-temporary impairment loss related to our investment in Inquam. The impairment loss was the difference between the carrying value of the investment and its estimated fair value.respectively. At September 30, 2003,25, 2005, our equity and debt investmentinvestments in Inquam was $68totaled $26 million, net of equity in losses, and impairment.we had no remaining funding commitment under our bridge loan agreement.

     During fiscal 2005, Inquam secured new long-term financing (the new facilities). We expect that Inquam will focus its resourcesand the Other Investor 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 $49 million as of September 25, 2005. The guarantee expires and the new facilities mature on December 25, 2011.
     In October 2005, we and the developmentOther Investor agreed to restructure Inquam. Upon close of CDMA properties in the 450MHz frequency band in Romania and western Europe and will transfer its non-CDMA operations to one or more of Inquam’s other shareholders. Inquamrestructuring, which is expected to use approximately $70 million to $80 millionoccur in cash through the first half of calendar 2004. Inquam’s management does not expectfiscal 2006, the Portugal companies will be spun-off through the exchange of portions of our and the Other Investor’s debt investments for direct equity interests in the Portugal companies. Inquam, which will continue to own the Romania companies, will repurchase certain minority equity interests. Immediately after the restructuring, we will hold an approximate 49.7% equity interest in Inquam and a 23% equity interest in the Portugal companies, which is expected to be reduced over time as the Other Investor makes the further investments in the Portugal companies contemplated by the restructuring agreements. In addition, we and the Other Investor will have a put-call option arrangement. Under this arrangement, the Other Investor will have the right to buy our equity and debt investments in Inquam, subject to certain conditions, by exercising its call option, which will expire no later than May 14, 2008. The minimum purchase price will be approximately $66 million. In the event that the Other Investor’s call option expires, or in certain other circumstances prior to that date, we will have the right to sell our equity and debt investments in Inquam to be cash flow positive until calendar 2007 with its current business plan. If the Other Investor at a minimum sales price of $66 million. Such right will expire after six months. We do not anticipate providing any further funding to Inquam operating companies cannot raise debt financing as expected or new investors cannot be found, Inquam’s growth potential andto the value of our investment in Inquam may be negatively affected.

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Portugal companies.

Fiscal 20032005 Compared to Fiscal 2002

2004

Revenues.Total revenues for fiscal 20032005 were $3,971 million,$5.67 billion, compared to $3,040 million$4.88 billion for fiscal 2002.2004. Revenues from Samsung, LG Electronics, Motorola,Samsung and Kyocera,Motorola, customers of our QCT, QTL and other nonreportableQWI segments, comprised an aggregate of 17%, 13%15%, 13% and 9%11% of total consolidated revenues, respectively, in fiscal 2003 as2005, compared to 15%, 11%, 7%15% and 14%10% of total consolidated revenues, respectively, in fiscal 2002. The percentages for Kyocera included 1% and 3% in fiscal 2003 and 2002, respectively, related to services provided to Kyocera by employees from our terrestrial-based CDMA wireless consumer phone business which was sold to Kyocera in February 2000. This arrangement expired in February 2003.

2004.

     Revenues from sales of equipment and services for fiscal 20032005 were $2,986 million,$3.74 billion, compared to $2,205 million$3.51 billion for fiscal 2002. Revenues from sales of equipment and services for fiscal 2003 included $123 million related to the consolidation of Vésper Holding, compared to $125 million in fiscal 2002.2004. Revenues from sales of integrated circuits increased $828$165 million, resulting primarily due tofrom an increase inof $396 million related to higher unit shipments of Mobile Station Modem (MSM)MSM and accompanying radio frequency (RF)RF integrated circuits.

circuits, partially offset by a decrease of $241 million related to the 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 $25 million and revenues from the sale of satellite portable phones that operate on the Globalstar low-Earth-orbit satellite communications system increased $19 million.

     Revenues from licensing and royalty fees for fiscal 20032005 were $985 million,$1.93 billion, compared to $835 million$1.37 billion for fiscal 2002.2004. During fiscal 2005, the QTL segment recorded royalty revenues solely based on royalties reported by licensees during the year, as compared to the method used during the first three quarters of fiscal 2004 of recording royalty revenues from certain licensees based on estimates of royalty revenues earned by those licensees during the quarter. The increase in royalty revenue year to year resulted from higher QTL segment royalties, resulting primarily from a $350 million increase in royalties reported to us by our external licensees and the effect of changing the timing of recognizing royalty revenues in the fourth quarter of fiscal 2004. Royalty revenues recorded in fiscal 2004 excluded $151 million of royalties that were reported by external licensees in the first quarter of fiscal 2004, but estimated and recorded as revenue in the fourth quarter of fiscal 2003. Royalties reported to us by external licensees in fiscal 2005 were $1.64 billion, as compared to $1.29 billion in fiscal 2004. The increase in royalties reported to us by external licensees was primarily due to an increase in phone sales of CDMA products by our licensees.licensees, resulting from higher worldwide demand for CDMA products at higher average selling prices due primarily to the growth in sales of high-end WCDMA products and shifts in the geographic distribution of sales of CDMA products.

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Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 20032005 was $1,430 million,$1.65 billion, compared to $1,137 million$1.48 billion for fiscal 2002. The increase primarily resulted from an increase in revenues from sales of equipment and services.2004. Cost of equipment and services revenues as a percentage of equipment and services revenues was 48%44% for fiscal 2003,2005, compared to 52%42% for fiscal 2002.2004. The margin percentage improvementdecline in fiscal 20032005 compared to fiscal 20022004 was primarily due to the increasea 1.3% decrease in QCT revenues as a percentage ofmargin percentage. Increases in product support costs and the reserves for excess and obsolete inventory contributed 1.1% and 0.5%, respectively, to the total equipment and services revenues, resultingdecrease in increased QCT margin relative to the total. Cost of equipment and services revenues for fiscal 2003 included $162 million related to the consolidation of Vésper Holding, compared to $183 million in fiscal 2002.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 fiscal 2003,2005, research and development expenses were $523 million$1.01 billion or 13%18% of revenues, compared to $452$720 million or 15% of revenues for fiscal 2002.2004. The dollar increaseand percentage increases in research and development expenses primarily resulted from a $275 million increase in costs related to integrated circuit products and other initiatives to support lower cost phones, multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA, GSM/GPRS/EDGE and OFDMA, and the development of our FLO technology, MediaFLO MDS and iMoD display products using MEMS technology. We expect that research and development costs will increase in fiscal 2006 as we continue our active support of CDMA-based technologies, products and network operations and other product initiatives.
Selling, General and Administrative Expenses.For fiscal 2005, selling, general and administrative expenses were $631 million or 11% of revenues, compared to $547 million or 11% of revenues for fiscal 2004. The dollar increase was primarily due to a $38 million increase in professional fees, primarily patent administration and outside consultants, a $33 million increase in employee-related expenses, and a $13 million decrease in other income.
Net Investment Income.Net investment income was $423 million for fiscal 2005, compared to $184 million for fiscal 2004. The change was primarily comprised as follows (in millions):
             
  Year Ended    
  September 25,  September 26,    
  2005  2004  Change 
Interest and dividend income:            
QSI $4  $14  $(10)
Corporate and other segments  252   161   91 
Interest expense  (3)  (2)  (1)
Net realized gains on investments:            
QSI  101   56   45 
Corporate  78   32   46 
Other-than-temporary losses on investments  (14)  (12)  (2)
Gains on derivative instruments  33   7   26 
Equity in losses of investees  (28)  (72)  44 
          
  $423  $184  $239 
          
     The increase in interest and dividend 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 earned on interest-bearing securities. Net realized gains on corporate investments increased primarily as a result of an $88increase in the positive performance of 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 NextWaveTelecom Inc. Gains and losses on derivative instruments in both fiscal 2005 and 2004 related 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 $33 million for fiscal 2005 as compared to $59 million for fiscal 2004.
Income Tax Expense.Income tax expense from continuing operations was $666 million for fiscal 2005, compared to $588 million for fiscal 2004. The annual effective tax rate for continuing operations was approximately 24% for fiscal 2005, compared to 25% for fiscal 2004. The annual effective tax rate from continuing operations for fiscal 2005 was lower than the annual effective tax rate from continuing operations for fiscal 2004 primarily due to an increase in foreign earnings taxed at less than the United States federal tax rate.

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     The annual effective tax rate for fiscal 2005 was 11% 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 an increase in tax benefits resulting from our increased ability to use our capital loss carryforwards and 2% related to research and development tax credits, partially offset by state taxes of approximately 4%.
     As of September 25, 2005, we had a valuation allowance of approximately $62 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.
Fiscal 2004 Compared to Fiscal 2003
Revenues.Total revenues for fiscal 2004 were $4.88 billion, compared to $3.85 billion for fiscal 2003. Revenues from Samsung, LG Electronics and Motorola, customers of our QCT, QTL and QWI segments, comprised an aggregate of 15%, 15% and 10% of total consolidated revenues, respectively, in fiscal 2004, compared to 17%, 13% and 13% of total consolidated revenues, respectively, in fiscal 2003.
     Revenues from sales of equipment and services for fiscal 2004 were $3.51 billion, compared to $2.86 billion for fiscal 2003. Revenues from sales of integrated circuits increased $652 million, resulting primarily from an increase of $994 million related to higher unit shipments of MSM and accompanying RF integrated circuits, partially offset by a decrease of $331 million related to the effects of reductions in average sales prices and changes in product mix.
     Revenues from licensing and royalty fees for fiscal 2004 were $1.37 billion, compared to $985 million for fiscal 2003. The increase resulted primarily from higher QTL segment royalties, resulting primarily from an increase in phone and infrastructure equipment sales by our licensees at higher average selling prices, partially offset by the effect of the change in timing of recognizing royalties to an “as reported” method during the fourth quarter of fiscal 2004. Royalty revenues recorded in fiscal 2004 excluded $151 million of royalties that were reported by licensees in the first quarter of fiscal 2004, but estimated and recorded as revenue in the fourth quarter of fiscal 2003. Royalties reported to us by licensees in fiscal 2004 were $1.29 billion as compared to $837 million in fiscal 2003.
Cost of Equipment and Services.Cost of equipment and services revenues for fiscal 2004 was $1.48 billion, compared to $1.27 billion for fiscal 2003. Cost of equipment and services revenues as a percentage of equipment and services revenues was 42% for fiscal 2004, compared to 44% for fiscal 2003. The margin percentage improvement in fiscal 2004 compared to fiscal 2003 was primarily due to the increase in QCT revenues as a percentage of total equipment and services revenues, resulting in increased QCT margin relative to the total.
Research and Development Expenses.For fiscal 2004, research and development expenses were $720 million or 15% of revenues, compared to $523 million or 14% of revenues for fiscal 2003. The dollar and percentage increases in research and development expenses primarily resulted from a $187 million increase in costs primarily related to increased engineering resources for integrated circuit productproducts and other initiatives to support multimedia applications, high-speed wireless Internet access and multimode, multiband, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO/1xEV-DV,1xEV-DO, WCDMA, HSDPA and GSM/GPRS, WLAN, WCDMAGPRS/EDGE, and radioOne technologies, partially offset by an $11 million reduction in researchthe development of our FLO technology and development efforts supporting the QDM division of the QWI segmentMediaFLO MDS.
Selling, General and a $3 million reduction of support efforts related to the Globalstar business.

Administrative Expenses.For fiscal 2003,2004, selling, general and administrative expenses were $535$547 million or 11% of revenues, compared to $483 million or 13% of revenues compared to $509 million or 17% of revenues for fiscal 2002.2003. The dollar increase was primarily due to a $27$61 million increase in employee-related expenses, a $12 million increase in depreciation and amortization expense, a $6$21 million increase in professional fees, primarily patent administration and outside servicesconsultants, and a $6$12 million increase related to international marketinga charitable grant to an educational institution for the primary purpose of furthering the study of engineering and support efforts,math, partially offset by a $45 million decrease in Vésper expenses, including the effectseffect of foreign currency fluctuations. Selling, general and administrative expenses for fiscal 2003 included $62 million related to the consolidation of Vésper Holding, compared to $107 million in fiscal 2002.

     Amortization of goodwill and other acquisition-related intangible assets was $9 million for fiscal 2003, compared to $259 million in fiscal 2002. Starting in fiscal 2003, we no longer record goodwill amortization as a result of the adoption of Statement of Financial Accounting Standards No. 142. Amortization charges were primarily related to the acquisition of SnapTrack in March 2000.

     For fiscal 2003, asset impairment and related charges were $194 million, compared to less than $1 million of such charges in fiscal 2002. Asset impairment and related charges during fiscal 2003 were comprised of a $160 million impairment loss on long-term assets related to Vésper and a $34 million impairment loss recorded in fiscal 2003 on our wireless licenses in Australia due to recent developments that affected potential strategic alternatives for using the spectrum. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.

48

     For fiscal 2003, other operating income was $31 million, compared to other operating expenses of $9 million in fiscal 2002. Other operating income during fiscal 2003 resulted from $47 million of other income related to the

49


transfer of a portion of the Federal Communications Commission (FCC) auction discount voucher’s value to two wireless operators, offset by a $16 million charge related to the write down of notes receivable from an early stage CDMA wireless operator and an early stage media company. Other operating expenses during fiscal 2002 resulted from the write down of a note receivable from an early stage CDMA wireless operator.

     Interest expense was $31 million for fiscal 2003, compared to $26 million for fiscal 2002. Interest expense was primarily related to the $226 million and $113 million Vésper-related long-term debt at September 30, 2003 and 2002, respectively.

Net Investment Income (Expense).Net investment income was $6$184 million for fiscal 20032004, compared to net investment expense of $186$8 million for fiscal 2002.2003. The change was primarily comprised as follows (in millions):
              
   Years Ended September 30,    
   
    
   2003 2002 Change
   
 
 
Interest income:            
 Corporate $112  $102  $10 
 QSI  51   33   18 
Net realized gains on investments:            
 Corporate  17      17 
 QSI  56   2   54 
Other-than-temporary losses on marketable securities  (100)  (206)  106 
Other-than-temporary losses on other investments  (38)  (24)  (14)
Change in fair values of derivative investments  (3)  (58)  55 
Minority interest in loss (income) of consolidated subsidiaries  37   52   (15)
Equity in losses of investees  (126)  (87)  (39)
    
   
   
 
  $6  $(186) $192 
    
   
   
 

             
  Year Ended    
  September 26,  September 28,    
  2004  2003  Change 
Interest and dividend income:            
QSI $14  $45  $(31)
Corporate and other segments  161   113   48 
Interest expense  (2)  (2)   
Net realized gains on investments:            
QSI  56   63   (7)
Corporate  32   17   15 
Other-than-temporary losses on investments  (12)  (128)  116 
Gains (losses) on derivative instruments  7   (3)  10 
Equity in losses of investees  (72)  (113)  41 
          
  $184  $(8) $192 
          
     The increase in interest and dividend income on corporate cash and marketable securities held by corporate and other segments was a result of higher average cash and marketable securities balances, partially offset by the impact of lower interest rates earned on these balances.interest-bearing securities, and $6 million in interest income recorded as a result of a refund from the United States Internal Revenue Service. The increasedecrease in QSI interest income was primarily the result of $23 million of deferred interest income recorded as a result of athe prepayment on the Pegaso debt facilitiesfacility in the first quarter of fiscal 2003.2004. The other-than-temporary losses on marketable securitiesinvestments during fiscal 2003 primarily related to an $81 million impairment of our investment in KTFa wireless operator in South Korea and a $16 million impairment of our investment in a provider of semiconductor packaging, test and distribution services. The increase in other-than-temporary losses on other investments is primarily related to an $11 million impairment of our investment in Inquam and a $9 million impairment of our investment in a development stage CDMA wireless operator. The change in fair values of derivative investments during fiscal 2002 primarily resulted from movements in the price of Leap Wireless stock, which affected the fair values of our warrants to acquire Leap Wireless stock. Equity in losses of investees decreased primarily increased due to a $43 million increase in our equitydecrease in losses incurred by Inquam.

Inquam, of which our share was $59 million for fiscal 2004 as compared to $99 million for fiscal 2003.

Income Tax Expense.Income tax expense from continuing operations was $458$588 million for fiscal 2003,2004, compared to $101$536 million for fiscal 2002. The annual effective tax rate was approximately 36% for fiscal 2003, compared to a rate of 22% for fiscal 2002.2003. The annual effective tax rate for continuing operations was approximately 25% for fiscal 20032004, compared to 34% for fiscal 2003. The annual effective tax rate for continuing operations for fiscal 2004 was lower than the combined federal and state statutory2003 effective tax rate of approximately 39%for continuing operations primarily due to the U.S. tax write-off of investmentsan increase in certain foreign subsidiaries that became worthless during the year and foreign earnings that were taxed at less than the United States federal rate.tax rate, an increase in tax benefits recorded arising from our increased ability to use capital loss carryforwards and the reduction of QTL earnings, which are taxed at a rate that is lower than our effective tax rate, as a percentage of total earnings due to the change in the timing of recognizing QTL royalties. Foreign earnings taxed at less than the United States federal rate were higher in fiscal 2004 primarily due to the adjustment of an intercompany royalty agreement and an increase in foreign earnings. The reductions wereannual effective tax rate for continuing operations for fiscal 2004 was 10% lower than the United States federal statutory rate due primarily to a benefit of approximately 14% related to foreign earnings taxed at less than the United States federal rate, research and development tax credits and our increased ability to use capital loss carryforwards, partially offset by foreign and capital losses for which we are not recording a tax benefit. The fiscal 2002 effective tax rate was lower than the fiscal 2003 effective tax rate principally due to the reductionstate taxes of valuation allowances in fiscal 2002 that were previously charged to tax expense, partially offset by the amortization of non-deductible goodwill in fiscal 2002.

4%.

Our Segment Results for Fiscal 20032005 Compared to Fiscal 2002

QUALCOMM CDMA Technologies2004

     The following should be read in conjunction with the financial results of fiscal 2005 and 2004 for each reporting segment. See “Notes to Consolidated Financial Statements — Note 10 — Segment (QCT)

Information.”

QCT segmentSegment.QCT revenues for fiscal 20032005 were $2,424 million,$3.29 billion, compared to $1,591$3.11 billion for fiscal 2004. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits, were $3.20 billion for fiscal 2005, compared to $3.04 billion for fiscal 2004. The increase in integrated circuits revenue was comprised of $396 million related to higher unit shipments, partially offset by a decrease of $241 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 151 million MSM integrated circuits were sold during fiscal 2005, compared to approximately 137 million for fiscal 2002. Earnings2004.

49


     QCT’s earnings before taxes for fiscal 20032005 were $797$852 million, compared to $441 million$1.05 billion for fiscal 2002.2004. QCT’s operating income as a percentage of its revenues (operating margin

50


percentage) was 33%26% in fiscal 2003,2005, compared to 28%34% in fiscal 2002. Revenues2004. The decline in operating margin percentage in fiscal 2005 as compared to fiscal 2004 was primarily the result of a 45% increase in research and development expenses for fiscal 2005 as compared to 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 and technologies, including CDMA2000 1X/1xEV-DO, WCDMA, HSDPA and GSM/GPRS/EDGE.

QTL Segment.QTL revenues for fiscal 2005 were $1.84 billion, compared to $1.33 billion for fiscal 2004. QTL’s earnings before taxes for fiscal 2005 were $1.66 billion, compared to $1.20 billion for fiscal 2004. QTL’s operating margin percentage was 90% during both fiscal 2005 and 2004. The increase in both revenues and earnings before taxes increasedprimarily resulted from a $350 million increase in royalties reported to us by our external licensees and the effect of changing the timing of recognizing royalty revenues in the fourth quarter of fiscal 2004. Royalty revenues recorded in fiscal 2004 excluded $151 million of royalties that were reported by external licensees in the first quarter of fiscal 2004, but estimated and recorded as revenue in the fourth quarter of fiscal 2003. Royalties reported to us by external licensees in fiscal 2005 were $1.64 billion, as compared to $1.29 billion in fiscal 2004. The increase in royalties reported to us by external licensees was primarily due to an increase in unit shipmentssales 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 license fees were $69 million in fiscal 2005, as compared to $59 million in fiscal 2004. During fiscal 2005, we recognized $4 million in revenue related to equity received as license fees, compared to $5 million in fiscal 2004. 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. In the fourth quarter of fiscal 2004, we determined that, due to escalating and changing business trends, we no longer had 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 fiscal 2005.
QWI Segment.QWI revenues for fiscal 2005 were $644 million, compared to $571 million for fiscal 2004. Revenues increased primarily due to a $37 million increase in QIS revenue and a $27 million increase in QWBS revenue. The increase in QIS revenue was primarily attributable to a $41 million increase in fees related to our expanded BREW customer base and products. The increase in QWBS revenue was primarily attributable to a $16 million increase in equipment revenue, net of a $24 million decrease in amortization of deferred revenues related to historical equipment sales, and a $10 million increase in related messaging services revenue. QWBS shipped approximately 46,800 satellite-based systems and 62,500 terrestrial-based systems during fiscal 2005, compared to approximately 43,400 satellite-based systems and 10,000 terrestrial-based systems in fiscal 2004.
     QWI’s earnings before taxes for fiscal 2005 were $57 million, compared to $19 million for fiscal 2004. QWI’s operating margin percentage was 9% in fiscal 2005, compared to 3% in fiscal 2004. The increases in QWI earnings before taxes and operating percentage were primarily due to a $39 million increase in QIS gross margin largely resulting from the increase in fees related to our expanded BREW customer base and products.
     During fiscal 2005, QWBS completed the process of moving high volume, standard product manufacturing to Mexico to reduce manufacturing costs. The low volume, prototype and new product manufacturing activities remains in San Diego. We continue to evaluate other low cost manufacturing opportunities.
QSI Segment.QSI’s earnings before taxes from continuing operations for fiscal 2005 were $10 million, compared to losses before taxes from continuing operations of $31 million for fiscal 2004. During fiscal 2005, QSI recorded $101 million in realized gains on marketable securities and other investments, compared to $56 million in fiscal 2004. Equity in losses of investees decreased by $43 million primarily due to a decrease in losses incurred by

50


Inquam during fiscal 2005 as compared to fiscal 2004, of which our share was $33 million for fiscal 2005 as compared to $59 million for fiscal 2004. These improvements in QSI’s earnings before taxes from continuing operations were partially offset by a $42 million increase in MediaFLO USA operating expenses.
Our Segment Results for Fiscal 2004 Compared to Fiscal 2003
     The following should be read in conjunction with the financial results of fiscal 2004 and 2003 for each reporting segment. See “Notes to Consolidated Financial Statements — Note 10 — Segment Information.”
QCT Segment.QCT revenues for fiscal 2004 were $3.11 billion, compared to $2.43 billion for fiscal 2003. Equipment and services revenues, primarily from MSM and accompanying RF integrated circuits.circuits, were $3.04 billion for fiscal 2004, compared to $2.39 billion for fiscal 2003. The increase in integrated circuits revenue was comprised of $994 million related to higher unit shipments, partially offset by a decrease of $331 million related to the effects of reductions in average sales prices and changes in product mix. Approximately 99137 million MSM integrated circuits were sold during fiscal 2003,2004, compared to approximately 6599 million for fiscal 2002.2003.
     QCT’s earnings before taxes for fiscal 2004 were $1.05 billion, compared to $805 million for fiscal 2003. QCT’s operating income as a percentage of its revenues (operating margin percentage) was 34% in fiscal 2004, compared to 33% in fiscal 2003. The operating margin percentage in fiscal 2004 as compared to fiscal 2003 increased slightly primarily as a result of the increase in gross margin percentage, partially offset by a 40% increase in research and development and selling, general and administrative expenses. Research and development and selling, general and administrative expenses were $62$153 million higher and $19$55 million higher, respectively, for fiscal 20032004 as compared to fiscal 20022003 primarily associated with increased investment in new integrated circuit productproducts and technology research, development and marketing initiatives to support multimedia applications, high-speed wireless Internet access and multiband, multimode, multinetwork products and technologies, including CDMA2000 1X/1xEV-DO/1xEV-DV,1xEV-DO, WCDMA, HSDPA and GSM/GPRS, WLAN, WCDMA and radioOne technologies. The increase in operating margin percentage in fiscal 2003 as compared to fiscal 2002 was primarily related to the 52% increase in revenue as compared to the 18% increase in research and development and selling, general and administrative expenses. QCT inventories were $75 million at September 30, 2003, representing a 48% increase from September 30, 2002, primarily as a result of anticipated future demand for 1X products.

QUALCOMM Technology Licensing Segment (QTL)

GPRS/EDGE.

QTL segmentSegment.QTL revenues for fiscal 20032004 were $1,000 million,$1.33 billion, compared to $847 million$1.00 billion for fiscal 2002.2003. Royalty revenues from external licensees were $1.14 billion in fiscal 2004, compared to $838 million in fiscal 2003,2003. QTL’s earnings before taxes for fiscal 2004 were $1.20 billion, compared to $725$897 million for fiscal 2003. QTL’s operating margin percentage was 90% in fiscal 2002. Revenues from license fees were $59 million2004, compared to 89% in fiscal 2003, compared2003. The increase in both revenues and earnings before taxes primarily resulted from a $455 million increase in royalties reported to $55 millionus by our external licensees, partially offset by the change in fiscal 2002. Other revenues were comprised of intersegmentour ability to estimate royalties. Royalty revenues include an estimaterecorded in fiscal 2004 excluded $151 million of royalties from certain licensees that have been earned, but will not bewere reported by thoseexternal licensees to us until after the end of the fiscal year. Once royalty reports are received from those licensees, the variance between such reports and the estimate is recorded in royalty revenue in the period the reports are received, usually the following quarter. Royalties for fiscal 2003 included $151 million in estimated royalties for the fourthfirst quarter of fiscal 20032004, but estimated and $17 million in royalties earned, but not estimated,recorded as revenue in the fourth quarter of fiscal 2002. By comparison, royalties for2003. Royalties reported to us by external licensees in fiscal 2002 included $1502004 were $1.29 billion, as compared to $837 million in estimated royalties for the fourth quarter of fiscal 2002 and $24 million in royalties earned, but not estimated, in the fourth quarter of fiscal 2001. Earnings before taxes for fiscal 2003 were $897 million, compared to $756 million for fiscal 2002. QTL’s operating margin percentage was 89% in both fiscal 2003 and 2002.2003. The increase in revenues and earnings before taxesroyalties reported to us by external licensees was primarily due to an increase in sales of CDMA products by licensees, resulting from higher demand for CDMA products across all major regions of CDMA deployment.deployment at higher average selling prices. Revenues from license fees were $59 million in both fiscal 2004 and 2003. During each of fiscal 2004 and 2003, we recognized $5 million in revenue related to equity received as considerationlicense 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 license fees, comparedsales 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. In the fourth quarter of fiscal 2004, we determined that, due to $6 millionescalating and changing business trends, we no longer had 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 2002.

QUALCOMM Wireless & Internet Segment (QWI)

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.

QWI segmentSegment.QWI revenues for fiscal 20032004 were $485$571 million, compared to $439$484 million for fiscal 2002. Earnings before taxes for fiscal 2003 were $27 million, compared to losses before taxes of $9 million for fiscal 2002. QWI’s operating margin was 6% in fiscal 2003, compared to negative 2% in fiscal 2002.2003. Revenues increased primarily due to a $19$58 million increase in QWBS revenue an $11and a $37 million increase in revenue related to the sale of test equipment used primarily in testing WCDMA networks, a $10 million increase in QDM revenue, primarily as a result of license revenue related to the sale of the TDC joint venture, and a $7 million increase in software and services revenue related to our QChat and BREW products.QIS revenue. The increase in QWBS revenue was primarily attributable to $23a $14 million increase in messaging revenue amortizedas a result of a larger installed base and a $44 million increase in the fourth quarterequipment revenue, net of fiscal 2003an $19 million decrease in amortization of deferred revenues related to historical equipment salessales. QWBS shipped approximately 43,400

51


satellite-based systems and 10,000 terrestrial-based systems during fiscal 2004, compared to approximately 32,200 satellite-based systems and 5,300 terrestrial-based systems in prior periods, while equipment sales during the fourth quarter were recognized as revenue upon shipment. (See “Notes to Consolidated Financial Statements, Note 1 – The Company and its Significant Accounting Policies.”)fiscal 2003. The increase in QIS revenue is primarily attributable to a $53 million increase in fees related to our expanded BREW customer base and products, partially offset by a $19 million decrease in QChat revenue resulting from the wind down of development efforts under the licensing agreement with Nextel.
     QWI’s earnings before taxes and improvement infor fiscal 2004 were $19 million, compared to $15 million for fiscal 2003. QWI’s operating margin werepercentage was 3% in both fiscal 2004 and 2003. The increase in QWI’s earnings before taxes was primarily due to a $25$31 million increase in QIS gross margin largely resulting from the increase in fees related to our expanded BREW customer base and products, offset by a $29 million increase in QWI research and development and selling, general and administrative expenses. QWI’s operating margin percentage remained flat in fiscal 2004 as compared to fiscal 2003 primarily due to a decline in QWBS gross margin andpercentage, offset by an $11 million decreaseimprovement in QDM research and development spending.QIS gross margin percentage. The increasedecline in QWBS gross margin percentage in fiscal 2004 as compared to fiscal 2003 was primarily attributable to $11 milliona decline in the gross margin amortized in the fourth quarter of fiscal 2003 related topercentage on equipment sales, in prior periods, while equipment sales duringwhich are lower than the fourth quarter were recognized upon shipment, a $12 million increase resulting frommargins on messaging services, combined with an increase in higherequipment sales as a percentage of total QWBS revenue. The improvement in QIS gross margin messaging servicespercentage was primarily attributable to the increase in fees related to our expanded BREW customer base and the effect of a $6 million release of warranty reserves resultingproducts.
QSI Segment.QSI’s losses before taxes from the substantial completion of a QWBS warranty program. We shipped approximately 38,000 OmniTRACS and other related communications systems during fiscal 2003, compared to approximately 46,000 in fiscal 2002.

QUALCOMM Strategic Initiatives Segment (QSI)

     QSI segment revenuescontinuing operations for fiscal 20032004 were $124$31 million, compared to $126 million in fiscal 2002. QSI segment revenues were primarily related to the consolidation of Vésper Holding. QSI segment losses before taxes for fiscal 2003 were $448 million, compared to $507$168 million for fiscal 2002. During fiscal 2003, we recorded a $238 million loss, net of minority interest, due to the consolidation of Vésper Holding and $24 million of equity2003. Equity in losses of VeloCom, as compared with a $130investees decreased by $42 million loss, net of minority interest,primarily due to the consolidation of Vésper Holding and $30 million of equity in losses of VeloCom and the Vésper Operating Companies (pre-acquisition) in fiscal

51


2002. We recorded a $43 million increase in our equitydecrease in losses incurred by Inquam and a $14during fiscal 2004 as compared to fiscal 2003, of which our share was $59 million increase in other-than-temporary losses on other investments, partially offset by a $97for fiscal 2004 as compared to $99 million decreasefor fiscal 2003. During fiscal 2004, we recorded $12 million in other-than-temporary losses on marketable securities and a $56 million decrease in the change in fair values of derivativeother investments during fiscal 2003 as compared to $127 million for fiscal 2002.2003. During fiscal 2003, we also recorded other income of $47 million related to the transfer of portions of the FCC auction discount voucher value to two wireless operators, partially offset by a $34 million impairment loss on our wireless licenses in Australia due to recent developments that affected strategic alternatives for using the spectrum.

     For additional financial information relating to our reportable business segments, see Note 10 of the Consolidated Financial Statements.

Fiscal 2002 Compared to Fiscal 2001

     Total revenues for fiscal 2002 These improvements in QSI’s losses before taxes were $3,040 million, compared to $2,680 million for fiscal 2001. Revenues from Samsung, Kyocera, and LG Electronics, customers of our QCT, QTL and other nonreportable segments, comprised an aggregate of 15%, 14% and 11% of total consolidated revenues, respectively, in fiscal 2002. In fiscal 2001, revenues from Samsung, Kyocera and LG Electronics, comprised an aggregate of 14%, 12% and 10% of total consolidated revenues, respectively. The percentages for Kyocera included 3% and 4% in fiscal 2002 and 2001, respectively, related to services provided to Kyocera by employees from our terrestrial-based CDMA wireless consumer phone business which was sold to Kyocera in February 2000.

     Revenues from sales of equipment and services for fiscal 2002 were $2,205 million, compared to $1,908 million for fiscal 2001. Revenues from sales of equipment and services for fiscal 2002 included $125 million related to the consolidation of Vésper Holding effective in November 2001 and $8 million related to the Globalstar business. Revenues from sales of equipment and services for fiscal 2001 included $54 million related to Globalstar. Revenues from sales of integrated circuits increased by $218 million, primarily due to an increase in unit shipments of MSM integrated circuits, and the effect of the change in product mix toward the higher end devices utilizing our 3G CDMA2000 1X integrated circuits products. Software development services revenues related to the QChat licensing agreement increased $34 million.

     Revenues from licensing and royalty fees for fiscal 2002 were $835 million, compared to $772 million for fiscal 2001. QTL segment royalty revenues from licensees increased $64 million.

     Cost of equipment and services revenues for fiscal 2002 was $1,137 million, compared to $1,035 million for fiscal 2001. Cost of revenues for fiscal 2002 included $183 million related to the consolidation of Vésper Holding and $11 million related to our on-going obligation to Globalstar. Cost of revenues for fiscal 2001 included $129 million related to Globalstar. Cost of revenues as a percentage of revenues was 52% for fiscal 2002, compared to 54% for fiscal 2001. The margin improvement in fiscal 2002 was primarily due to the change in product mix toward the higher end devices utilizing our CDMA2000 1X integrated circuits products and the increase in revenues from royalties in the QTL segment.

     For fiscal 2002, research and development expenses were $452 million or 15% of revenues, compared to $415 million or 15% of revenues for fiscal 2001. The dollar increase in research and development expenses was primarily due to $41 million in increased integrated circuit product initiatives to support high-speed wireless Internet access and multimode, multiband, multinetwork products including cdmaOne, CDMA2000 1X/1xEV-DO, GSM/GPRS, WCDMA and position location technologies and $14 million in increased QWBS research and development initiatives, partially offset by a $29$31 million reduction of development efforts related to the Globalstar business.

     For fiscal 2002, selling, general and administrative expenses were $509 million or 17% of revenues, compared to $367 million or 14% of revenues for fiscal 2001. Selling, general and administrative expenses for fiscal 2002 included $107 million related to the consolidation of Vésper Holding. The remaining dollar increase was primarily due to a $33 million increasedecrease in marketing and support efforts related to products and services of our QIS division, including the BREW product, $23 million associated with the expansion of our integrated circuit customer base and international business development activities, particularly in China, and $13 millioninterest income resulting from the consolidation of Wireless Knowledge, Inc. (Wireless Knowledge), partially offset by a $22 million reduction in support efforts related to the Globalstar business and a $14 million reduction in bad debt expense.

     Amortization of goodwill and other acquisition-related intangible assets was $259 million for fiscal 2002, compared to $255 million in fiscal 2001. Amortization charges were primarily related to the acquisition of SnapTrack in March 2000.

52


     For fiscal 2002, asset impairment and related charges were less than $1 million, compared to $518 million of such charges in fiscal 2001. Asset impairment and related charges during fiscal 2001 were comprised primarily of $519 million in charges resulting from management’s determination that certain assets related to the Globalstar business were impaired.

     For fiscal 2002, other operating expenses were $9 million, compared to $51 million in fiscal 2001. Other operating expenses for fiscal 2002 resulted from the write down of a note receivable from a development stage CDMA carrier. Other operating expenses for fiscal 2001 were comprised of a $62 million arbitration decision against us, offset by $11 million in other income related to the irrevocable transfer of a portion of an FCC auction discount voucher to a third party.

     Interest expense was $26 million for fiscal 2002, compared to $10 million for fiscal 2001. Interest expense for fiscal 2002 was primarily related to the long-term debt of Vésper Holding. Interest expense for fiscal 2001 was primarily related to interest charges resulting from the arbitration decision made against us.

     Net investment expense was $186 million for fiscal 2002 compared to $317 million for fiscal 2001. The change was primarily comprised as follows (in millions):

              
   Years Ended September 30,    
   
    
   2002 2001 Change
   
 
 
Interest income:            
 Corporate $102  $135  $(33)
 QSI  33   108   (75)
Net realized gains on investments:            
 Corporate     11   (11)
 QSI  2   59   (57)
Other-than-temporary losses on marketable securities  (206)  (147)  (59)
Other-than-temporary losses on other investments  (24)  (51)  27 
Change in fair values of derivative investments  (58)  (243)  185 
Minority interest in loss (income) of consolidated subsidiaries  52   (4)  56 
Equity in losses of investees  (87)  (185)  98 
    
   
   
 
  $(186) $(317) $131 
    
   
   
 

     The decline in interest income on corporate cash and marketable debt securities was a result of lower interest rates. The decline in QSI interest income was a resultprepayment of the cessation of interest income recognition on Pegaso debt facilities startingfacility in the fourth fiscalfirst quarter of fiscal 20012004 and on Leap Wireless bonds starting in the third quarter of fiscal 2002. The other-than-temporary losses on marketable securities during fiscal 2002 primarily related to $162 million and $18$28 million in losses on our investments in Leap Wireless bonds and common stock, respectively. We determined that the declines in fair values were other than temporary, as the market values of the bond and common stock had significantly declined during fiscal 2002 as a result of unfavorable developments in Leap Wireless’ business. The other-than-temporary losses on marketable securities during fiscal 2001 primarily related to a $134 million loss on our investment in NetZero, Inc., which subsequently completed a merger with Juno Online Services, Inc. and became United Online, Inc. The change in fair values of derivative instruments primarily resulted from $59 million in losses resulting from declines in the price of Leap Wireless common stock, which reduced the fair values of our warrants to acquire Leap Wireless common stock. The warrants had insignificant value at September 30, 2002. Equity in losses of investees decreased as a result of the consolidation of Vésper Holding effective November 13, 2001, as these losses are now included in operations.

     For fiscal 2002 there were no other non-operating charges, compared to $167 million in fiscal 2001. Other non-operating charges in fiscal 2001 were primarily comprised of a $120 million write-down of the note receivable from

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VeloCom to its fair value and $58 million in write-downs of recorded values of a note receivable from Globalstar and warrants to acquire partnership interests in Globalstar to their estimated fair values.

     Income tax expense was $101 million for fiscal 2002, compared to $105 million for fiscal 2001. The annual effective tax rate was 22% for fiscal 2002, compared to a negative 23% rate for fiscal 2001. The annual effective tax rate for fiscal 2002 was lower than the statutory rate due to the reduction of deferred tax assets and the related valuation allowance that was previously charged to tax expense, partially offset by foreign losses for which we are not recording a tax benefit. The fiscal 2001 effective tax rate was the result of pre-tax losses for which no tax benefit was recorded and foreign tax expense. The annual effective tax rate on profits for fiscal 2002 cannot be meaningfully compared to the effective tax rate on losses for the prior fiscal year.

     We recorded an $18 million loss, net of taxes, in fiscal 2001 as the net cumulative effect of changes in accounting principles at September 30, 2000. The cumulative effect of the adoption of SAB 101 was a $147 million loss, net of taxes, offset by a $129 million gain, net of taxes, resulting from the cumulative effect of the adoption of FAS 133. The gain resulting from the adoption of FAS 133 related primarily to the unrealized gain on a warrant to purchase 4,500,000 shares of Leap Wireless common stock issued to us in connection with our spin-off of Leap Wireless in September 1998.

Our Segment Results for Fiscal 2002 Compared to Fiscal 2001

QUALCOMM CDMA Technologies Segment (QCT)

     QCT segment revenues for fiscal 2002 were $1,591 million, compared to $1,365 million for fiscal 2001. Earnings before taxes for fiscal 2002 were $441 million, compared to $306 million for fiscal 2001. Revenues and earnings before taxes increased primarily due to an increase in unit shipments of MSM integrated circuits and the effect of the change in product mix toward the higher end devices utilizing our CDMA2000 1X products. Approximately 65 million MSM integrated circuits were sold during fiscal 2002, compared to approximately 58 million for fiscal 2001. Approximately 10 million CSM infrastructure integrated circuits equivalent voice channels were sold during fiscal 2002, compared to approximately 9 million for fiscal 2001. Both research and development and selling and marketing expenses were $22 million higher for fiscal 2002 as compared to fiscal 2001 primarily associated with new integrated circuit product and technology initiatives to support high-speed wireless Internet access and multiband, multimode, multinetwork products including cdmaOne, CDMA2000 1X/1xEV-DO, GSM/GPRS, WCDMA and position location technologies. QCT inventories decreased by 27% during fiscal 2002 primarily as a result of strong demand for 1X products across our customer base and improved component availability.

QUALCOMM Technology Licensing Segment (QTL)

     QTL segment revenues for fiscal 2002 were $847 million, compared to $782 million for fiscal 2001. Royalty revenues from licensees were $725 million in fiscal 2002, compared to $661 million in fiscal 2001. Revenues from license fees were $55 million in fiscal 2002, compared to $67 million in fiscal 2001. Other revenues were comprised of intersegment royalties. Earnings before taxes for fiscal 2002 were $756 million, compared to $706 million for fiscal 2001. The increase in revenues and earnings before taxes was primarily due to an increase in sales of CDMA products by licensees resulting from higher demand for CDMA products across all major regions of CDMA deployment. During fiscal 2002, we recognized $6 million in revenue related to equity received as consideration for license fees, compared to $7 million in fiscal 2001.

QUALCOMM Wireless & Internet Segment (QWI)

     QWI segment revenues for fiscal 2002 were $439 million, compared to $426 million for fiscal 2001. Losses before taxes for fiscal 2002 were $9 million, compared to earnings before taxes of $33 million for fiscal 2001. Revenues increased primarily due to an increase in software development and services revenues related to our BREW products and QChat licensing agreement. Earnings before taxes decreased primarily due to a $35 million increase in our development, support and marketing efforts related to products and services of our QIS division, including the BREW product and a $14 million increase in QWBS research and development expenditures. We shipped approximately 46,000 OmniTRACS and other related communications systems during fiscal 2002, compared to approximately 43,000 in fiscal 2001.

QUALCOMM Strategic Initiatives Segment (QSI)

     QSI segment revenues for fiscal 2002 were $126 million, primarily related to the consolidation of Vésper Holding. QSI segment losses before taxes for fiscal 2002 were $507 million, compared to $1,125 million for fiscal 2001. The decrease in losses was primarily due to $568 million in charges incurred in fiscal 2001 related to

54


Globalstar. During fiscal 2002, we recorded a $130 million loss, net of minority interest, due to the consolidation of Vésper Holding and $30 million of equity losses in the Vésper Operating Companies (pre-acquisition) and VeloCom, as compared with $150 million of equity losses for the Vésper Operating Companies in fiscal 2001. During fiscal 2002, we recorded $180 million in other-than-temporary losses on Leap Wireless marketable securities, compared to an $11 million realized gain in fiscal 2001. We also recorded $59 million in losses related to changes in the fair values of Leap Wireless derivative investments in fiscal 2002, compared to $213 million in losses in fiscal 2001. Losses on Leap Wireless derivative investments resulted from declines in the market price of Leap Wireless common stock during those fiscal years. During fiscal 2001, we recorded a $120 million charge to write down a note receivable from VeloCom to its fair value as a result of the reorganization of the Vésper Operating Companies initiated during fiscal 2001.

MediaFLO USA operating expenses.

Liquidity and Capital Resources

     Cash and cash equivalents and marketable securities were $5.4$8.7 billion at September 30, 2003,25, 2005, an increase of $2.2$1.0 billion from September 30, 2002.26, 2004. The increase during fiscal 2003 was primarily the result of $1.8$2.7 billion in cash provided by operating activities $663 million in net collections received on finance receivables, mainly comprised of payments from Pegaso, $191and $386 million in net proceeds from the issuance of common stock under our stock option and employee stock purchase plans, and $37 million in net marketable securities purchases pending cash settlement, partially offset by $231$953 million in repurchases of our common stock under our stock repurchase program, $576 million in capital expenditures, $158$524 million in net purchasesdividends paid and $249 million invested in other entities and acquisitions.
     On March 8, 2005, we authorized the repurchase of up to $2 billion of our common stock under a stock repurchase program with no expiration date. Through November 2, 2005, we repurchased and retired approximately 27,083,000 shares of our common stock for $953 million. In connection with this stock repurchase program, we have two put options outstanding, with expiration dates of December 7, 2005 and March 21, 2006, that may require us to repurchase 11,500,000 shares for $411 million (net of the option premiums received). At November 2, 2005, $636 million remained authorized for repurchases under our stock repurchase program. We announced dividends totaling $524 million, $307 million and $135 million, or $0.320, $0.190 and $0.085 per share, during fiscal 2005, 2004 and 2003, respectively. On October 10, 2005, we announced a cash dividend of $0.09 per share on our common stock, payable on January 4, 2006 to stockholders of record as of December 7, 2005. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations that cash dividends are in dividend payments.

the best interest of our stockholders.

     Accounts receivable decreased by 10%6% during fiscal 2003. The decrease in accounts receivable was primarily due to the timing of cash receipts and the expiration of our services arrangement with Kyocera in February 2003.2005. Days sales outstanding, on a consolidated basis, were 4630 days at September 30, 200325, 2005, compared to 5443 days at September 30, 2002.26, 2004. The change in days sales outstanding is consistent with the increase in revenue and improved cash collections resulting in the decrease in the accounts receivable balance.

     In February 2003, we committed up to $1 billion to repurchase sharesresulting from cash collections.

     We started construction of our common stock over a two year period. During fiscal 2003, we bought 4,915,000 shares at a net aggregate cost of $158 million. At September 30, 2003, $834 million remains to be expended. Repurchased shares are retired upon repurchase. In connection with our stock repurchase program, we sold put options in March 2003 that could have required us to purchase three million shares of our common stock upon exercise. All of these written put options expired unexercised. We recorded $7 million in premiums received for the put options as additions to paid-in capital. We declared dividends totaling approximately $135 million or $0.17 per share during fiscal 2003.

     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 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 carriers, other commitments, the payment of dividends and possible additional stock buy backs. In fiscal 2003, we began construction on two new facilities in San Diego, California in fiscal 2003, totaling approximately one million additional square feet, to meet the requirements projected in our long-term business plan. The remaining cost of these new facilities is expected to approximate $250 million.be approximately $149 million through fiscal 2007. In fiscal 2005, we announced our plans to expand our backup Network Management Center in Las Vegas, Nevada, which uses satellite and terrestrial-based technologies to track freight transportation and shipping nationwide. We expect the remaining cost of this expansion will be approximately $35 million through fiscal 2008. In fiscal 2005, our MediaFLO USA subsidiary, a

52


wireless multimedia operator, began the development of a nationwide mediacast network based on our FLO technology and MediaFLO MDS. As part of this development, MediaFLO USA has executed a number of lease agreements at broadcast tower sites and has begun the installation of equipment and leasehold improvements at some of these sites. The remaining costs for our existing tower sites under lease, including equipment and leasehold improvements as well as the costs of installation, are expected to be approximately $18 million through fiscal 2006.
     On August 11, 2005, we announced our intention to acquire Flarion, a developer of OFDMA technology. Upon completion of the acquisition, which is anticipated in the first half of fiscal 2006, pending regulatory approval and other customary closing conditions, we estimate that we will pay approximately $545 million in consideration, including approximately $235 million in cash. Upon achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of this transaction, we may issue additional aggregate consideration of $205 million, including approximately $173 million payable in cash, to Flarion stockholders.
     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, we may provide financing or other support to facilitate the marketing and sale of CDMA equipment by authorized suppliers. In the event additional needs for cash arise, we may raise additional funds from a combination of sources including potential debt and equity issuance.

     On September 25, 2003, Embratel entered into an agreement

     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 acquire from us for nominal considerationsupport the Vésper Operating Companies, excludinggrowth of our business, financing and other commitments, the towerpayment of dividends and rooftop antennae assets and related property leases (Tower Sites). Concurrent with the closing, Vésper will enter into a multi-year arrangement whereby it pays a monthly fee to us to use the Tower Sites. The sum of these fees, net of certain pass through expenses, is expected to exceed $77 million over the life of the arrangement. The closing of the Embratel sale transaction is contingent upon a number of events being completed prior to or concurrent with closing. We are required to provide $6 million in interim funding to Vésper on, or prior to, closing of the Embratel sale transaction. Assuming the requisite government approvals are received and all conditions to close are satisfied, we anticipate providing approximately $40 million to $45 million in aggregate

55


funding (including the $6 million of interim funding) by the closing date to facilitate the Embratel sale transaction.

     On July 14, 2003, we approved anpossible additional $50 million investment in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investor in Inquam. We are currently negotiating the terms and conditions of an investment agreement. No commitments related to these potential investments were in place at September 30, 2003.

stock repurchases.

Contractual Obligations

/ Off-Balance Sheet Arrangements

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

     At September 30, 2003,25, 2005, our outstanding contractual obligations included (in millions):
                           
    Contractual Obligations
    Payments Due By Period
                        No
        Less than 1-3 3-5 More than Expiration
    Total 1 Year Years Years 5 Years Date
    
 
 
 
 
 
Long-term financing under Ericsson arrangement(1)
 $464  $346  $  $  $  $118 
Purchase obligations  377   327   50          
Operating leases  135   42   57   25   11    
Equity investments(1)
  24   1   19      4    
Inquam bridge loan and guarantee  13   13             
Other commitments  1   1             
   
   
   
   
   
   
 
 Total commitments  1,014   730   126   25   15   118 
   
   
   
   
   
   
 
Long-term debt  179   68   17   34   60    
Capital leases  47   35   5      7    
Other long-term liabilities(2)
  55   3   1   4      47 
   
   
   
   
   
   
 
 Total recorded liabilities  281   106   23   38   67   47 
   
   
   
   
   
   
 
  Total $1,295  $836  $149  $63  $82  $165 
   
   
   
   
   
   
 

                         
      Fiscal  Fiscal  Fiscal  Beyond  No Expiration 
  Total  2006  2007-2008  2009-2010  Fiscal 2010  Date 
Long-term financing under Ericsson arrangement(1)
 $118  $  $  $  $  $118 
Purchase obligations  1,042   750   286   6       
Operating leases  193   67   75   29   22    
Equity investments(1)
  13               13 
Inquam guarantee  27            27    
Other commitments  1   1             
                   
Total commitments  1,394   818   361   35   49   131 
                   
Capital leases(2)
  2            2    
Other long-term liabilities (3)
  40      40          
                   
Total recorded liabilities  42      40      2    
                   
Total $1,436  $818  $401  $35  $51  $131 
                   
(1) The majority of theseThese commitments do not have fixed funding dates, and the expected funding dates cannot be forecast.dates. Amounts are presented based on the expiration of the commitment, but actual funding may occur earlier or not at all as funding is subject to certain conditions. Commitments represent the maximum amounts to be financed or funded under these arrangements; actual financing or funding may be in lesser amounts.
 
(2)(2)Amounts represent future minimum lease payments not including interest payments.
(3) Certain long-term liabilities reflected on our balance sheet, such as unearned revenue, are not presented in this table because they do not require cash settlement in the future.

     The long-term financing commitment under our arrangement with Ericsson included $346 million that expires on November 6, 2003.

     Additional information regarding our financial commitments at September 30, 200325, 2005 is provided in the Notes to our Consolidated Financial Statements. See “Notes to Consolidated Financial Statements, Note 3 – Composition of

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Certain Financial Statement Captions, Finance Receivables, Note 4 Investments in Other Entities and Note 9 Commitments and Contingencies and Note 11 – Acquisitions.Contingencies.

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Future Accounting Requirements

     Financial Accounting Standards Board (FASB) Interpretation

     In December 2004, the FASB revised Statement No. 46 (FIN 46)123 (FAS 123R), “Consolidation“Share-Based Payment,” which requires companies to expense the estimated fair value of Variable Interest Entities,” was issued in January 2003. FIN 46 requires certain variable interest entities toemployee 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 consolidated by the primary beneficiary of the entity if the equity investorseffective for us beginning in the entity do not have the characteristicsfirst quarter of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, we have not invested in any entities we believe are variable interest entities. For those arrangements entered into prior to February 1, 2003, we are requiredfiscal 2006. We tentatively expect to adopt the provisions of FIN 46 atFAS 123R using a modified prospective application. FAS 123R, which provides certain changes to the endmethod 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 first quarter of fiscal 2004,effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At September 25, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with the FASB Staff Position 46-6 which delayed the effective date of FIN 46 for those arrangements.FAS 123, that we expect to record during fiscal 2006 was approximately $394 million before income taxes. We will incur additional expense during fiscal 2006 related to new awards granted during fiscal 2006 that cannot yet be quantified. We are in the process of determining how the effect, if any,guidance regarding valuing share-based compensation as prescribed in FAS 123R will be applied to valuing share-based awards granted after the adoptioneffective date and the impact that the recognition of FIN 46compensation expense related to such awards will have on our financial statements.

Item 7a.7A. Quantitative and Qualitative Disclosure aboutDisclosures About Market Risk

Interest Rate Market Risk.We haveinvest most of our cash in a number of diversified investment and non-investment grade fixed incomeand floating rate securities, consisting of cash equivalents and investments in marketable debt securities. We also have diversified portfolios of non-investment grade securities managed by institutional portfolio managers, which are subject to a higher degree of default risk than our investment grade fixed income portfolios. Changes in the general level of United States interest rates can affect the principal values and yields of fixed income investments. Our fixed income investments have grown significantly in size and are subject to interest rate risk and credit risk. If interest rates in the general economy were to rise rapidly in a short period of time, our fixed income investments could lose value. If the general economy were to weaken significantly, the credit profile of issuers of securities held in our investment portfolios could deteriorate, and our fixed income investments could lose value. We may implement investment strategies of different types with varying duration and risk/return trade-offs that do not perform well. (See Note 2 to the Consolidated Financial Statements – Marketable Securities for information about investments in marketable debt securities.)

     We have finance receivables and notes receivable (included in other assets) from third parties that bear interest at both fixed and variable rates (see Note 3 to the Consolidated Financial Statements – Composition of Certain Financial Statement Captions for information about finance receivables). Interest earned on certain finance receivables and notes is at variable interest rates and is affected by changes in the general level of United States interest rates and/or changes in the LIBOR index. Finance receivables and notes that bear interest at fixed rates could lose value if interest rates increase.

     The following table provides information about our financial instruments that are sensitive to changes in interest rates. For our fixed income investment portfolio,interest bearing securities, the table presents principal cash flows, and related weighted-averageweighted average yield at cost. For our finance receivablescost and notes receivable, the table presents contractual interest rates by expected maturity dates. Additionally, we have assumed that our fixed incomethese securities are similar enough within the specified categories to aggregate thosethese securities for presentation purposes.

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Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rates
(Dollars in millions)
                                       
                            No Single     Fair
    2004 2005 2006 2007 2008 Thereafter Maturity Total Value
    
 
 
 
 
 
 
 
 
Fixed income securities:                                    
 Cash and cash equivalents $284  $  $  $  $  $  $  $284  $284 
 Interest rate  1.1%                                
 Held-to-maturity securities $167  $20  $180  $  $  $  $  $367  $368 
 Interest rate  3.4%  1.8%  2.0%                        
 Available-for-sale securities:                                    
  Investment grade $177  $701  $602  $239  $98  $20  $484  $2,321  $2,321 
  Interest rate  3.0%  2.0%  2.4%  2.9%  3.3%  7.2%  3.2%        
  Non-investment grade $11  $2  $8  $11  $41  $425  $  $498  $498 
  Interest rate  8.7%  7.7%  9.2%  9.6%  8.9%  8.3%            
Finance receivables:                                    
 Fixed rate $7  $1  $  $  $  $2  $  $10  $6 
 Interest rate  8.0%  8.0%              0.0%            
 Variable rate (LIBOR) $  $  $49  $65  $65  $16  $  $195  $192 
 Margin over LIBOR          6.3%  6.5%  9.9%  5.2%            
Notes receivable in other assets:                                    
 Fixed rate $37  $  $  $  $  $46  $  $83  $64 
 Interest rate  7.5%                  0.0%            
 Variable rate (LIBOR) $  $  $  $  $  $56  $  $56  $6 
 Margin over LIBOR                      0.0%            
Vésper-related long-term debt:                                    
 Wireless license
  Fixed rate $  $  $17  $17  $17  $60  $  $111  $111 
  Interest rate          12.0%  12.0%  12.0%  12.0%            
 Bank loans 
  Variable rate (CDI) $68  $  $  $  $  $  $  $68  $65 
  Margin over CDI  1.5%                                
  Default rate  12.0%                                
 Capital leases 
  Fixed rate $33  $  $  $  $  $7  $  $40  $39 
  Interest rate  12.6%                  12.6%            
  Variable rate (LIBOR) $  $  $4  $  $  $  $  $4  $4 
  Margin over LIBOR          6.0%                        
  Variable rate (TR) $2  $1  $  $  $  $  $  $3  $3 
  Margin over TR  12.0%  12.0%                            

     The Vésper-related bank loans and $33 million of the capital lease obligations are callable by the bank creditors as a result of the failure of the Vésper Operating Companies to make interest and certain lease payments. The Vésper Operating Companies were charged a 2% default penalty and are being charged an additional 1% interest rate per month on the amount in default until the default is cured. The bank creditors have provided forbearance through December 15, 2003 with respect to the amounts owed under certain agreements that are in payment default. (See Note 11 to the Consolidated Financial Statements – Acquisitions for information about long-term debt.) The fair values of bank loans and capital lease obligations will change as interest rates change. Interest expense will be affected by changes in the Certificate of Deposit InterBank (CDI) rate.

                                     
                          No Single     Fair
  2006 2007 2008 2009 2010 Thereafter Maturity Total Value
Fixed interest-bearing securities:                                    
Cash and cash equivalents $608  $  $  $  $  $  $  $608  $608 
Interest rate  3.6%                                
Held-to-maturity securities $60  $  $  $  $  $  $  $60  $60 
Interest rate  2.1%                                
Available-for-sale securities:                                    
Investment grade $2,266  $336  $221  $9  $20  $9  $213  $3,074  $3,074 
Interest rate  3.4%  3.7%  4.1%  4.4%  4.1%  6.7%  4.5%        
Non-investment grade $2  $5  $24  $48  $38  $573  $  $690  $690 
Interest rate  6.5%  7.5%  7.3%  7.3%  8.2%  7.9%            
                                     
Floating interest-bearing securities:                                    
Cash and cash equivalents $1,364  $  $  $  $  $  $  $1,364  $1,364 
Interest rate  3.7%                                
Held-to-maturity securities $70  $  $  $  $  $  $  $70  $70 
Interest rate  1.4%                                
Available-for-sale securities:                                    
Investment grade $174  $289  $131  $26  $13  $49  $552  $1,234  $1,234 
Interest rate  3.6%  3.7%  3.6%  3.5%  4.0%  4.3%  4.1%        
Non-investment grade $  $6  $  $3  $2  $17  $  $28  $28 
Interest rate      4.9%      6.4%  7.1%  8.5%            
Equity Price Market Risk.We holdinvest in a number of diversified marketable securities and derivative instrumentsmutual fund shares subject to equity price risk which are accounted for under FAS 115 and FAS 133.risk. The recorded values of marketable equity securities totaled $140increased to $1.16 billion at September 25, 2005 from $765 million at September 30, 2003. As of September 30, 2003, one equity position constituted approximately 59% of the fair value of the marketable securities portfolio.26, 2004. The recorded value of derivative instruments subjectequity mutual fund shares decreased to FAS 133$293 million at September 30, 2003 was $2 million. We generally invest in technology companies and typically do not attempt to reduce or eliminate our market exposure on these securities. These25, 2005 from $296 million at September 26, 2004. Our diversified investments are held for purposes other

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than trading. The portfolio’s concentrations in specific companies and industry segments may vary over time, and changes in the concentrations of these investments may affect the portfolio’s price volatility. During the last three years, many technology stocks experienced significant decreases in value, negatively affecting the fair valuesvolatility of our available-for-sale equity securities and derivative instruments.investments. A 10% decrease in the market price of our marketable equity securities and equity mutual fund shares at September 30, 200325, 2005 would cause a corresponding 10% decrease in the carrying amounts of these securities, or $14$145 million.

     Our strategic investments in other entities consist substantially of investments in private early stage companies accounted for under the equity and cost methods. Accordingly, we believe that our exposure to market risk from these investments is not material. Additionally, we do not anticipate any near-term changes in the nature of our market risk exposures or in management’s objectives and strategies with respect to managing such exposures. The recorded values of these strategic investments totaled $153$121 million at September 30, 2003.

25, 2005, as compared to $162 million at September 26, 2004.

     We hold warrants to acquire equity interests in certain strategic investees that are subject to equity price risk. Substantially all of these warrants are recorded at fair value in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The recorded values of warrants held at September 25, 2005 totaled $1 million, as compared to $4 million at September 26, 2004.
     In connection with our stock repurchase program, we sell put options that may require us to repurchase shares of our common stock at fixed prices. These written put options subject us to equity price risk. At September 25, 2005, two put options were outstanding, which expire on December 7, 2005 and March 21, 2006, that may require us to repurchase 11,500,000 shares of our common stock upon exercise for $411 million (net of the option premiums received). The put option liabilities, with a fair value of $7 million at September 25, 2005, were included in other current liabilities. If the fair value of our common stock at September 25, 2005 decreased by 10%, the put options would expire unexercised resulting in $7 million in investment income. If the fair value of our common stock at September 25, 2005 decreased by 25%, the amount required to physically settle the put options would exceed the fair value of the shares repurchased by approximately $25 million, net of the $23 million in premiums received.
     Additional information regarding our strategic investments is provided in Management’s Discussion and Analysis of Financial Condition and Operating Results in this Annual Report.

55


Foreign Exchange Market Risk.We manage our exposure to foreign exchange market risks, when deemed appropriate, through the use of derivative financial instruments, consisting primarily of foreign currency forward contracts and options. Derivativeoption contracts. Such derivative financial instruments are viewed as hedging or risk management tools and are not used for speculative or trading purposes. At September 30, 2003,25, 2005, we had no foreign currency forward contracts outstanding. At September 25, 2005, the recorded values of our foreign currency option contracts that hedge the foreign currency risk on royalties earned from certain international licensees on their sales of CDMA and WCDMA products were outstanding. (See Note$16 million. If our forecasted royalty revenues were to decline by 20% and foreign exchange rates were to change unfavorably by 20% in each of our hedged foreign currencies, we would incur a loss of approximately $6 million resulting from a decrease in fair value of the portion of our hedges that would be rendered ineffective. See “Note 1 to the Consolidated Financial Statements - The Company and its Significant Accounting PoliciesPolicies” for a description of our foreign currency accounting policies.)

     Financial instruments held by consolidated subsidiaries and equity method investees which are not denominated in the functional currency of those entities are subject to the effects of currency fluctuations and may affect reported earnings. As a global concern, we face exposure to adverse movements in foreign currency exchange rates. We may hedge currency exposures associated with certain assets and liabilities denominated in nonfunctional currencies and certain anticipated nonfunctional currency transactions. As a result, we could experience unanticipated gains or losses on anticipated foreign currency cash flows, as well as economic loss with respect to the recoverability of investments. While we may hedge certain transactions with non-United States customers, declines in currency values in certain regions may, if not reversed, adversely affect future product sales because our products may become more expensive to purchase in the countries of the affected currencies.

     We are exposed to foreign exchange risk related to our consolidation of the Vésper Operating Companies. We report our financial statements in U.S. dollars. The Vésper Operating Companies account for the majority of their transactions in Brazilian real, and their results are translated into U.S. dollars during and at the end of the fiscal quarter. In addition, the Vésper Operating Companies capital lease commitments are denominated in U.S. dollars. As a result, a significant change in the value of the U.S. dollar against the Brazilian real could have a material effect on the Vésper Operating Companies and on us. A significant devaluation of the Brazilian real occurred in the past and may occur again in the future. A 10% weakening of the U.S. dollar relative to the Brazilian real during fiscal 2003 would have resulted in a decrease in net income of approximately $25 million for the year ended September 30, 2003.

     Finance receivables and notes receivable from international carriers and customers that do not use the United States dollar as their functional currencies subject us to credit risk. Because our financing is U.S. dollar denominated, any significant change in the value of the U.S. dollar against the debtors’ functional currencies could result in an increase in the debtor’s cash flow requirements and could thereby affect our ability to collect our receivables. At September 30, 2003, finance and note receivables from international carriers and customers totaled $214 million, net of allowances.

     Our analysis methods used to assess and mitigate risk discussed above should not be considered projections of future risks.

Item 8. Financial Statements and Supplementary Data

     Our consolidated financial statements at September 30, 200325, 2005 and 2002September 26, 2004 and the Report of PricewaterhouseCoopers LLP, Independent Auditors,Registered Public Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1 through F-37.

59


F-34.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
     Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a - 15(e)13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.Annual Report.
Management’s Report on Internal Control Over Financial Reporting
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of September 25, 2005.
     PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial consolidated statements included in this Annual Report on Form 10-K, has also audited management’s assessment of our internal control over financial reporting and the effectiveness of our internal control over financial reporting as of September 25, 2005, as stated in their report which appears on pages F-1 and F-2.
Item 9B. Other Information
     None.

56

60


PART III

PART III

Item 10. Directors and Executive Officers of the Registrant

     The information required by this item regarding directors is incorporated by reference to our Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Annual Meeting of Stockholders to be held in 20042006 (the “Proxy“2006 Proxy Statement”) under the headingheadings “Election of Directors.” Information regarding executive officers is set forth in Item 1 of Part I of this Report under the caption “Executive Officers.Officers of the Registrant. The information regarding our code of ethics is incorporated by reference to our Definitive Proxy Statement filed with the Securities and Exchange Commission on January 14, 2005 under the heading “Code of Ethics.”

Item 11. Executive Compensation

     The information required by this item is incorporated by reference to the 2006 Proxy Statement under the heading “Executive Compensation.Compensation and Other Matters.

Item 12. Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

     The information required by this item is incorporated by reference to the 2006 Proxy Statement under the headingheadings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management.”

Item 13. Certain Relationships and Related Transactions

     The information required by this item is incorporated by reference to the 2006 Proxy Statement under the heading “Certain Transactions.”

Item 14. Principal Accounting Fees and Services

     The information required by this item is incorporated by reference to the 2006 Proxy Statement under the heading “Fees Paid to PricewaterhouseCoopers LLP.”

57

61


PART IV

PART IV
Item 15. Exhibits and Financial Statement Schedules and Reports on Form 8-K

Schedule

The following documents are filed as part of this report:
       
    Page
    Number
(a) Financial Statements: Financial Statements:  
 (1)Report of Independent AuditorsRegistered Public Accounting Firm F-1
  Consolidated Balance Sheets at September 30, 200325, 2005 and 2002September 26, 2004 F-2F-3
  Consolidated Statements of Operations for Fiscal 2003, 20022005, 2004 and 20012003 F-3F-4
  Consolidated Statements of Cash Flows for Fiscal 2003, 20022005, 2004 and 20012003 F-4F-5
  Consolidated Statements of Stockholders’ Equity for Fiscal 2003, 20022005, 2004 and 20012003 F-5F-6
  Notes to Consolidated Financial StatementsF-7
  F-6(2) 
(2) Schedule II-Valuation and Qualifying Accounts S-1

     Financial statement schedules other than those listed above have been omitted because they are either not required, not applicable or the information is otherwise included. See Exhibit 99.3 for financial statements required under Article 3-09 of Regulation S-X.

included in the notes to the Financial Statements.

(b) Exhibits:
   
Exhibit
NumberDescription
2.1  
Restructuring NumberDescription
2.6Agreement and Plan of Reorganization, dated as of November 9, 2001,July 25, 2005, by and among the Company, Vésper São Paulo S.A., Vésper S.A., Vésper Holding São Paulo S.A., Vésper Holding S.A., VeloCom Cayman Brasil Holdings, QUALCOMM do Brasil Ltda., Bell Canada International (Brazil Telecom I) Limited, Bell Canada International (Megatel) Limited, VeloCom Inc., Nortel Networks Limited, LucentFluorite Acquisition Corporation, Quartz Acquisition Corporation, Flarion Technologies, Inc., Telefonaktiebolaget LM Ericsson (Publ.), Harris Corporation, VeloCom do Brasil Ltda., Vésper São Paulo Cayman and Vésper Holding, Ltd.QFREP, LLC. (1)
   
2.23.1 The Subscription and Shareholders Agreement, dated asRestated Certificate of November 9, 2001, by and among the Company, VeloCom Inc., Bell Canada International (Brazil Telecom I) Limited, Bell Canada International (Megatel) Limited, Bell Canada International (Espelho Sul) Limited, Nortel Networks Limited, Lucent Technologies Inc., Telefonaktiebolaget LM Ericsson (Publ.), Harris Corporation and Vésper Holding, Ltd.(1)Incorporation. (2)
   
2.4Agreement and Plan of Merger and Reorganization dated as of January 25, 2000 among the Company, Falcon Acquisition Corporation and SnapTrack, Inc.(16)
2.5Embratel Share Purchase Agreement dated as of September 25, 2003, by and among Vésper Holding, Ltd., QUALCOMM do Brasil Ltda. and Embratel Particpações S.A.
3.1Restated Certificate of Incorporation.(24)
3.2 Certificate of Amendment of Restated Certificate of Incorporation.(24)Designation. (3)
   
3.33.4 Certificate of Designation of Preferences.(24)Amended and Restated Bylaws. (2)
   
3.4Bylaws.(24)
3.5Amendment of the Bylaws.(24)
10.1 Form of Indemnity Agreement between the Company, each director and certain officers.(2)(9)(4)(5)
   
10.2 1991 Stock Option Plan, as amended.(9)(11)(4)(6)
   
10.4 Form of Supplemental Stock Option Grant under the 1991 Stock Option Plan.(2)(9)(4)(6)
   
10.51991 Employee Stock Purchase Plan.(9)(11)
10.6Form of Employee Stock Purchase Plan Offering under the 1991 Employee Stock Purchase Plan.(2)(9)

62


Exhibit
NumberDescription
10.12 DS-CDMA Technology Agreement and related Patent License Agreement, each dated September 26, 1990 between the Company and MOTOROLA, Inc.(2)(3)(5)(7)
   
10.14401(k) Plan.(2)
10.16 Amendment dated January 21, 1992 to that certain Technology Agreement dated September 26, 1990 with MOTOROLA, Inc.(4)(5)
10.17Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”).(9)(10)
10.18Form of Stock Option Grant under the Directors’ Plan, with related schedule.(6)(8)(9)
   
10.21 Executive Retirement Matching Contribution Plan, as amended.(9)(15)(4)(6)
   
10.22 1996 Non-qualified Employee Stock Purchase Plan.(8)(9)Plan, as amended.(4)(6)
   
10.23Stockholder Rights Plan.(7)
10.29 1998 Non-Employee Director’s Stock Option Plan.(9)(11)Plan, as amended.(4)(10)
   
10.32Multi-Product License Agreement between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(12)
10.33Subscriber Unit License Agreement between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(12)
10.34Settlement Agreement and Mutual Release between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson dated March 24, 1999.(12)
10.36Amendment No. 1 dated as of May 24, 1999 to the Asset purchase Agreement dated as of March 24, 1999 between QUALCOMM Incorporated and Telefonaktiebolaget LM Ericsson (publ).(13)
10.37Amendment to Stockholder Rights Plan dated November 15, 1999.(14)
10.38Credit Agreement dated as of May 5, 2000 between Globalstar, L.P. and the Company.(17)
10.392001 Stock Option Plan.(18)
10.40 Form of Stock Option Grant Notice and Agreement under the 2001 Stock Option Plan.(18)(4)(6)
   
10.41 2001 Employee Stock Purchase Plan.(18)Plan, as amended.(4)(6)
   
10.422001 Non-Employee Directors’ Stock Option Plan.(18)
10.43 Form of Stock Option Grant Notice and Agreement under the 2001 Non-Employee Directors’ Stock Option Plan.(4)(11)
10.552001 Stock Option Plan, as amended.(4)(12)
10.58Form of Annual Grant under the 1998 Non-Employee Directors’ Stock Option Plan.(4)(6)
10.59Iridigm Display Corporation 2000 Stock Option Plan.(4)(13)
10.60Forms of Stock Option Agreements under the Iridigm Display Corporation 2000 Stock Option Plan.(4)(13)
10.61Summary of 2005 Annual Bonus Program (4)(14)

58


Exhibit
NumberDescription
10.62Offer Letter Agreement with Richard Sulpizio dated January 17, 2005.(4)(15)
10.63Summary of Changes to Non-Employee Director Compensation Program.(4)(16)
10.64Sulpizio Stock Option Agreement dated March 8, 2005 (18,000 Options).(2)(4)
10.65Sulpizio Stock Option Agreement dated March 8, 2005 (157,000 Options).(2)(4)
10.662001 Non-Employee Directors’ Stock Option Plan, as amended.(4)(17)
10.67Description of 2005 Named Executive Officer Salaries.(7)(18)
   
10.4410.68 Bridge LoanCopy of Cruickshank Stock Option Agreement dated as of May 27, 1999 with Amendments thereto, among QUALCOMM Incorporated, as lender, and PEGASO COMUNICACIONES Y SISTEMAS, S.A. DE C. V., as Borrower, and CITIBANK, N.A., as administrative agent for Lender, and SOCIETE GENERALE, as Syndication Agent, and ABN AMRO BANK N.V., as Documentation Agent.June 3, 2005 (40,000 options).(4)(19)
   
10.4510.69 Common Agreement dated December 15, 1998, among PEGASO COMUNICACIONES Y SISTEMAS, S.A. DE C.V., PEGASO PCS, S.A. DE C.V., PEGASO TELECOMUNICACIONES, S.A. DE C.V., PEGASO RECURSOS HUMANOS. S.A. DE C.V. and CITIBANK, NA., as Intercreditor Agent, and CITIBANK MEXICO, S.A., GRUPO FINANCIERO CITIBANK, as Collateral Agent and CITIBANK INTERNATIONAL PLC, as Alcatel Administrative Agent, N.A., and ABN AMRO BANK N.V., as QUALCOMM Administrative Agent.(19)
10.46Credit Agreement dated asDescription of September 25, 1998 with Amendments thereto, among QUALCOMM Incorporated, as lender, PEGASO COMUNICACIONES Y SISTEMAS, S.A. DE C.V., as borrower.(19)
10.47Second Bridge Interest Capitalization Letter, dated as of January 28, 2002, by and among QUALCOMM Incorporated, Pegaso Communicaciones y Sistemas S. A. de C.V., Pegaso Telecomunicaciones, S. A. de C. V., Pegaso PCS, S. A. de C. V., Pegaso Recursos Humanos, S. A. de C. V., Pegaso Finanzas, S. A. de C. V., and Pegaso Finco I, S. A. de C. V.(20)

63


Exhibit
NumberDescription
10.48Interim Funding Agreement, dated as of January 16, 2002, by and among QUALCOMM Incorporated, Pegaso Comunicaciones y Sistemas, S. A. de C. V. and the other members of the Borrower Group and consented and agreed to and acknowledged by Telefonaktiebolaget L. M. Ericsson (Publ), ABN Amro Bank N. V. and Alcatel.Adjusted Annual Salaries.(20)
   
10.4910.70 Amendment No. 4 to Amended and Restated CreditRights Agreement dated September 26, 2005 between the Company and Computershare Investor Services LLC, as of January 16, 2002, by and among QUALCOMM Incorporated, Pegaso Comunicaciones y Sistemas S. A. de C. V., the other members of the Borrower Group, Telefonaktiebolaget L. M. Ericsson (Publ) and ABN Amro Bank N. V.(20)Rights Agent.(3)
   
10.5010.71 Amended and Restated Interim Funding Agreement, datedVoluntary Executive Retirement Contribution Plan, as of April 26, 2002, by and among QUALCOMM Incorporated, Pegaso Comunicaciones y Sistemas, S. A. de C. V. and the other members of the Borrower Group and consented and agreed to and acknowledged by Telefonaktiebolaget L. M. Ericsson (Publ), ABN Amro Bank N. V. and Alcatel.amended.(4)(21)
   
10.51Amendment No. 5 to Amended and Restated Credit Agreement, dated as of April, 26, 2002, by and among QUALCOMM Incorporated, Pegaso Comunicaciones y Sistemas S. A. de C. V., the other members of the Borrower Group, Telefonaktiebolaget L. M. Ericsson (Publ) and ABN Amro Bank N. V.(21)
10.52Amendment No. 7 to the Bridge Loan Agreement, dated as of September 10, 2002, by and among QUALCOMM Incorporated, as Lender, Pegaso Comunicaciones y Sistemas, S.A. de C.V., as Borrower, and CITIBANK, N.A., as Administrative Agent for Lender and the other signatories thereto.(22)
10.53Amendment No. 6 to the Amended and Restated Credit Agreement, dated as of September 10, 2002, by and among QUALCOMM Incorporated, Pegaso Comunicaciones y Sistemas, S.A. de C.V., the other members of the Borrower Group, Telefonaktiebolaget L.M. Ericsson (Publ) and ABN AMRO Bank N.V.(22)
10.54Amended and Restated Common Agreement by and among Pegaso Comunicaciones y Sistemas, S.A. de C.V., Pegaso Pcs, S.A., de C.V., Pegaso Finanzas, S.A. de C.V., Pegaso Finco I, S.A. de C.V. and Banco Nacional de México, S.A., Grupo Financiero Banamex, as Collateral Agent, Citibank, N.A. as Intercreditor Agent, Citibank International Plc, as Alcatel Administrative Agent, ABN AMRO Bank N.V., as QUALCOMM Administrative Agent and Electro Banque, as Facility 2 Administrative Agent, dated as of September 10, 2002.(23)
21 Subsidiaries of the Registrant.
   
23.1 Consent of PricewaterhouseCoopers LLP.Independent Registered Public Accounting Firm.
   
24.1Power of Attorney. Reference is made to page 66.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Irwin MarkPaul E. Jacobs.
   
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for William E. Keitel.
   
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Irwin MarkPaul E. Jacobs.
   
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for William E. Keitel.
(1) Filed as Annex A to the Registrant’s Registration Statement on Form S-4 (No. 333-127725).
 
99.3Financial Statements of Vésper Holding, Ltd. and Subsidiaries for the period from January 1, 2001 through November 13, 2001 (date of QUALCOMM Incorporated’s acquisition of a controlling interest in Vésper Holding, Ltd. and Subsidiaries) and for the year ended December 31, 2000.(22)

(1)(2) Filed as an exhibit to the Registrant’s Registration StatementCurrent Report on Form S-3 (No. 33-62724)8-K filed on March 11, 2005.
(3)Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 30, 2005.
(4)Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 15(a).
 
(2)(5) Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-42782).
 
(3)(6)Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2004.
(7) Certain confidential portions deleted pursuant to Order Granting Application or Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated December 12, 1991.
 
(4)(8) Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 1992.
 
(5)(9) Certain confidential portions deleted pursuant to Order Granting Application for Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated March 19, 1993.

64


(6)Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 26, 1993.
(7)Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 26, 1995.
(8)Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (File No. 333-2750) filed on March 25, 1996.
(9)Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 14(c).
 
(10) Filed as an exhibit to the Registrant’s AnnualQuarterly Report on Form 10-K10-Q for the fiscal yearquarter ended September 29, 1996.March 26, 2000.
 
(11) Filed as an exhibit to the Registrant’s Registration StatementQuarterly Report on Form S-8 (File No. 333-69457) filed on December 22, 1998.10-Q for the quarter ended April 1, 2001.
 
(12) Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 1999.2004.
 
(13)Filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (No. 333 119904).
(14) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on May 24, 1999.
(14)Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 26, 1999.December 13, 2004.
 
(15) Filed as an exhibit to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended December 26, 1999.8-K filed on January 19, 2005.
 
(16) Filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on March 11, 2000.February 25, 2005.
 
(17) Filed as an exhibit to the QuarterlyRegistrant’s Current Report on Form 10-Q8-K/A filed by Globalstar Telecommunications Limited for the quarter ended March 31, 2000.on May 6, 2005.
 
(18) Filed as an exhibit tounder the heading “2005 Named Executive Officer Salaries” in Item 1.01 of the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended April 1, 2001.The compensatory plan contract or arrangement of which the Company’s directors and named executive officers may participate.8-K filed on March 11, 2005.
 
(19) Filed as an exhibit to the Registrant’s AnnualCurrent Report on Form 10-K for the fiscal year ended September 30, 2001.8-K filed on June 8, 2005.
 
(20) Filed as an exhibit tounder the heading “Adjusted Annual Salaries” in Item 1.01 of the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended March 31, 2002.8-K filed on July 8, 2005.
 
(21) Filed as an exhibit to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended June 30, 2002.
(22)Filed as an exhibit to the Registrant’s Annual Report8-K filed on Form 10-K for the fiscal year ended September 29, 2002.
(23)Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 29, 2002.
(24)Filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2003.October 26, 2005.

59

Reports on Form 8-K

     On July 23, 2003, we furnished to the SEC a report on Form 8-K containing the July 23, 2003 press release by QUALCOMM Incorporated related to our announcement of third quarter fiscal 2003 results.

SIGNATURES


SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

November 5, 2003
2, 2005
     
 QUALCOMM Incorporated
 
 By /s/ Paul E. Jacobs   
/s/ Irwin MarkPaul E. Jacobs,
Chief Executive Officer 

60


    
Irwin Mark Jacobs,
Chief Executive Officer and Chairman

65


POWER OF ATTORNEY

     Know all persons by these presents, that each person whose signature appears below constitutes and appoints Irwin Mark Jacobs and William E. Keitel, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue thereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
     
Signature Title Date



/s/ IRWIN MARKPAUL E. JACOBS

Irwin Mark Jacobs
 Chief Executive Officer and Chairman
(Principal Executive Officer)
 November 5, 20032, 2005
     
Paul E. Jacobs(Principal Executive Officer)
/s/ WILLIAM E. KEITEL

William E. Keitel
 Chief Financial Officer
(Principal Financial and Accounting Officer)
 November 5, 20032, 2005
     
/s/ RICHARD C. ATKINSONIRWIN JACOBS

Richard C. Atkinson
Irwin Jacobs
 DirectorChairman of the Board November 5, 20032, 2005
     
/s/ ADELIA A. COFFMANRICHARD C. ATKINSON

Adelia A. Coffman
Richard C. Atkinson
 Director November 5, 20032, 2005
     
/s/ RAYMOND DITTAMOREADELIA A. COFFMAN

Raymond Dittamore
Adelia A. Coffman
 Director November 5, 20032, 2005
     
/s/ DIANA LADY DOUGANDONALD CRUICKSHANK

Diana Lady Dougan
Donald Cruickshank
 Director November 5, 20032, 2005
     
/s/ ROBERT E. KAHNRAYMOND V. DITTAMORE

Robert E. Kahn
Raymond V. Dittamore
 Director November 5, 20032, 2005
     
/s/ DUANE A. NELLESDIANA LADY DOUGAN

Duane A. Nelles
Diana Lady Dougan
 Director November 5, 20032, 2005
     
/s/ PETER M. SACERDOTEROBERT E. KAHN

Peter M. Sacerdote
Robert E. Kahn
 Director November 5, 20032, 2005
     
/s/ FRANK SAVAGEDUANE A. NELLES

Frank Savage
Duane A. Nelles
 Director November 5, 20032, 2005
     
/s/ BRENT SCOWCROFTPETER M. SACERDOTE

Brent Scowcroft
Peter M. Sacerdote
 Director November 5, 20032, 2005
     
/s/ MARC I. STERN

Marc I. SternBRENT SCOWCROFT
Brent Scowcroft
 Director November 5, 20032, 2005
     
/s/ MARC I. STERN
Marc I. Stern
DirectorNovember 2, 2005
/s/ RICHARD SULPIZIO

Richard Sulpizio
 Director November 5, 20032, 2005

61

66


REPORT OF INDEPENDENT AUDITORS

Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of QUALCOMM Incorporated

Incorporated:

     We have completed integrated audits of QUALCOMM Incorporated’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of September 25, 2005 and September 26, 2004 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions on QUALCOMM Incorporated’s 2005, 2004 and 2003 consolidated financial statements and of its internal control over financial reporting as of September 25, 2005, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
     In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 62 present fairly, in all material respects, the financial position of QUALCOMM Incorporated and its subsidiaries (the “Company”) atCompany) as of September 30, 200325, 2005 and 2002,September 26, 2004, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 200325, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 62 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; ourmanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditingthe standards generally accepted inof the United States of America, whichPublic Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     As discussed

Internal control over financial reporting
     Also, in Note 1our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of September 25, 2005 based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 25, 2005, based on criteria established inInternal Control — Integrated Frameworkissued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the consolidatedmaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company adopted Statementcompany are being made only in accordance with authorizations of Financial Accounting Standard No. 142, “Goodwillmanagement and Other Intangible Assets,” duringdirectors of the year ended September 30, 2003,company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company changedcompany’s assets that could have a material effect on the financial statements.

F- 1


     Because of its methodinherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of recognizing revenue and adopted Statementany evaluation of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” duringeffectiveness to future periods are subject to the year ended September 30, 2001.

PRICEWATERHOUSECOOPERSrisk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
San Diego, California
November 3, 2003

2, 2005

F- 12


QUALCOMM Incorporated
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
           
    September 30,
    
    2003 2002
    
 
ASSETS
        
Current assets:        
 Cash and cash equivalents $2,045,094  $1,406,704 
 Marketable securities  2,516,003   1,411,178 
 Accounts receivable, net  483,793   536,950 
 Finance receivables, net  5,795   388,396 
 Inventories, net  110,351   88,094 
 Deferred tax assets  611,536   122 
 Other current assets  176,192   109,322 
    
   
 
  Total current assets  5,948,764   3,940,766 
Marketable securities  810,654   381,630 
Finance receivables, net  181,622   442,934 
Other investments  128,651   276,414 
Property, plant and equipment, net  622,265   686,283 
Goodwill, net  346,464   344,803 
Deferred tax assets  406,746   7,493 
Other assets  377,270   425,725 
    
   
 
  Total assets $8,822,436  $6,506,048 
    
   
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
Current liabilities:        
 Trade accounts payable $195,065  $209,418 
 Payroll and other benefits related liabilities  141,000   126,005 
 Unearned revenue  174,271   183,482 
 Current portion of long-term debt (Note 11)  102,625   19,355 
 Other current liabilities  195,241   136,726 
    
   
 
  Total current liabilities  808,202   674,986 
Unearned revenue  236,732   259,995 
Long-term debt (Note 11)  123,302   94,288 
Other liabilities  55,578   40,283 
    
   
 
  Total liabilities  1,223,814   1,069,552 
    
   
 
Commitments and contingencies (Notes 3, 4 and 9) 
Minority interest in consolidated subsidiaries  50   44,540 
    
   
 
Stockholders’ equity:        
 Preferred stock, $0.0001 par value; issuable in series; 8,000 shares authorized; none outstanding at September 30, 2003 and 2002      
 Common stock, $0.0001 par value; 3,000,000 shares authorized; 798,353 and 778,549 shares issued and outstanding at September 30, 2003 and 2002  81   79 
 Paid-in capital  6,324,971   4,918,202 
 Retained earnings  1,297,289   604,624 
 Accumulated other comprehensive loss  (23,769)  (130,949)
    
   
 
  Total stockholders’ equity  7,598,572   5,391,956 
    
   
 
  Total liabilities and stockholders’ equity $8,822,436  $6,506,048 
    
   
 

See accompanying notes.

F- 2


QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands,millions, except per share data)

               
    Years Ended September 30,
    
    2003 2002 2001
    
 
 
Revenues:            
 Equipment and services $2,985,760  $2,204,835  $1,907,856 
 Licensing and royalty fees  984,876   834,725   771,930 
    
   
   
 
   3,970,636   3,039,560   2,679,786 
    
   
   
 
Operating expenses:            
 Cost of equipment and services revenues  1,430,047   1,137,360   1,035,103 
 Research and development  523,267   451,678   414,760 
 Selling, general and administrative  534,915   508,644   367,155 
 Amortization of goodwill and other acquisition-related intangible assets (Note 1)  8,589   259,196   255,230 
 Asset impairment and related charges (Notes 4 and 11)  194,258   459   518,026 
 Other  (30,675)  8,955   50,825 
    
   
   
 
  Total operating expenses  2,660,401   2,366,292   2,641,099 
    
   
   
 
Operating income  1,310,235   673,268   38,687 
Interest expense  (30,709)  (25,731)  (10,235)
Investment income (expense), net (Note 5)  5,621   (186,412)  (317,091)
Other        (167,001)
    
   
   
 
Income (loss) before income taxes and accounting changes  1,285,147   461,125   (455,640)
Income tax expense  (457,706)  (101,448)  (104,501)
    
   
   
 
Income (loss) before accounting changes  827,441   359,677   (560,141)
Accounting changes, net of tax (Note 1)        (17,937)
    
   
   
 
Net income (loss) $827,441  $359,677  $(578,078)
    
   
   
 
Basic earnings (loss) per common share:            
 Income (loss) before accounting changes $1.05  $0.47  $(0.74)
 Accounting changes, net of tax        (0.02)
    
   
   
 
 Net income (loss) $1.05  $0.47  $(0.76)
    
   
   
 
Diluted earnings (loss) per common share:            
 Income (loss) before accounting changes $1.01  $0.44  $(0.74)
 Accounting changes, net of tax        (0.02)
    
   
   
 
 Net income (loss) $1.01  $0.44  $(0.76)
    
   
   
 
Shares used in per share calculations:            
 Basic  789,586   770,887   755,969 
    
   
   
 
 Diluted  817,755   809,329   755,969 
    
   
   
 

         
  September 25,  September 26, 
  2005  2004 
ASSETS
        
         
Current assets:        
Cash and cash equivalents $2,070  $1,214 
Marketable securities  4,478   4,768 
Accounts receivable, net  544   581 
Inventories  177   154 
Deferred tax assets  343   409 
Other current assets  179   101 
       
Total current assets  7,791   7,227 
Marketable securities  2,133   1,653 
Property, plant and equipment, net  1,022   675 
Goodwill  571   356 
Deferred tax assets  444   493 
Other assets  518   416 
       
Total assets $12,479  $10,820 
       
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
        
         
Current liabilities:        
Trade accounts payable $376  $286 
Payroll and other benefits related liabilities  196   194 
Unearned revenue  163   172 
Other current liabilities  335   242 
       
Total current liabilities  1,070   894 
Unearned revenue  146   170 
Other liabilities  144   92 
       
Total liabilities  1,360   1,156 
       
         
Commitments and contingencies (Notes 4 and 9)        
         
Stockholders’ equity:        
Preferred stock, $0.0001 par value; issuable in series; 8 shares authorized; none outstanding at September 25, 2005 and September 26, 2004      
Common stock, $0.0001 par value; 6,000 shares authorized; 1,640 and 1,635 shares issued and outstanding at September 25, 2005 and September 26, 2004      
Paid-in capital  6,753   6,940 
Retained earnings  4,328   2,709 
Accumulated other comprehensive income  38   15 
       
Total stockholders’ equity  11,119   9,664 
       
Total liabilities and stockholders’ equity $12,479  $10,820 
       
See accompanying notes.

F- 3

F-3


QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
Revenues:            
Equipment and services $3,744  $3,514  $2,862 
Licensing and royalty fees  1,929   1,366   985 
          
   5,673   4,880   3,847 
          
Operating expenses:            
Cost of equipment and services revenues  1,645   1,484   1,268 
Research and development  1,011   720   523 
Selling, general and administrative  631   547   483 
          
Total operating expenses  3,287   2,751   2,274 
          
Operating income  2,386   2,129   1,573 
Investment income (expense), net (Note 5)  423   184   (8)
          
Income from continuing operations before income taxes  2,809   2,313   1,565 
Income tax expense  (666)  (588)  (536)
          
Income from continuing operations  2,143   1,725   1,029 
          
             
Discontinued operations (Note 12):            
Loss from discontinued operations before income taxes     (10)  (280)
Income tax benefit     5   78 
          
Loss from discontinued operations     (5)  (202)
          
             
Net income $2,143  $1,720  $827 
          
             
Basic earnings per common share from continuing operations $1.31  $1.07  $0.65 
Basic loss per common share from discontinued operations     (0.01)  (0.13)
          
Basic earnings per common share $1.31  $1.06  $0.52 
          
             
Diluted earnings per common share from continuing operations $1.26  $1.03  $0.63 
Diluted loss per common share from discontinued operations        (0.12)
          
Diluted earnings per common share $1.26  $1.03  $0.51 
          
             
Shares used in per share calculations:            
Basic  1,638   1,616   1,579 
          
Diluted  1,694   1,675   1,636 
          
             
Dividends per share announced $0.320  $0.190  $0.085 
          
See accompanying notes.

F- 4


QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)millions)
               
    Years Ended September 30
    
    2003 2002 2001
    
 
 
Operating Activities:
            
 Net income (loss) $827,441  $359,677  $(578,078)
 Depreciation and amortization  179,694   394,257   319,811 
 Asset impairment and related charges and credits  194,258   459   746,330 
 Net realized gains on marketable securities and other investments  (72,818)  (2,476)  (69,687)
 Change in fair values of derivative investments  3,201   58,874   242,849 
 Other-than-temporary losses on marketable securities and other investments  138,456   230,491   198,398 
 Minority interest in (loss) income of consolidated subsidiaries  (36,949)  (52,498)  3,769 
 Equity in losses of investees  126,015   86,958   185,060 
 Non-cash income tax expense  332,964   12,394   29,948 
 Accounting changes, net of tax        17,937 
 Other non-cash charges and credits  26,900   9,965   (31,068)
 Increase (decrease) in cash resulting from changes in:            
  Proceeds from (purchases of) trading securities  2,085   (2,036)   
  Accounts receivable, net  60,318   (4,544)  69,541 
  Inventories, net  (21,303)  11,187   (40,735)
  Other assets  7,302   12,472   19,762 
  Trade accounts payable  (12,811)  411   (13,838)
  Payroll, benefits, and other liabilities  40,605   31,565   (67,440)
  Unearned revenue  (13,474)  (38,457)  18,858 
    
   
   
 
 Net cash provided by operating activities  1,781,884   1,108,699   1,051,417 
    
   
   
 
Investing Activities:
            
 Capital expenditures  (230,622)  (141,578)  (114,191)
 Purchases of wireless licenses  (8,247)     (83,774)
 Purchases of available-for-sale securities  (4,484,457)  (1,754,055)  (1,182,698)
 Proceeds from sale of available-for-sale securities  3,183,445   1,049,404   977,285 
 Purchases of held-to-maturity securities  (355,382)  (188,846)  (301,870)
 Maturities of held-to-maturity securities  257,025   257,371   973,879 
 Issuance of finance receivables  (150,046)  (141,099)  (498,196)
 Collection of finance receivables  813,122   7,374   139,052 
 Issuance of notes receivable  (28,233)  (3,914)  (225,747)
 Collection of notes receivable  4,181   16,202   15,581 
 Proceeds from sale of other investments  4,131   9,374   26,730 
 Other investments and acquisitions  (37,456)  (320,655)  (246,538)
 Other items, net  3,606   267   11,139 
    
   
   
 
 Net cash used by investing activities  (1,028,933)  (1,210,155)  (509,348)
    
   
   
 
Financing Activities:
            
 Net proceeds from issuance of common stock  191,473   119,671   132,690 
 Repurchase and retirement of common stock  (158,488)  (5,773)   
 Dividends paid  (134,776)      
 Proceeds from minority shareholders in consolidated subsidiary     10,000    
 Proceeds from the issuance of long-term debt  7,887   16,896   501 
 Payments on long-term debt  (19,937)  (20,187)  (620)
 Other items, net        1,014 
    
   
   
 
 Net cash (used) provided by financing activities  (113,841)  120,607   133,585 
    
   
   
 
 Effect of exchange rate changes on cash  (720)  (1,049)  (3,923)
    
   
   
 
Net increase in cash and cash equivalents
  638,390   18,102   671,731 
Cash and cash equivalents at beginning of year
  1,406,704   1,388,602   716,871 
    
   
   
 
Cash and cash equivalents at end of year
 $2,045,094  $1,406,704  $1,388,602 
    
   
   
 

             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
Operating Activities:
            
Income from continuing operations $2,143  $1,725  $1,029 
Depreciation and amortization  200   163   146 
Asset impairment and related charges        34 
Net realized gains on marketable securities and other investments  (179)  (88)  (80)
(Gains) losses on derivative instruments  (33)  (7)  3 
Other-than-temporary losses on marketable securities and other investments  14   12   128 
Equity in losses of investees  28   72   113 
Non-cash income tax expense  498   419   411 
Other non-cash charges     35   13 
Proceeds from (purchases of) trading securities        2 
Increase (decrease) in cash resulting from changes in:            
Accounts receivable, net  35   (93)  53 
Inventories  (23)  (50)  (23)
Other assets  (74)  51   (12)
Trade accounts payable  57   151   (24)
Payroll, benefits and other liabilities  49   148   43 
Unearned revenue  (29)  (57)  (12)
          
Net cash provided by operating activities  2,686   2,481   1,824 
          
Investing Activities:
            
Capital expenditures  (576)  (332)  (202)
Purchases of available-for-sale securities  (8,055)  (8,372)  (4,484)
Proceeds from sale of available-for-sale securities  8,072   5,026   3,183 
Purchases of held-to-maturity securities     (184)  (355)
Maturities of held-to-maturity securities  10   401   257 
Issuance of finance receivables     (1)  (150)
Collection of finance receivables  2   196   813 
Other investments and acquisitions, net of cash acquired  (249)  (70)  (37)
Other items, net  20   10   (17)
          
Net cash used by investing activities  (776)  (3,326)  (992)
          
Financing Activities:
            
Proceeds from issuance of common stock  386   330   191 
Repurchase and retirement of common stock  (953)     (166)
Proceeds from put options  37   5   7 
Dividends paid  (524)  (308)  (135)
          
Net cash (used) provided by financing activities  (1,054)  27   (103)
          
Net cash used by discontinued operations     (13)  (89)
          
Effect of exchange rate changes on cash        (2)
          
Net increase (decrease) in cash and cash equivalents
  856   (831)  638 
Cash and cash equivalents at beginning of year
  1,214   2,045   1,407 
          
Cash and cash equivalents at end of year
 $2,070  $1,214  $2,045 
          
See accompanying notes.

F- 5

F-4


QUALCOMM Incorporated
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)millions)
                           
                    Accumulated    
    Common Stock         Other Total
    
 Paid-in Retained Comprehensive Stockholders’
    Shares Amount Capital Earnings Income (Loss) Equity
    
 
 
 
 
 
Balance at September 30, 2000
  747,651  $75  $4,653,818  $823,025  $(8,655) $5,468,263 
                       
 
Components of comprehensive loss:                        
 Net loss           (578,078)     (578,078)
 Foreign currency translation              (39,515)  (39,515)
 Change in unrealized loss on securities, net of income taxes of $42,551              (222,931)  (222,931)
 Reclassification adjustment for net realized gains included in net loss, net of income taxes of $18,181              (27,044)  (27,044)
 Reclassification adjustment for other-than-temporary losses on marketable securities included in net loss, net of income taxes of $47,092              70,053   70,053 
 Reclassification adjustment for losses included in accounting change, net of income taxes of $2,638              3,925   3,925 
                       
 
  Total comprehensive loss           ��          (793,590)
                       
 
Exercise of stock options  14,831   1   92,051         92,052 
Issuance for Employee Stock Purchase and Executive Retirement Plans  758      40,639         40,639 
Stock-based compensation expense        2,661         2,661 
Shares issued for business acquisitions  49                
Adjustment to spin-off of Leap Wireless        2,390         2,390 
   
   
   
   
   
   
 
Balance at September 30, 2001
  763,289   76   4,791,559   244,947   (224,167)  4,812,415 
                       
 
Components of comprehensive income:                        
 Net income           359,677      359,677 
 Foreign currency translation              (15,225)  (15,225)
 Change in unrealized loss on securities              (85,714)  (85,714)
 Reclassification adjustment for net realized gains included in net income, net of income taxes of $524              (11,620)  (11,620)
 Reclassification adjustment for other-than-temporary losses on marketable securities included in net income              205,777   205,777 
                       
 
  Total comprehensive income                      452,895 
                       
 
Exercise of stock options  14,325   2   81,369         81,371 
Tax benefit from exercise of stock options        10,606         10,606 
Issuance for Employee Stock Purchase and Executive Retirement Plans  1,145   1   38,302         38,303 
Repurchase and retirement of common stock  (210)     (5,773)        (5,773)
Stock-based compensation expense        2,139         2,139 
   
   
   
   
   
   
 
Balance at September 30, 2002
  778,549   79   4,918,202   604,624   (130,949)  5,391,956 
                       
 
Components of comprehensive income:                        
 Net income           827,441      827,441 
 Foreign currency translation              (3,225)  (3,225)
 Change in unrealized gain/loss on securities, net of income taxes of $47,340              69,543   69,543 
 Reclassification adjustment for net realized gains included in net income, net of income taxes of $26,641              (41,292)  (41,292)
 Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $18,045              82,154   82,154 
                       
 
  Total comprehensive income                      934,621 
                       
 
Exercise of stock options  23,347   2   153,257         153,259 
Tax benefit from exercise of stock options        267,087         267,087 
Issuance for Employee Stock Purchase and Executive Retirement Plans  1,372      38,214         38,214 
Reversal of the valuation allowance on certain deferred tax assets (Note 6)        1,105,640         1,105,640 
Repurchase and retirement of common stock  (4,915)     (158,488)        (158,488)
Dividends           (134,776)     (134,776)
Stock-based compensation expense        1,059         1,059 
   
   
   
   
   
   
 
Balance at September 30, 2003
  798,353  $81  $6,324,971  $1,297,289  $(23,769) $7,598,572 
   
   
   
   
   
   
 

                     
              Accumulated    
              Other  Total 
  Common Stock  Paid-in  Retained  Comprehensive  Stockholders’ 
  Shares  Capital  Earnings  Income (Loss)  Equity 
Balance at September 29, 2002
  1,557  $4,918  $605  $(131) $5,392 
                    
Components of comprehensive income:                    
Net income        827      827 
Foreign currency translation           (3)  (3)
Unrealized net gains on securities, net of income taxes of $45           69   69 
Reclassification adjustment for net realized gains included in net income, net of income taxes of $27           (41)  (41)
Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $18           82   82 
                    
Total comprehensive income                  934 
                    
Exercise of stock options  47   153         153 
Tax benefit from exercise of stock options     267         267 
Issuance for Employee Stock Purchase and Executive Retirement Plans  3   38         38 
Reversal of the valuation allowance on certain deferred tax assets     1,106         1,106 
Repurchase and retirement of common stock  (10)  (158)        (158)
Dividends        (135)     (135)
Stock-based compensation expense     1         1 
                
Balance at September 28, 2003
  1,597   6,325   1,297   (24)  7,598 
                    
Components of comprehensive income:                    
Net income        1,720      1,720 
Foreign currency translation           56   56 
Unrealized net gains on securities, net of income taxes of $20           29   29 
Reclassification adjustment for net realized gains included in net income, net of income taxes of $35           (53)  (53)
Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $5           7   7 
                    
Total comprehensive income                  1,759 
                    
Exercise of stock options  36   284         284 
Tax benefit from exercise of stock options     285         285 
Issuance for Employee Stock Purchase and Executive Retirement Plans  2   46         46 
Dividends        (308)     (308)
                
Balance at September 26, 2004
  1,635   6,940   2,709   15   9,664 
                    
Components of comprehensive income:                    
Net income        2,143      2,143 
Foreign currency translation           5   5 
Unrealized net gains on securities, net of income taxes of $73           103   103 
Unrealized net gains on derivative instruments, net of income taxes of $6           9   9 
Reclassification adjustment for net realized gains on securities included in net income, net of income taxes of $68           (102)  (102)
Reclassification adjustment for other-than-temporary losses on marketable securities included in net income, net of income taxes of $5           8   8 
                    
Total comprehensive income                  2,166 
                    
Exercise of stock options  30   348         348 
Tax benefit from exercise of stock options     346         346 
Issuance for Employee Stock Purchase and Executive Retirement Plans  2   56         56 
Repurchase and retirement of common stock  (27)  (953)        (953)
Dividends        (524)     (524)
Value of options exchanged for acquisitions     19         19 
Deferred stock-based compensation from acquisitions     (3)        (3)
                
Balance at September 25, 2005
  1,640  $6,753  $4,328  $38  $11,119 
                
See accompanying notes.

F- 6

F-5


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies

The CompanyCompany.

QUALCOMM Incorporated (the Company or QUALCOMM), a Delaware corporation, develops, designs, manufactures and markets digital wireless telecommunications products and services based on its Code Division Multiple Access (CDMA) technology. The Company is a leading developer and supplier of CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products to wireless device and infrastructure manufacturers. The Company grants licenses to use portions of its intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA products, and receives license fees as well as ongoing royalties based on sales by licensees of wireless telecommunications equipment products incorporating its CDMA technologies. The Company provides satellite and terrestrial-based two-way data messaging and position reporting services for transportation companies, private fleets, and construction equipment fleets.fleets and other enterprise companies. The Company provides the BREW (Binary Runtime Environment for Wireless) product and services to wireless network operators, handset manufacturers and application developers and support for developing and delivering over-the-air wireless applications and services. The Company also makes strategic investments to promote the worldwide adoptionsadoption of CDMA products and services for wireless voice and Internet data communications.

Principles of ConsolidationConsolidation.

The Company’s consolidated financial statements include the assets, liabilities and operating results of majority-owned subsidiaries and other subsidiaries controlled by the Company.subsidiaries. The ownership of the other interest holders of consolidated subsidiaries is reflected as minority interest.interest and is not significant. All significant intercompany accounts and transactions have been eliminated.

Certain of the Company’s foreign subsidiaries are included in the consolidated financial statements one month in arrears to facilitate the timely inclusion of such entities in the Company’s consolidated financial statements. The Company does not have any investments in entities it believes are variable interest entities for which the Company is the primary beneficiary.

     The Company deconsolidated the Vésper Operating Companies and TowerCo during fiscal 2004 as a result of their sale (Note 12). Results of operations and cash flows related to the Vésper Operating Companies and TowerCo are presented as discontinued operations.
Financial Statement PreparationPreparation.

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

Fiscal YearYear.

The Company operates and reports using a 52-53 week fiscal year ending on the last Sunday in September. As a result, theThe fiscal years ended September 30,25, 2005, September 26, 2004 and September 28, 2003 2002, and 2001each include 52 weeks, 52 weeks, and 53 weeks, respectively. For presentation purposes, the Company presents its fiscal years as ending on September 30.

weeks.

Revenue RecognitionRecognition.

The Company derives revenue principally from sales of integrated circuit products, from royalties for its intellectual property, from messaging and other services and related hardware sales, from software development and licensing and related services, and from license fees for intellectual property. The timing of revenue recognition and the amount of revenue actually recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of the Company’s deliverables and obligations. The development stage of the Company’s customers’ products does not affect the timing or amount of revenue recognized.

     The Company licenses rights to use portions of its intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of CDMA products, including, without limitation, products implementing cdmaOne, CDMA2000, Wideband CDMA (WCDMA) and/or the CDMA Time Division Duplex (TDD) standards and their derivatives. Licensees typically pay a license fee in one or more installments and ongoing royalties based on their sales of products incorporating or using the Company’s licensed intellectual property. License fees are recognized over the estimated period of future benefit to the average licensee, typically five to seven years. The Company earns royalties on such licensed CDMA products sold worldwide by its licensees at the time that the licensees’ sales occur. The Company’s licensees, however, do not report and pay royalties owed for sales in any given quarter until after the conclusion of that quarter, and, in some instances, although royalties are

F- 7

     In December 1999,


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reported quarterly, payment is on a semi-annual basis. During the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements” whichperiods preceding the fourth quarter of fiscal 2004, the Company adoptedestimated 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 estimated.
     Starting in the fourth quarter of fiscal 20012004, the Company determined that, due to escalating and applied retroactivelychanging business trends, the Company no longer had the ability to reliably estimate royalty revenues from the firstEstimated 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 2001.2004, the Company began recognizing royalty revenues for a quarter solely based on royalties reported by licensees during such quarter. The Company recorded a $147 million loss, netchange in the timing of taxes of $98 million, asrecognizing royalty revenue was made prospectively and had the cumulativeinitial one-time effect of reducing royalty revenues recorded in the accounting changefourth quarter of fiscal 2004. Total royalties reported by external licensees for fiscal 2005 and recorded as revenue for the period were $1.64 billion. Total royalties reported by external licensees for fiscal 2004 and 2003 were $1.29 billion and $837 million, respectively, as compared to $1.14 billion and $838 million, respectively, recorded as royalty revenues from the external licensees for the same periods.
     Revenues from sales of the beginningCompany’s CDMA-based integrated circuits are recognized at the time of fiscal 2001shipment, or when title and risk of loss pass to reflect the deferral ofcustomer and other criteria for revenue and expenses related to future periods. The Company recognized $44 million, $66 million and $95 million during fiscal 2003, 2002 and 2001, respectively, in operating income related to revenue and expense that were recognized in prior years.

recognition are met, if later. Revenues from providing services are recorded when earned.

     In November 2002, the Emerging Issues Task Force (EITF) issued Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” which the Company adopted in the fourth quarter of fiscal 2003. This issue addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of

F-6


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

accounting. Beginning with the adoption of SAB 101 until the fourth quarter of fiscal 2003, theThe Company recognized revenues and expenses from sales of certain satellite and terrestrial-based two-way data messaging and position reporting hardware and related software products by its QWBS division (Note 10) ratably over the shorter of the estimated useful life of the hardware product or the expected messaging service period, which is typically five years. SAB 101 requiredyears, until the fourth quarter of fiscal 2003. The ratable recognition of these sales had been required because the messaging service was considered integral to the functionality of the hardware and software. Because EITF Issue No. 00-21 does not require the deferral of revenue when an undelivered element is considered integral to the functionality of a delivered element and because EITF Issue No. 00-21 otherwise requires separate unit accounting in multiple element arrangements. Given that the Company began recognizing revenues and expensesmeets the criteria stipulated in EITF Issue No. 00-21, the sale of the hardware is accounted for as a unit of accounting separate from such salesthe future service to be provided by the Company. Accordingly, starting in the fourth quarter of fiscal 2003, the Company began recognizing revenues allocated to the hardware using the residual method and related expenses from such sales at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later.later, instead of amortizing the related revenue over future periods. The Company has elected to adopt EITF Issue No. 00-21 prospectively for revenue arrangements entered into after the third quarter of fiscal 2003, rather than reporting the change in accounting as a cumulative-effect adjustment. AsThe amortization of QWBS equipment revenue that was deferred in the periods prior to the adoption of EITF Issue No. 00-21 will continue with a result,declining impact through fiscal 2008. QWBS amortized $52 million, $76 million and $23 million in revenue related to such prior period equipment sales in fiscal 2005 and 2004 and during the fourth quarter of fiscal 2003, the Company recognized certain revenue and related cost of sales for QWBS equipment sales upon shipment, while continuing to amortize unearned revenue and cost of sales, with an $11 million gross margin effect, for units shipped in prior periods.respectively. Deferred revenues and expenses related to the historical QWBS sales that will continue to be amortized in future periods were $183$54 million and $102$34 million, respectively, at September 30, 2003.25, 2005. Gross margin related to these prior sales is expected to be recognized as follows: $37 million in fiscal 2004, $24 million in fiscal 2005, $13 million in fiscal 2006, $6 million in fiscal 2007 and $1 million in fiscal 2008.

     The Company licenses rights to use its intellectual property portfolio, which includes patent rights to use cdmaOne, CDMA2000 1X/1xEV-DO/1xEV-DV, TD-SCDMA and WCDMA technologies. Licensees typically pay a non-refundable license fee in one or more installments and on-going royalties based on their sales of products incorporating the Company’s intellectual property. License fees are generally recognized over the estimated period of future benefit to the average licensee, typically five to seven years. The Company earns royalties on CDMA products sold worldwide by its licensees in the period that the licensees’ sales occur. The Company’s licensees, however, do not report and pay royalties owed until the subsequent quarter and, in some instances, payment is on a semi-annual basis. Therefore, the Company estimates royalty revenues from certain licensees (the Estimated Licensees) in the current quarter when reasonable estimates of such amounts can be made. Not all royalties earned are estimated. Royalties for licensees for which the Company has minimal history and certain licensees that do not buy its integrated circuit products are recorded one quarter in arrears when they are reported to the Company by those licensees. Estimates of royalty revenues for the Estimated Licensees are based on analyses of the Company’s sales of integrated circuits to its Estimated Licensees, historical royalty data by Estimated Licensee, the relationship between the timing of the Company’s sales of integrated circuits to its Estimated Licensees and its Estimated Licensees’ sales of CDMA products, average sales price forecasts, and current market and economic trends. Once royalty reports are received from the Estimated Licensees, the variance between such reports and the estimate is recorded in royalty revenue in the period the reports are received. The recognition of this variance in most cases lags the royalty estimate by one quarter.

     The following table summarizes royalty related data for fiscal 2003, 2002 and 2001 (in millions):

F-7


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

             
  Fiscal Year
  
  2003 2002 2001
  
 
 
Components of royalty revenues
            
Estimate at end of prior year* $150  $122  $100 
Royalties reported in first quarter related to prior year estimate  167   146   133 
   
   
   
 
Variance included in current year revenues  17   24   33 
Other royalties reported in current year  670   551   506 
Estimate at year end  151   150   122 
   
   
   
 
Total royalty revenues from licensees $838  $725  $661 
   
   
   
 

*This amount is the estimate for the fourth quarter of the previous fiscal year.

     For example, for fiscal 2002, the Company estimated royalties of $150 million from the Estimated Licensees for the fourth quarter of fiscal 2002. The actual royalties reported to the Company by the Estimated Licensees, on a one quarter lag basis, during the first quarter of fiscal 2003 were $167 million. The variance of $17 million was recorded in royalty revenues in the first quarter of fiscal 2003. Therefore, total royalty revenues from licensees for fiscal 2003 of $838 million included: 1) the variance of $17 million, 2) other royalties reported during fiscal 2003 of $670 million, and 3) the estimate made in the fourth quarter of fiscal 2003 of $151 million based upon Estimated Licensees’ estimated sales during the fourth quarter of fiscal 2003, which the Company believes will be reported by the Estimated Licensees in the first quarter of fiscal 2004.

     Revenues from sales of the Company’s CDMA-based integrated circuits are recognized at the time of shipment, or when title and risk of loss pass to the customer and other criteria for revenue recognition are met, if later. Revenues from providing services are recorded when earned.

     Revenues from long-term contracts are generally recognized using the percentage-of-completion efforts-expended method of accounting, based on costs incurred compared with total estimated costs. The percentage-of-completion method relies on estimates of total contract revenue and costs. RevenuesRevenue and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged or credited to income in the period in which the facts that give rise to the revision become known. If actual contract costs are greater than expected, reduction of contract profit would be required. Billings on uncompleted contracts in excess of incurred cost and accrued profitsprofit are classified as unearned revenue. Estimated contract losses are recognized when determined. If substantive uncertainty related to customer acceptance exists or the contract’s duration is relatively short, the Company uses the completed-contract method.

F- 8


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The Company provides both perpetual and renewable time-based software licenses. Revenues from software license fees are recognized when all of the following criteria are met: the written agreement is executed; the software is delivered; the license fee is fixed and determinable; collectibility of the license fee is probable; and if applicable, when vendor-specific objective evidence exists to allocate the total license fee to elements of multiple-element arrangements, including post-contract customer support. When contracts contain multiple elements wherein vendor-specific objective evidence exists for all undelivered elements, the Company recognizes revenue for the delivered elements and defers revenue for the fair value of the undelivered elements until the remaining obligations have been satisfied. If vendor-specific objective evidence does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until remaining obligations have been satisfied, or if the only undelivered element is post-contract customer support and vendor specific objective evidence of the fair value of post-contract customer support does not exist, revenue from the entire arrangement is recognized ratably over the support period. Significant judgmentsJudgments and estimates are made in connection with the recognition of software license revenue, includingwhich may include assessments of collectibility, and the fair value of deliverable elements.elements and the implied support period. The amount or timing of the Company’s software license revenue may differ as a result of changes in these judgments or estimates.

     The Company records reductions to revenue for customer incentive programs, including special pricing agreements and other volume-related rebate programs. Such reductions to revenue are estimates, which are based on a number of factors, including our assumptions related to historical and projected customer sales volumes and the contractual provisions of the customer agreements.
     Unearned revenue consists primarily of fees related to software products, and license fees for intellectual property for which delivery is not yet complete and to hardware products sales with a continuing service obligation.

performance obligations.

ConcentrationsConcentrations.

A significant portion of the Company’s revenues is concentrated with a limited number of customers as the worldwide market for wireless telecommunications products is dominated by a small number of large corporations.

F-8


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenues from Samsung, LG Electronics, Samsung and Motorola, customers of the Company’s QCT, QTL and other nonreportable segments, comprised 17%, 13% and 13% of total consolidated revenues, respectively, in fiscal 2003. Revenues from Samsung, Kyocera and LG Electronics, customers of the Company’s QCT, QTL and other nonreportableQWI segments, comprised 15%, 14%13% and 11% of total consolidated revenues, respectively, in fiscal 2002,2005, as compared to 14%15%, 12%15% and 10% of total consolidated revenues in fiscal 2004, respectively, and 13%, 17% and 13%, respectively, in fiscal 2001.2003. Aggregated accounts receivable from Samsung, and LG Electronics and Motorola comprised 25%45% and 23%51% of net receivablesgross accounts receivable at September 30, 200325, 2005 and 2002,September 26, 2004, respectively.

     Revenues from international customers were approximately 78%82%, 70%79% and 65%77% of total consolidated revenues in fiscal 2005, 2004 and 2003, 2002respectively.
Cost of Equipment and 2001, respectively.

Services Revenues.Cost of equipment and services revenues is primarily comprised of the cost of equipment revenues, the cost of messaging services revenues and the cost of development and other services revenues. Cost of equipment revenues consists of the cost of equipment sold and sustaining engineering costs, including personnel and related costs. Cost of messaging services revenues consists principally of satellite transponder costs, network operations expenses, including personnel and related costs, depreciation, and airtime charges by telecommunications operators. Cost of development and other services revenues primarily includes personnel costs and related expenses.

Research and DevelopmentDevelopment.

Costs incurred in research and development activities are expensed as incurred, except certain software development costs capitalized after technological feasibility of the software is established.

Shipping and Handling CostsCosts.

Costs incurred for shipping and handling are included in cost of revenues at the time the related revenue is recognized. Amounts billed to a customer for shipping and handling are reported as revenue.

Income TaxesTaxes.

The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax law and rate changes are reflected in income in the period such changes are enacted. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.

F- 9


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes. As part of its assessment of potential adjustments to its tax returns, the Company increases its current tax liability to the extent an adjustment would result in a cash tax payment or decreases its deferred tax assets to the extent an adjustment would not result in a cash tax payment. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
Cash EquivalentsEquivalents.

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of money market funds, certificates of deposit, commercial paper and government agencies’ securities. The carrying amounts approximate fair value due to the short maturities of these instruments.

Marketable SecuritiesSecurities.

Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date. Held-to-maturity securities are carried at amortized cost, which approximates fair value. Available-for-sale securities and trading securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. The net unrealized gains or losses on available-for-sale securities are reported as a component of comprehensive income (loss), net of tax. Unrealized gains or losses on trading securities are reported in investment income (expense). The specific identification method is used to compute the realized gains and losses on debt and equity securities.

     The Company regularly monitors and evaluates the realizable value of its marketable securities. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as, among other things, how significant the decline in value is as a percentage of the original cost, how long the market value of the investment has been less than its original cost, the performance of the investee’s stock price in relation to the stock price of its competitors within the industry and the market in general, analyst recommendations, any news that has been released specific to the investee and the outlook for the overall industry in which the investee operates. The Company also reviews the financial statements of the investee to determine if the investee is experiencing financial difficulties and considers new products/services that the investee may have forthcoming that will improve its operating results. If events and circumstances indicate that a decline in the value of these assets has occurred and is other than temporary, the Company records a charge to investment income (expense).

Allowances for Doubtful AccountsAccounts.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining

F-9


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

if collection of a fee is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. If the Company has no previous experience with the customer, the Company typically obtains reports from various credit organizations to ensure that the customer has a history of paying its creditors. The Company may also request financial information, including financial statements or other documents (e.g., bank statements) to ensure that the customer has the means of making payment. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

     The Company also maintains allowances for doubtful accounts for estimated losses resulting from the inability of entities it has financed to make required payments. The Company evaluates the adequacy of allowances for doubtful finance and note receivables based on analyses of the financed entities’ credit-worthiness, current economic trends or market conditions, review of the entities’ current and projected financial and operational information, and consideration of the fair value of collateral to be received, if applicable. From time to time, the Company may consider third party evaluations, valuation reports or advice from investment banks. If the financial condition of the financed entities were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

InventoriesInventories.

Inventories are valued at the lower of cost or market (replacement cost, not to exceed net realizable value) using the first-in, first-out method. Recoverability of inventory is assessed based on review of committed purchase orders from customers, as well as purchase commitment projections provided by customers, among other things.

Property, Plant and EquipmentEquipment.

Property, plant and equipment are recorded at cost and depreciated or amortized using the straight-line method over their estimated useful lives. Buildings and building improvements are depreciated over thirty30 years and fifteen15 years, respectively. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the related lease. Other property, plant and equipment have useful lives ranging from two2 to eighteen15 years. Direct external and internal costs of developing software for internal use are capitalized subsequent to the preliminary stage of development. Maintenance, repairs, and minor renewals and betterments are charged to expense as incurred.

F-10


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Upon the retirement or disposition of property, plant and equipment, the related cost and accumulated depreciation or amortization are removed, and thea gain or loss is recorded.

Other Investments

Investments in Other EntitiesEntities.

The Company makes strategic investments in companies that have developed or are developing innovative wireless data applications and wireless carriersoperators that promote the worldwide deployment of CDMA systems. Investments in corporate entities with less than a 20% voting interest are generally accounted for under the cost method. The Company uses the equity method to account for investments in corporate entities, including limited liability corporations that do not maintain specific ownership accounts, in which it has a voting interest of 20% to 50% and other than minor to 50% ownership interests in partnerships and limited liability corporations that do maintain specific ownership accounts, or in which it otherwise has the ability to exercise significant influence. Under the equity method, the investment is originally recorded at cost and adjusted to recognize the Company’s share of net earnings or losses of the investee, limited to the extent of the Company’s investment in and advances to the investee and financial guarantees on behalf of the investee that create additional basis.

The Company’s equity in net earnings or losses of its investees are recorded one month in arrears to facilitate the timely inclusion of such equity in net earnings or losses in the Company’s consolidated financial statements.

     The Company regularly monitors and evaluates the realizable value of its investments. When assessing an investment for an other-than-temporary decline in value, the Company considers such factors as, among other things, the share price from the investee’s latest financing round, the performance of the investee in relation to its own operating targets and its business plan, the investee’s revenue and cost trends, as well as liquidity and cash position, including its cash burn rate, market acceptance of the investee’s products/services as well as any new products or services that may be forthcoming, any significant news that has been released specific to the investee or the

F-10


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

investee’s competitors and/or industry, and the outlook for the overall industry in which the investee operates. From time to time, the Company may consider third party evaluations, valuation reports or advice from investment banks. If events and circumstances indicate that a decline in the value of these assets has occurred and is other than temporary, the Company records a charge to investment income (expense).

DerivativesDerivatives.

     The Company adopted Statement of Financial Accounting Standards No. 133 (FAS 133), “Accounting for Derivative Instruments and Hedging Activities,” as of the beginning of fiscal 2001. FAS 133 requires that certain derivative instruments be recorded at fair value. Derivative instruments held by the Company are comprised of warrants and other rights to purchase equity interests in certain other companies acquired as a result of strategic investment and financing activities. The Company recorded a $129 million gain, net of taxes of $87 million, as the cumulative effect of the change in accounting principle as of the beginning of fiscal 2001. The cumulative effect of the accounting change related primarily to the recognition of the unrealized gain on a warrant to purchase 4,500,000 shares of Leap Wireless International, Inc. (Leap Wireless) common stock issued to the Company in connection with its spin-off of Leap Wireless in September 1998 (Leap Wireless Spin-off). At September 30, 2003 and 2002, the Company had the right to purchase 3,375,000 shares of Leap Wireless common stock under the warrant. The warrant’s value was insignificant at September 30, 2003 and 2002.

The Company holds warrants to purchase equity interests in certain other publicly-traded and private companies related to its strategic investment activities. The Company’sThese warrants are not held for trading or hedging purposes. The Company’sCertain of these warrants are recorded at fair value. Changes in fair value are recorded in investment income (expense) as a change in fair values ofgains (losses) on derivative instruments because the warrants do not meet the requirements for hedge accounting.instruments. Warrants that do not have contractual net settlement provisions are recorded at cost.

The recorded values of the warrants in other current assets were $1 million and $4 million at September 25, 2005 and September 26, 2004, respectively.

     The Company entersmay enter into foreign currency forward and option contracts to hedge certain foreign currency transactions and probable anticipated foreign currency transactions. Unrealized gainsGains and losses arising from foreign currency forward and option contracts that are reportednot designated as hedging instruments are recorded in investment income (expense) as a changegains (losses) on derivative instruments. Gains and losses arising from the effective portion of foreign currency forward and option contracts that are designated as cash-flow hedging instruments are recorded in fair values ofaccumulated other comprehensive income as gains (losses) on derivative instruments becauseinstruments. The amounts are subsequently reclassified into revenues in the same period in which the underlying transactions affect the Company’s earnings. The Company had no outstanding forward contracts are notat September 25, 2005 and the value of the Company’s foreign currency forward contracts was insignificant at September 26, 2004. The value of the Company’s foreign currency option contracts recorded in other current assets was $16 million at September 25, 2005, of which all were designated as cash-flow hedging instruments. The Company had no foreign currency forwardoption contracts outstanding at September 26, 2004.
     In connection with its stock repurchase program, the Company may sell put options that require the Company to repurchase shares of its common stock at fixed prices. In fiscal 2005 and 2004, the premiums received from put options were recorded as other current liabilities in accordance with Statement of September 30, 2003Financial Standards No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and 2002.

     At September 30, 2003 and 2002,Equity.” Changes in the fair value of put options are recorded in investment income (expense) as gains (losses) on derivative instruments. The value of the Company’s derivative investments totaled $2 million and $1 million, respectively, and none of the Company’s derivatives were designated as hedges. The Company’s derivative investments are includedput options recorded in other investments.current liabilities was $7 million at September 25, 2005. The

F-11


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company had no put options outstanding at September 26, 2004. In fiscal 2003, the $7 million in premiums received from put options were recorded as paid-in capital in accordance with EITF Issue No. 00-19, “Accounting for Derivative Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” which was subsequently amended by FAS 150.
Goodwill and Other Intangible AssetsAssets.

Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Effective as of the beginning of fiscal 2003, the Company fully adopted Statement of Financial Accounting Standards No. 141 (FAS 141), “Business Combinations,” and Statement of Financial Accounting Standards No. 142 (FAS 142), “Goodwill and Other Intangible Assets.” The provisions of FAS 141 (1) require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill, and (3) require that unamortized negative goodwill be written off immediately as an extraordinary gain instead of being deferred and amortized. FAS 141 also required that, upon adoption of FAS 142, the Company reclassify the carrying amounts of certain intangible assets into or out of goodwill, based on certain criteria. Upon the adoption of FAS 142, the Company reclassified approximately $2 million of certain intangible assets into goodwill.

     FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. The provisions of FAS 142 (1) prohibit the amortization of goodwill and indefinite-lived intangible assets, (2) require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur indicating that the carrying value of goodwill and/or indefinite-lived intangible assets may be impaired), (3) require that reporting units be identified for the purpose of assessing potential impairments of goodwill, and (4) remove the forty-year limitation on the amortization period of intangible assets that have finite lives. The Company completed its transitional testing for goodwill impairment upon adoption of FAS 142 and its annual testing for fiscal 2003 and determined that its recorded goodwill was not impaired.

F-11


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Starting in fiscal 2003, the Company no longer records goodwill amortization. Goodwill is tested annually for impairment and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from three to twenty-eight years.The Company completed its annual testing for fiscal 2005, 2004 and 2003 and determined that its recorded goodwill was not impaired.

     Software development costs are capitalized when a product’s technological feasibility has been established through the date a product is available for general release to customers.

Software development costs are amortized on a straight-line basis over the estimated economic life of the software, ranging from less than one year to four years, taking into account such factors as the effects of obsolescence, technological advances and competition. The results of operationsweighted-average amortization period for capitalized software was one year at both September 25, 2005 and earnings per share, assuming FAS 142 had been adopted atSeptember 26, 2004. Other intangible assets are amortized on a straight-line basis over their useful lives, ranging from less than one year to 28 years.

     Weighted-average amortization periods for finite lived intangible assets, by class, were as follows:
September 25, 2005September 26, 2004
Wireless licenses15 years15 years
Marketing-related18 years17 years
Technology-based9 years11 years
Customer-related7 years8 years
Other28 years28 years
Total intangible assets13 years14 years
     Changes in the beginning ofweighted-average amortization periods from fiscal 2001, are as follows (in thousands, except per share data):
             
  September 30,
  
  2003 2002 2001
  
 
 
Reported income (loss) before accounting changes $827,441  $359,677  $(560,141)
Goodwill amortization     249,536   245,678 
   
   
   
 
Adjusted income (loss) before accounting changes $827,441  $609,213  $(314,463)
   
   
   
 
Adjusted basic earnings (loss) before accounting changes per share $1.05  $0.79  $(0.42)
   
   
   
 
Adjusted diluted earnings (loss) before accounting changes per share $1.01  $0.75  $(0.42)
   
   
   
 
Reported net income (loss) $827,441  $359,677  $(578,078)
Goodwill amortization     249,536   245,678 
   
   
   
 
Adjusted net income (loss) $827,441  $609,213  $(332,400)
   
   
   
 
Adjusted basic earnings (loss) per share $1.05  $0.79  $(0.44)
   
   
   
 
Adjusted diluted earnings (loss) per share $1.01  $0.75  $(0.44)
   
   
   
 

2004 to 2005 resulted from additions to intangible assets related to acquisitions (Note 11).

Valuation of Long-Lived and Intangible AssetsAssets.

     The Company adopted Statement of Financial Accounting Standards No. 144 (FAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets” as of the beginning of fiscal 2003. The adoption of this accounting standard did not have a material impact on the Company’s operating results and financial position. The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.

LitigationLitigation.

The Company is currently involved in certain legal proceedings. The Company estimates the range of liability related to pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to the Company’s pending litigation and revises its estimates.

Guarantees and Product WarrantiesShare-Based Compensation.

     Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. The Company establishes a reserve for warranty obligations based on its historical warranty experience.

F-12


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

         
  September 30,
  
  2003 2002
  
 
Balance at beginning of the year $15,670  $19,748 
Charges to expense  3,022   8,874 
Release of warranty reserves  (6,669)  (5,018)
Usage  (8,476)  (7,934)
   
   
 
Balance at end of the year $3,547  $15,670 
   
   
 

     In the normal course of business, the Company may provide guarantees to other parties. Upon issuance of a guarantee, the Company recognizes a liability for the fair value of the obligation it assumes under that guarantee, as required. At September 30, 2003, liabilities related to guarantees were not significant.

Stock-Based Compensation

The Company records compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to Accounting Principles Board Opinion 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 stock optionsshare-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 share.common share as their effect is anti-dilutive.

F-12

     Equity instruments issued to non-employees for goods or services are accounted for at fair value and are marked to market until service is complete or a performance commitment date is reached.


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     As required under Financial Accounting Standards Board 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 stock-based compensationshare-based payments on net income and net earnings per common share have been estimated at the date of grant using the Black-Scholes option-pricing model based on the following assumptions:
                         
  Stock Option Plans Purchase Plans
  
 
  2003 2002 2001 2003 2002 2001
  
 
 
 
 
 
Risk-free interest rate  3.2%  4.4%  5.0%  1.0%  2.3%  4.4%
Volatility  58.0%  58.0%  63.0%  41.1%  69.0%  78.0%
Dividend yield  0.2%  0.0%  0.0%  0.3%  0.0%  0.0%
Expected life (years)  6.0   6.0   6.0   0.5   0.5   0.5 

                         
  Stock Option Plans Purchase Plans
  2005 2004 2003 2005 2004 2003
Risk-free interest rate  3.9%  3.8%  3.2%  2.9%  1.1%  1.0%
Volatility  36.5%  53.2%  58.0%  29.8%  33.3%  41.1%
Dividend yield  0.8%  0.6%  0.2%  0.9%  0.7%  0.3%
Expected life (years)  6.0   6.0   6.0   0.5   0.5   0.5 
     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. Black-ScholesThis model does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s employee options.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 employee optionsshare-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 the fair value of those options,values, in the Company’s opinion, the existing valuation models including Black-Scholes, aremay not be reliable single measures and may misstateof the fair valuevalues of the Company’s employee options. As required by FAS 123, theshare-based payments. The Black-Scholes weighted average estimated fair values of stock options granted during fiscal 2005, 2004 and 2003 2002were $14.80, $13.92 and 2001 were $19.33, $28.20 and $44.25$9.67 per share, respectively. The Black-Scholes weighted average estimated fair values of purchase

F-13


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

rights granted pursuant to the Employee Stock Purchase Plans during fiscal 2005, 2004 and 2003 2002were $8.76, $7.53 and 2001 were $9.60, $14.57 and $24.20, respectively,$4.80 per share.

share, respectively.

     For purposes of pro forma disclosures, the estimated fair value of the optionsshare-based payments is assumed to be amortized to expense over the options’their vesting periods. The pro forma effects of recognizing compensation expense under the fair value method on net income and net earnings per common share for the years ended September 30 were as follows (in thousands,millions, except for earnings per common share):
              
   2003 2002 2001
   
 
 
Net income (loss), as reported $827,441  $359,677  $(578,078)
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax benefits  639   1,279   1,591 
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects  (260,350)  (235,193)  (168,715)
   
   
   
 
Pro forma net income (loss) $567,730  $125,763  $(745,202)
   
   
   
 
Earnings (loss) per share:            
 Basic - as reported $1.05  $0.47  $(0.76)
   
   
   
 
 Basic - pro forma $0.72  $0.16  $(0.99)
   
   
   
 
 Diluted - as reported $1.01  $0.44  $(0.76)
   
   
   
 
 Diluted - pro forma $0.69  $0.16  $(0.99)
   
   
   
 
             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
Net income, as reported $2,143  $1,720  $827 
Add: Share-based employee compensation expense included in reported net income, net of related tax benefits  2      1 
Deduct: Share-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects  (305)  (281)  (260)
          
Pro forma net income $1,840  $1,439  $568 
          
             
Earnings per common share:            
Basic — as reported $1.31  $1.06  $0.52 
          
Basic — pro forma $1.12  $0.89  $0.36 
          
Diluted — as reported $1.26  $1.03  $0.51 
          
Diluted — pro forma $1.09  $0.86  $0.35 
          

F-13


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign CurrencyCurrency.

Foreign subsidiaries operating in a local currency environment use the local currency as the functional currency. Assets and liabilities are translated to United States dollars at year-endthe exchange rates;rate in effect at the balance sheet date; revenues, expenses, gains and losses are translated at rates of exchange that approximate the rates in effect at the transaction date. Resulting translation gains or losses are recognized as a component of other comprehensive income. The functional currency of the Company’s foreign investees that do not use local currencies is the United States dollar. Where the United States dollar is the functional currency, the monetary assets and liabilities are translated into United States dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains and losses associated with the monetary assets and liabilities are translated at the rates of exchange that approximate the rates in effect at the transaction date. Non-monetary assets and liabilities and related elements of expense,revenues, expenses, gains and losses are translated at historical rates. Resulting translation gains or losses of these foreign investees are recognized in the statements of operations.

     During fiscal 2005, net foreign currency transaction gains included in the Company’s statement of operations were $1 million. During fiscal 2004, net foreign currency transaction losses included in the Company’s statements of operations were $1 million. During fiscal 2003, and 2001, net foreign currency transaction gains and losses included in the Company’s statements of operations were insignificant. During fiscal 2002, net foreign currency transaction losses included in the Company’s statements of operations were $11 million.

Comprehensive IncomeIncome.

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments and unrealized gains and losses on marketable securities. The Company presents other comprehensive income (loss)��in its consolidated statements of stockholders’ equity.

     The reclassification adjustment for other-than-temporary losses on marketable securities results from the recognition of unrealized losses in the statement of operations resulting fromdue to declines in the market prices of those securities deemed to be other than temporary. The reclassification adjustment for net realized losses (gains)gains results from the recognition of the net realized losses or gains in the statement of operations when the marketable securities are sold. The reclassification adjustment for losses included in the accounting change results from the recognition of unrealized losses attributable to derivative instruments as of the beginning of fiscal 2001 in the statement of

F-14


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

operations as a result of the implementation of FAS 133. Unrealized losses on certain derivative instruments subject to FAS 133 were previously recorded as a component of other comprehensive income (loss).

     Components of accumulated other comprehensive lossincome consisted of the following (in thousands)millions):
         
  September 30,
  
  2003 2002
  
 
Foreign currency translation $(82,987) $(79,762)
Unrealized gain (loss) on marketable securities, net of income taxes  59,218   (51,187)
   
   
 
  $(23,769) $(130,949)
   
   
 

         
  September 25  September 26, 
  2005  2004 
Foreign currency translation $(22) $(27)
Unrealized gains on marketable securities, net of income taxes  60   42 
       
  $38  $15 
       
Stock Split.On July 13, 2004, the Company announced a two-for-one stock split in the form of a stock dividend. Stock was distributed on August 13, 2004 to stockholders of record as of July 23, 2004. Stockholders’ equity has been restated to give retroactive recognition to the stock split for all periods presented by reclassifying the par value of the additional shares arising from the split from paid-in capital to common stock. All references in the financial statements and notes to number of shares and per share amounts reflect the stock split.
Earnings Per Common ShareShare.

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s stock-basedshare-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 fiscal 2005, 2004 and 2003 were approximately 56,127,000, 58,686,000 and 2002 were 28,169,000 and 38,442,000,56,338,000, respectively. The diluted loss per common share for fiscal 2001 is based only on the weighted average number of common shares outstanding during the period, as the inclusion of 51,188,000 common share equivalents would have been anti-dilutive.

     Stock

     Employee stock options to purchase approximately 43,270,0000, 40,845,00033,660,000, 40,221,000 and 14,427,00086,540,000 shares of common stock during fiscal 2003, 20022005, 2004 and 20012003, respectively, were outstanding but not included in the computation of diluted earnings (loss) per common share because the option exercise price was greater than the average market price of the common stock, and therefore, the effect on dilutive earnings (loss) per common share would be anti-dilutive. Put options

F-14


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
outstanding during fiscal 2005 and 2004 to purchase a weighted-average of 13,000,000 and 3,000,000 shares of common stock, respectively, were not included in the earnings per common share computation for fiscal 2005 and 2004 because the put options’ exercise prices were less than the average market price of the common stock while they were outstanding, and therefore, the effect on diluted earnings per common share would be anti-dilutive (Note 7).
Future Accounting RequirementsRequirements.

     Financial Accounting Standards Board (FASB) InterpretationIn December 2004, the FASB revised Statement No. 46 (FIN 46)123 (FAS 123R), “Consolidation“Share-Based Payment,” which requires companies to expense the estimated fair value of Variable Interest Entities,” was issued in January 2003. FIN 46 requires certain variable interest entities toemployee 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 consolidated byeffective for the primary beneficiary of the entity if the equity investorsCompany beginning in the entity do not have the characteristicsfirst quarter of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.fiscal 2006. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. Since January 31, 2003, the Company has not invested in any entities it believes are variable interest entities. For those arrangements entered into prior to February 1, 2003, the Company is requiredtentatively expects to adopt the provisions of FIN 46 atFAS 123R using a modified prospective application. FAS 123R, which provides certain changes to the endmethod 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 first quarter of fiscal 2004,effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FAS 123. At September 25, 2005, unamortized compensation expense related to outstanding unvested options, as determined in accordance with FAS 123, that the FASB Staff Position 46-6 which delayed the effective date of FIN 46 for those arrangements.Company expects to record during fiscal 2006 was approximately $394 million before income taxes. The Company will incur additional expense during fiscal 2006 related to new awards granted during 2006 that cannot yet be quantified. The Company is in the process of determining how the effect, if any,guidance regarding valuing share-based compensation as prescribed in FAS 123R will be applied to valuing share-based awards granted after the adoptioneffective date and the impact that the recognition of FIN 46compensation expense related to such awards will have on its financial statements.

Note 2. Marketable Securities

     Marketable securities were comprised as follows (in thousands)millions):

F-15


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   
    Current Noncurrent
    
 
    September 30, September 30,
    
 
    2003 2002 2003 2002
    
 
 
 
Held-to-maturity:                
  Certificates of deposit $5,073  $76,153  $  $ 
  Commercial paper           6,200 
  Federal agencies  489      129,988    
  Corporate medium-term notes  161,416   97,669   70,111   89,418 
   
   
   
   
 
   166,978   173,822   200,099   95,618 
   
   
   
   
 
Available-for-sale:                
  Federal agencies  346,056   270,896       
  U.S. government securities  349,398   238,286       
  Corporate medium-term notes  1,117,968   300,648   22,099   14,121 
  Mortgage and asset-backed securities  485,859   290,702       
  Non-investment grade debt securities  39,316   6,558   458,768   245,075 
  Equity securities  10,428   130,266   129,688   24,956 
   
   
   
   
 
   2,349,025   1,237,356   610,555   284,152 
   
   
   
   
 
Trading:                
  Corporate convertible bonds          1,860 
   
   
   
   
 
            1,860 
   
   
   
   
 
  $2,516,003  $1,411,178  $810,654  $381,630 
   
   
   
   
 

                 
  Current  Noncurrent 
  September 25,  September 26,  September 25,  September 26, 
  2005  2004  2005  2004 
Held-to-maturity:                
Government-sponsored enterprise securities $60  $  $  $70 
Corporate bonds and notes  70   10      60 
             
   130   10      130 
             
Available-for-sale:                
U.S. Treasury securities  151   267       
Government-sponsored enterprise securities  704   542       
Municipal bonds  10          
Foreign government bonds  17   8       
Corporate bonds and notes  2,645   2,603   14   3 
Mortgage and asset-backed securities  767   1,226       
Non-investment grade debt securities  24      694   571 
Equity mutual funds        293   296 
Equity securities  30   112   1,132   653 
             
   4,348   4,758   2,133   1,523 
             
  $4,478  $4,768  $2,133  $1,653 
             
     As of September 30, 2003,25, 2005, the contractual maturities of debt securities were as follows (in thousands)millions):
                         
  Years to Maturity        
  
 No Single    
  Less than One to Five to Greater than Maturity    
  One Year Five Years Ten Years Ten Years Date Total
  
 
 
 
 
 
Held-to-maturity $166,978  $200,099  $  $  $  $367,077 
Available-for-sale  187,571   1,702,214   428,331   16,816   484,532   2,819,464 
   
   
   
   
   
   
 
  $354,549  $1,902,313  $428,331  $16,816  $484,532  $3,186,541 
   
   
   
   
   
   
 

F-15


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         
  Years to Maturity  No Single    
  Less than  One to  Five to  Greater than  Maturity    
  One Year  Five Years  Ten Years  Ten Years  Date  Total 
Held-to-maturity $130  $  $  $  $  $130 
                        
Available-for-sale  2,439   1,173   626   21   767   5,026 
                   
  $2,569  $1,173  $626  $21  $767  $5,156 
                   
     Securities with no single maturity date include mortgage-backed securitiesmortgage- and asset-backed securities.

     Available-for-sale securities were comprised as follows at September 30 (in thousands)millions):
                 
      Unrealized Unrealized    
  Cost Gains Losses Fair Value
  
 
 
 
2003
                
Equity securities $103,735  $36,973  $(592) $140,116 
Debt securities  2,757,882   69,069   (7,487)  2,819,464 
   
   
   
   
 
     Total $2,861,617  $106,042  $(8,079) $2,959,580 
   
   
   
   
 
2002
                
Equity securities $210,769  $18,520  $(74,067) $155,222 
Debt securities  1,361,926   21,535   (17,175)  1,366,286 
   
   
   
   
 
     Total $1,572,695  $40,055  $(91,242) $1,521,508 
   
   
   
   
 

                 
      Unrealized  Unrealized    
  Cost  Gains  Losses  Fair Value 
September 25, 2005
                
Equity securities $1,353  $131  $(29) $1,455 
Debt securities  5,039   14   (27)  5,026 
             
Total $6,392  $145  $(56) $6,481 
             
                 
September 26, 2004
                
Equity securities $1,003  $77  $(19) $1,061 
Debt securities  5,208   27   (15)  5,220 
             
Total $6,211  $104  $(34) $6,281 
             
     The fair values of held-to-maturity debt securities at September 30, 200325, 2005 and 2002September 26, 2004 approximate cost.

     The Company recorded realized gains and losses on sales of available-for-sale marketable securities as follows (in millions):
             
  Gross  Gross  Net 
  Realized  Realized  Realized 
Fiscal Year Gains  Losses  Gains 
2005 $198  $(31) $167 
2004  105   (17)  88 
2003  82   (13)  69 
     The following table shows the gross unrealized losses and fair values of the Company’s investments in individual securities that have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months, aggregated by investment category, at September 25, 2005 (in millions):

F-16


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 
  Less than 12 months  More than 12 months 
  Fair  Unrealized  Fair  Unrealized 
  Value  Losses  Value  Losses 
U.S. Treasury securities $  $  $64  $(1)
Government-sponsored enterprise securities  159   (1)      
Corporate bonds and notes  821   (6)  182   (3)
Mortgage and asset-backed securities  304   (2)  90   (1)
Non-investment grade debt securities  337   (12)  17   (1)
Equity securities  384   (29)      
             
  $2,005  $(50) $353  $(6)
             
Investment Grade Debt Securities.The Company’s investments in investment grade debt securities consist primarily of investments in certificates of deposit, U.S. Treasury securities, government-sponsored enterprise securities, foreign government bonds, mortgage- and asset-backed securities and corporate bonds and notes. The unrealized losses on the Company’s investments in investment grade debt securities were caused by interest rate increases. Due to the fact that the decline in market value is attributable to changes in interest rates and not credit quality, and because the severity and duration of the unrealized losses were not significant, the Company considered these unrealized losses to be temporary at September 25, 2005.
Non-Investment Grade Debt Securities.The Company’s investments in non-investment grade debt securities consist primarily of investments in corporate bonds. The unrealized losses on the Company’s investment in non-investment grade debt securities were caused by credit quality and industry or company specific events. Because the severity and duration of the unrealized losses were not significant, the Company considered these unrealized losses to be temporary at September 25, 2005.
Marketable Equity Securities.The Company’s investments in marketable equity securities consist primarily of investments in common stock of large companies and equity mutual funds. The unrealized losses on the Company’s investment in marketable equity securities were caused by overall equity market volatility and industry specific events. The duration and severity of the unrealized losses in relation to the carrying amounts of the individual investments were consistent with typical equity market volatility. Current market forecasts support a recovery of fair value up to (or beyond) the cost of the investment within a reasonable period of time. Accordingly, the Company considered these unrealized losses to be temporary at September 25, 2005.

Note 3. Composition of Certain Financial Statement Captions

Accounts Receivable
          
   September 30,
   
   2003 2002
   
 
   (In thousands)
Trade, net of allowance for doubtful accounts of $12,352 and $21,647, respectively $460,477  $521,371 
Long-term contracts:        
 Billed  10,047   4,576 
 Unbilled  6,898   985 
Other  6,371   10,018 
   
   
 
  $483,793  $536,950 
   
   
 

     Unbilled receivables represent costs and profits recorded in excess of amounts billable pursuant to contract provisions and are expected to be realized within one year.

Finance Receivables

     Finance receivables 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. Finance receivables were comprised as follows:

         
  September 30,
  
  2003 2002
  
 
  (In thousands)
Finance receivables $205,464  $881,859 
Allowances  (18,047)  (50,529)
   
   
 
   187,417   831,330 
Current maturities, net  5,795   388,396 
   
   
 
Noncurrent finance receivables, net $181,622  $442,934 
   
   
 

     At September 30, 2003 and 2002, the fair value of finance receivables approximated $198 million and $826 million, respectively. The fair value of finance receivables is estimated by discounting the future cash flows using current interest rates at which similar financing would be provided to similar customers for the same remaining maturities.

     Maturities of finance receivables at September 30, 2003 were as follows (in thousands):

     
Fiscal Year Ending September 30, Amount

 
2004 $7,107 
2005  560 
2006  49,103 
2007  65,311 
2008  65,311 
Thereafter  18,072 
   
 
  $205,464 
   
 

     Maturities after 2008 include finance receivables which have been fully reserved.

     The Company had various financing arrangements, including a bridge loan facility, an equipment loan facility and interim and additional interim loan facilities, with Pegaso Comunicaciones y Sistemas S.A. de C.V., a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (collectively

         
  September 25,  September 26, 
  2005  2004 
  (In millions) 
Trade, net of allowance for doubtful accounts of $2 and $5, respectively $506  $529 
Long-term contracts  26   14 
Other  12   38 
       
  $544  $581 
       

F-17


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

referred to as Pegaso). On September 10, 2002, Telefónica Móviles (Telefónica) acquired a 65% controlling interest in Pegaso. On October 10, 2002, Pegaso paid $82 million in full satisfaction of the interim and additional interim loans. On November 8, 2002, Pegaso paid $435 million in full satisfaction of the bridge loan facility. The Company used approximately $139 million of the bridge loan proceeds to purchase outstanding vendor debt owed by Pegaso to other lenders. On March 31, 2003, Pegaso paid $4 million on the equipment loan facility. On June 13, 2003, Pegaso prepaid $281 million of the equipment loan facility, including accrued interest, in accordance with certain terms of the equipment loan facility. As a result of these transactions, finance receivables from Pegaso decreased by $663 million.

     At September 30, 2003, amounts outstanding, net of deferred interest, under the Pegaso equipment loan facility were $181 million, including the acquired vendor debt, as compared to $821 million outstanding under the various financing arrangements with Pegaso at September 30, 2002. The remaining equipment loan facility outstanding with Pegaso, including the acquired vendor debt, is payable quarterly starting in March 2006 through December 2008 and bears interest at the London Interbank Offered Rate (LIBOR) plus 1% through September 9, 2004, LIBOR plus 3% thereafter through September 9, 2007 and LIBOR plus 6% thereafter. The Company recognized $41 million, $9 million and $90 million in interest income related to the Pegaso financing arrangements during fiscal 2003, 2002 and 2001, respectively, including $23 million of deferred interest income recorded as a result of the prepayment in fiscal 2003.

     At September 30, 2003, commitments to extend long-term financing by the Company to certain CDMA customers of Ericsson totaled approximately $464 million. The commitment to fund $346 million of this amount expires on November 6, 2003. The funding of the remaining $118 million, if it occurs, is not subject to a fixed expiration date. The financing commitments are subject to the CDMA customers meeting conditions prescribed in the financing arrangements and, in certain cases, to Ericsson also financing a portion of such sales and services. This financing is generally collateralized by the related equipment. Commitments represent the maximum amounts to be financed under these arrangements; actual financing may be in lesser amounts.

Inventories
         
  September 30,
  
  2003 2002
  
 
  (In thousands)
Raw materials $18,512  $19,583 
Work-in-process  3,000   4,315 
Finished goods  88,839   64,196 
   
   
 
  $110,351  $88,094 
   
   
 

         
  September 25,  September 26, 
  2005  2004 
  (In millions) 
Raw materials $23  $20 
Work-in-process  6   3 
Finished goods  148   131 
       
  $177  $154 
       
Property, Plant and Equipment
         
  September 30,
  
  2003 2002
  
 
  (In thousands)
Land $47,214  $41,668 
Buildings and improvements  338,424   294,186 
Computer equipment  378,983   348,208 
Machinery and equipment  449,181   442,098 
Furniture and office equipment  22,152   29,841 
Leasehold improvements  42,750   53,769 
   
   
 
   1,278,704   1,209,770 
Less accumulated depreciation and amortization  (656,439)  (523,487)
   
   
 
  $622,265  $686,283 
   
   
 

F-18


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         
  September 25,  September 26, 
  2005  2004 
  (In millions) 
Land $65  $47 
Buildings and improvements  614   413 
Computer equipment  520   430 
Machinery and equipment  544   413 
Furniture and office equipment  33   24 
Leasehold improvements  107   54 
Property under capital leases  2    
       
   1,885   1,381 
         
Less accumulated depreciation and amortization  (863)  (706)
       
  $1,022  $675 
       
     Depreciation and amortization expense from continuing operations related to property, plant and equipment for fiscal 2005, 2004 and 2003 2002 and 2001 was $148$177 million, $133 million and $91$117 million, respectively.
     At September 30, 200325, 2005 and 2002,September 26, 2004, buildings and improvements and leasehold improvements with a net book value of $66$36 million and $86$38 million, respectively, including accumulated depreciation and amortization of $52$30 million and $43$27 million, respectively, were leased to third parties or held for lease to third parties. Future minimum rental income on facilities leased to others in each of the next fivefour years from fiscal 20042006 to 20082009 are $14$9 million, $7 million, $7$9 million, $7 million and $6$1 million, respectively.

F-18


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Other Intangible AssetsAssets.

     Starting in fiscal 2003, the Company no longer records goodwill amortization (Note 1). The Company’s reportable segment assets do not include goodwill (Note 10). The Company allocatedallocates goodwill to its reporting units for transitionannual testing purposes as of the date of its adoption of FAS 142.purposes. Goodwill was allocatedallocable to reporting units included in the Company’s reportable segments at September 25, 2005 as follows: $268$298 million in QUALCOMM CDMA Technologies, $73 million in QUALCOMM Technology Licensing, $4$72 million in QUALCOMM Wireless & Internet, and $2$128 million in QUALCOMM Strategic Initiatives.

     AllMEMS Technology (a nonreportable segment included in reconciling items in Note 10). The increase in goodwill from September 26, 2004 to September 25, 2005 was the result of the Company’s acquired intangible assets other than goodwill are subject to amortization. During fiscal 2003, the Company acquired $82 million in personal mobile services (SMP) licenses in Brazil. During fiscal 2003, the Company recorded a $160 million impairment loss on its long-lived assets in its QUALCOMM Strategic Initiatives (QSI) segment related to Vésperbusiness acquisitions (Note 11), including impairment of $34 million in wireless licenses, $12 million in marketing-related intangible assets and $5 million in customer-related intangible assets. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.

     During fiscal 2001, the Company acquired licenses in the third generation wireless spectrum auctions in Australia for $84 million. During fiscal 2003, the Company recorded a $34 million impairment loss in its QSI segment on its wireless licenses in Australia due to recent developments that affected potential strategic alternatives for using the spectrum. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values.

partially offset by currency translation adjustments.

     The components of purchased intangible assets, which are included in other assets, were as follows (in thousands)millions):
                  
   September 30, 2003 September 30, 2002
   
 
   Gross Carrying Accumulated Gross Carrying Accumulated
   Amount Amortization Amount Amortization
   
 
 
 
Wireless licenses $174,480  $(7,858) $118,705  $(1,429)
Marketing-related  20,683   (7,411)  34,673   (5,786)
Technology-based  35,558   (27,341)  31,846   (19,659)
Customer-related  16,652   (15,563)  22,806   (11,028)
Other  8,502   (1,089)  13,751   (4,881)
   
   
   
   
 
 Total intangible assets $255,875  $(59,262) $221,781  $(42,783)
   
   
   
   
 

                 
  September 25, 2005  September 26, 2004 
  Gross     Gross    
  Carrying  Accumulated  Carrying  Accumulated 
  Amount  Amortization  Amount  Amortization  
Wireless licenses $164  $(17) $77  $(11)
Marketing-related  21   (9)  21   (8)
Technology-based  116   (48)  77   (37)
Customer-related  17   (13)  15   (12)
Other  7   (1)  7   (1)
             
Total intangible assets $325  $(88) $197  $(69)
             
     Wireless licenses increased as a result of the Company’s acquisition of additional 700MHz spectrum in the United States during fiscal 2005 for its MediaFLO USA business (Note 10). Increases in other intangible asset categories primarily resulted from acquisitions during fiscal 2005 (Note 11).
     All of the Company’s purchased intangible assets other than certain wireless licenses in the amount of $84 million and goodwill are subject to amortization. Amortization expense from continuing operations for fiscal year2005, 2004 and 2003 2002 and 2001 was $20$19 million, $20$17 million and $12$18 million, respectively. Amortization expense related to these intangible assets is expected to be $22 million in fiscal 2006, $19 million in fiscal 2004,2007, $16 million in fiscal 2008, $15 million in fiscal 2005,2009 and $14 million in fiscal 2006, $14 million in fiscal 2007 and $13 million in fiscal 2008.

2010.

     Capitalized software development costs, which are included in other assets, were $36$43 million and $24$44 million at September 30, 200325, 2005 and 2002,September 26, 2004, respectively. Accumulated amortization on capitalized software was $26$42 million and $14$39 million at September 30, 200325, 2005 and 2002,September 26, 2004, respectively. Amortization expense from continuing operations related to capitalized software for fiscal 2005, 2004 and 2003 2002was $4 million, $13 million and 2001 was $12 million, $10 million and $1 million, respectively.

Note 4. Investments in Other Entities

Inquam LimitedLimited.

     InSince October 2000, the Company agreedand another investor (the Other Investor) have provided equity and debt funding to invest $200 million in the convertible preferred shares of Inquam Limited (Inquam) for an approximate 42% ownership interest in Inquam.. Inquam owns, develops and manages wireless CDMA-based communications systems, either directly or indirectly, withprimarily in Romania and Portugal. The Company recorded $33 million in equity in losses of Inquam during fiscal 2005, as compared to $59 million and $99 million for fiscal 2004 and 2003, respectively. At September 25, 2005 and September 26, 2004, the primary intentCompany’s equity and debt investments in Inquam totaled $26 million and $42 million, respectively, net of deploying CDMA-based

equity in losses. The Company had no remaining funding commitment under its bridge loan agreement at September 25, 2005.
     During fiscal 2005, Inquam secured new long-term financing (the new facilities). The Company and the Other Investor 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 $49 million as of September 25, 2005. The guarantee expires and the new facilities mature on December 25, 2011.

F-19


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

technology, primarily in Europe. The Company provided the final $27 million under this equity commitment during fiscal 2003 and had no remaining equity funding commitment at September 30, 2003.

     On March 26, 2003,

     In October 2005, the Company and the Other Investor agreed to extend $25 millionrestructure Inquam. Upon close of bridge loan financingthe restructuring, which is expected to Inquam. Another investoroccur in the first half of fiscal 2006, the Portugal companies will be spun-off through the exchange of portions of the Company’s and the Other Investor’s debt investments for direct equity interests in the Portugal companies. Inquam, which will continue to own the Romania companies, will repurchase certain minority equity interests. Immediately after the restructuring, the Company will hold an approximate 49.7% equity interest in Inquam also agreedand a 23% equity interest in the Portugal companies, which is expected to provide $25 millionbe reduced over time as the Other Investor makes the further investments in bridge loan financing. The Company provided the $25 million in funding during fiscal 2003 and had no remaining commitment underPortugal companies contemplated by the bridge loan at September 30, 2003.

     On July 14, 2003,restructuring agreements. In addition, the Company approved an additional $50 million investmentand the Other Investor will have a put-call option arrangement. Under this arrangement, the Other Investor will have the right to buy the Company’s equity and debt investments in Inquam, subject to certain conditions, including a matching $50 million investment by another existing investorexercising its call option, which will expire no later than May 14, 2008. The minimum purchase price will be approximately $66 million. In the event that the Other Investor’s call option expires, or in Inquam. No commitments relatedcertain other circumstances prior to these potential investments were in place at September 30, 2003. On September 19, 2003,that date, the Company and this other existing investor each agreedwill have the right to provide an additional $5 million bridge financing to enable Inquam to meet its cash flow requirements while the terms of a new equity investment are being negotiated. It is the intention of both parties that this second $10 million bridge loan will be repaid with the proceeds from the anticipated equity investment. The Company provided $2 million under this second bridge loan during fiscal 2003 and had a remaining funding commitment of $3 million at September 30, 2003.

     On September 22, 2003, the Company and another investor in Inquam agreed to guarantee the payment of amounts due by Inquam under a bank credit agreement. The Company’s maximum liability under the guarantee is limited to an amount equal to 50% of the amounts outstanding under Inquam’s credit agreement, up to a maximum of $10 million. No amounts were outstanding under the bank credit agreement as of September 30, 2003.

     The Company uses the equity method to account for its investment in Inquam. During fiscal 2003, the Company recorded an $11 million other-than-temporary impairment loss related to its investment in Inquam. The impairment loss was the difference between the carrying value of the investment and its estimated fair value. At September 30, 2003, the Company’ssell our equity and debt investmentinvestments in Inquam was $68 million, netto the Other Investor at a minimum sales price of equity in losses and impairment.$66 million. Such right will expire after six months. The Company expects that Inquam will focus its resources on the development of CDMA properties in the 450MHz frequency band in Romania and western Europe and will transfer its non-CDMA operations to one or more of Inquam’s other shareholders. Inquam is expected to use approximately $70 million to $80 million in cash through the first half of calendar 2004. Inquam’s management does not expectanticipate providing any further funding to Inquam or to be cash flow positive until calendar 2007 with its current business plan. If the Inquam operating companies cannot raise debt financing as expected or new investors cannot be found, Inquam’s growth potential and the value of the Company’s investment in Inquam may be negatively affected.

Portugal companies.

     Inquam’s summarized financial information, derived from its unaudited financial statements, is as follows (in thousands)millions):
           
    September 30,
    
    2003 2002
    
 
Balance sheet:        
 Current assets $45,356  $60,083 
 Noncurrent assets  172,398   265,631 
    
   
 
  Total assets $217,754  $325,714 
    
   
 
 Current liabilities $97,836  $98,496 
 Noncurrent liabilities  46,762   36,812 
    
   
 
  Total liabilities $144,598  $135,308 
    
   
 
              
   Years Ended September 30,
   
   2003 2002 2001
   
 
 
Income statement:            
 Net revenues $49,959  $17,648  $6,162 
    
   
   
 
 Gross (loss) profit  (2,141)  (9,344)  1,056 
    
   
   
 
 Net loss $(204,525) $(104,366) $(28,676)
    
   
   
 

F-20


         
  September 25,  September 26, 
  2005  2004 
Balance sheet:        
Current assets $41  $40 
Noncurrent assets  156   152 
       
Total assets $197  $192 
       
Current liabilities $60  $123 
Noncurrent liabilities  273   132 
       
Total liabilities $333  $255 
       
             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
Income statement:            
Net revenues $111  $88  $50 
          
Gross profit (loss)  53   35   (2)
          
Net loss $(73) $(136) $(205)
          
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSOther.

Globalstar L.P.

     Under now-terminated contracts with Globalstar L.P. (Globalstar), the Company designed, developed and manufactured subscriber products and ground communications systems utilizing CDMA technology and provided contract development services. Globalstar was formed to design, construct, and operate a worldwide, low-Earth-orbit satellite-based telecommunications system (the Globalstar System). Through partnership interests held in certain intermediate limited partnerships and other indirect interests, the Company owns an approximate 6.3% interest in Globalstar.

     On January 16, 2001, Globalstar announced that, in order to have sufficient funds available for the continued progress of its marketing and service activities, it had suspended indefinitely principal and interest payments on all of its debt, including its vendor financing obligations. As a result, Globalstar did not make an approximately $22 million payment for principal and interest due to the Company on January 15, 2001. Globalstar also announced its intent to restructure its debt. As a result, the Company recorded total net charges of $49 million in cost of revenues, $519 million in asset impairment and related charges, $10 million in investment expense and $58 million in other non-operating charges during fiscal 2001 related primarily to the impairment of certain assets related to its business with Globalstar. Globalstar filed for Chapter 11 bankruptcy protection during fiscal 2002. On April 25, 2003, the U.S. Bankruptcy Court approved the sale of Globalstar’s assets to a new company to be controlled by ICO Global Communications (Holdings) Limited (ICO), however ICO has indicated as of October 2003 that it does not believe it will complete the acquisition. Globalstar has opened negotiations with other parties with respect to an acquisition of Globalstar’s assets.

     The Company continues to provide services and sell products to Globalstar service providers and other customers involved with the Globalstar System. In addition, the Company is in negotiations with potential acquirers to provide products and services to the new operating company.

     Revenues resulting from agreements with Globalstar and its consolidated subsidiaries for fiscal 2003, 2002 and 2001 were $12 million, $4 million and $35 million, respectively. The Company recorded net credits of $11 million and $4 million during fiscal 2003 and 2002, respectively, related to sales of previously impaired assets. The Company did not recognize any interest income related to Globalstar during fiscal 2003, 2002 and 2001. All receivables from, loans to and investments in Globalstar have no remaining recorded values at September 30, 2003.

Other

Other strategic equity investments as of September 30, 200325, 2005 and 2002 amounted to $87September 26, 2004 totaled $96 million and $130$123 million, respectively, including $33$40 million and $73$50 million, respectively, accounted for using the cost method. The fair valuesDifferences between the carrying amounts of costcertain other strategic equity method investments approximate their recorded values.and the Company’s underlying equity in the net assets of those investees were not significant at September 25, 2005 and September 26, 2004. At September 30, 2003,25, 2005, effective ownership interests in thethese investees ranged from less than 1%approximately 7% to 50%.

     Summarized financial information regarding our principal equity method investments, excluding Inquam and Vésper (Note 11), derived from their unaudited financial statements, follows. These investments are noncontrolling interests in venture capital funds. Information is presented in the aggregate, and net (loss) income is generally presented from the acquisition date (in thousands):

F-21


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          
   September 30,
   
   2003 2002
   
 
Current assets $82,343  $59,625 
Noncurrent assets  41,064   65,742 
   
   
 
 Total assets $123,407  $125,367 
   
   
 
Current liabilities $347  $257 
Noncurrent liabilities  513    
   
   
 
 Total liabilities $860  $257 
   
   
 
             
  Years Ended September 30,
  
  2003 2002 2001
  
 
 
Net (loss) income $(41,156) $(15,259) $14,555 
   
   
   
 

     Funding commitments related to these investments total $24totaled $13 million at September 30, 2003,25, 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 successfully 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 5. Investment Income (Expense)

     Investment income (expense) for the years ended September 30 was comprised as follows (in thousands)millions):
             
  2003 2002 2001
  
 
 
Interest income $163,526  $134,937  $243,298 
Net realized gains on marketable securities  72,987   11,956   63,420 
Net realized (losses) gains on other investments  (169)  (9,480)  6,267 
Other-than-temporary losses on marketable securities  (100,199)  (205,811)  (147,649)
Other-than-temporary losses on other investments  (38,257)  (24,680)  (50,749)
Change in fair values of derivative instruments  (3,201)  (58,874)  (242,849)
Minority interest in loss (income) of consolidated subsidiaries  36,949   52,498   (3,769)
Equity in losses of investees  (126,015)  (86,958)  (185,060)
   
   
   
 
  $5,621  $(186,412) $(317,091)
   
   
   
 

F-20

     During fiscal 2003, management determined that declines in the market value of the Company’s investment in Korea Telecom Freetel Co., Ltd. (KTF), a wireless operator in South Korea, were other than temporary. In reaching this conclusion, the decline in stock value as a percentage of the original cost and the length of time in which the market value of the investment had been below its original cost were considered. As a result, the Company recorded $81 million in other-than-temporary losses on marketable securities. The Company holds 4,416,000 common shares of KTF as of September 30, 2003. The fair value of the common shares was $82 million at September 30, 2003.

     During fiscal 2002, management determined that declines in the market values of the Company’s investments in Leap Wireless (Note 1) were other than temporary when those values declined significantly due to unfavorable business developments. Subsequently, Leap Wireless filed for Chapter 11 bankruptcy protection in April, 2003. The Company recorded $162 million and $18 million in other-than-temporary losses on marketable securities for the notes and stock, respectively, during fiscal 2002. The Company also recorded $59 million and $213 million in losses related to changes in the fair values of Leap Wireless derivative investments for fiscal 2002 and 2001, respectively. The Company holds 308,000 units of Leap Wireless’ senior discount notes with detachable warrants for $150 million. The warrants entitle each holder to purchase 2.503 common shares per each senior discount note unit held at

F-22


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$96.80 per common share. In addition,

             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
Interest and dividend income $256  $175  $158 
Interest expense  (3)  (2)  (2)
Net realized gains on marketable securities  167   88   73 
Net realized gains on other investments  12      7 
Other-than-temporary losses on marketable securities  (13)  (12)  (100)
Other-than-temporary losses on other investments  (1)     (28)
Gains on derivative instruments  33   7   (3)
Equity in losses of investees  (28)  (72)  (113)
          
  $423  $184  $(8)
          
     The Company had various financing arrangements, including a bridge loan facility, an equipment loan facility, and interim and additional loan facilities with a wholly owned subsidiary of Pegaso Telecomunicaciones, S.A. de C.V., a CDMA wireless operator in Mexico (Pegaso). Pegaso paid the Company holds 489,000 shares of Leap Wireless’ common stock at September 30,loan facilities in full, including accrued interest, during fiscal 2003 and a warrant to purchase common stock issued2004. The Company recognized $12 million and $41 million in interest income related to the Company in connection with its spin-off of Leap Wireless. The fair values of the senior discount notesPegaso financing arrangements during fiscal 2004 and the common stock totaled $29 million, and the warrants had insignificant value at September 30, 2003.

     During fiscal 2001, the Company recorded an other-than-temporary impairment charge of $134 million in investment income (expense) related to its investment in NetZero, Inc. (NetZero). NetZero was a publicly-traded company that provided Internet access and services to consumers and on-line direct marketing services to advertisers. Effective September 26, 2001, NetZero and Juno Online Services, Inc. completed a merger and became United Online, Inc. (United Online). The Company received 2,300,000 shares of United Online for its 11,500,000 shares of NetZero, representing an approximate 5.7% interest in United Online. During fiscal 2003, the Company sold its shares in United Online, resulting in realized gains of $53 million. At September 30, 2003, the Company no longer holds shares in United Online.

respectively.

Note 6. Income Taxes

     The components of the income tax provision for the years ended September 30 were as follows (in thousands)millions):
              
   2003 2002 2001
   
 
 
Current provision:            
 Federal $228,099  $5,377  $274,316 
 State  49,909   7,989   69,640 
 Foreign  119,295   85,903   77,276 
    
   
   
 
   397,303   99,269   421,232 
    
   
   
 
Deferred provision (benefit):            
 Federal  44,936   (22)  (279,730)
 State  15,467   2,201   (37,001)
    
   
   
 
   60,403   2,179   (316,731)
    
   
   
 
  $457,706  $101,448  $104,501 
    
   
   
 

             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
Current provision:            
Federal $77  $115  $299 
State  42   60   57 
Foreign  140   157   119 
          
   259   332   475 
          
             
Deferred provision (benefit):            
Federal  398   227   45 
State  9   29   16 
   407   256   61 
          
  $666  $588  $536 
          
     The components of earnings from continuing operations before income taxes for the years ended September 30 were as follows (in thousands)millions):
             
  2003 2002 2001
  
 
 
United States $1,167,668  $487,615  $(435,237)
Foreign  117,479   (26,490)  (20,403)
   
   
   
 
Earnings before income taxes $1,285,147  $461,125  $(455,640)
   
   
   
 
             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
United States $1,570  $1,571  $1,163 
Foreign  1,239   742   402 
          
Earnings from continuing operations before income taxes $2,809  $2,313  $1,565 
          

F-21


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The following is a reconciliation fromof the expected statutory federal income tax provision to the Company’s actual income tax provision for the years ended September 30 (in thousands)millions):

F-23


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

             
  2003 2002 2001
  
 
 
Expected income tax provision (benefit) at federal statutory tax rate $449,801  $161,394  $(159,474)
State income tax provision (benefit), net of federal benefit  50,121   23,978   (23,693)
Goodwill amortization     96,642   95,728 
Other permanent differences  454   7,649   6,567 
Foreign income taxed at other than U.S. rates  (71,636)  (42,717)  (27,428)
U.S. deduction for foreign losses  (93,026)      
Valuation allowance  143,682   (116,697)  231,883 
Tax credits  (31,561)  (25,788)  (28,549)
Alternative Minimum Tax        4,165 
Other  9,871   (3,013)  5,302 
   
   
   
 
Actual income tax provision $457,706  $101,448  $104,501 
   
   
   
 

             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
Expected income tax provision at federal statutory tax rate $983  $809  $548 
State income tax provision, net of federal benefit  109   91   61 
One-time dividend  35       
Foreign income taxed at other than U.S. rates  (290)  (215)  (59)
Valuation allowance  (78)  (44)   
Tax credits  (66)  (49)  (32)
Other  (27)  (4)  18 
          
Income tax expense $666  $588  $536 
          
     The Company didhas not provideprovided for United States income taxes and foreign withholding taxes on a cumulative total of approximately $877 million$1.2 billion of undistributed earnings forfrom certain non-United States subsidiaries. The Company considers the operating earnings of non-United States subsidiaries to be indefinitely invested outside the United States. Should the Company 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. On October 22, 2004, the American Jobs Creation Act of 2004 (the Jobs Creation Act) was signed into law. The Jobs Creation Act created a temporary incentive for corporations in which the facts that give riseUnited States to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. In the revision become known.

     At September 30, 2003fourth quarter of fiscal 2005, the Company repatriated approximately $0.5 billion of foreign earnings qualifying for the special incentive under the Jobs Creation Act and 2002,recorded a related expense of approximately $35 million for federal and state income tax liabilities. This distribution does not change the Company’s intention to indefinitely reinvest undistributed earnings of certain of its foreign subsidiaries in operations outside the United States.

     The Company had net deferred tax assets as follows (in thousands)millions):
          
   2003 2002
   
 
Accrued liabilities, reserves and other $599,103  $280,706 
Deferred revenue  171,904   170,608 
Unrealized loss on marketable securities  236   35,600 
Unused net operating losses  308,476   458,742 
Tax credits  345,198   431,413 
Unrealized loss on investments  377,958   247,930 
   
   
 
 Total gross assets  1,802,875   1,624,999 
Valuation allowance  (660,276)  (1,523,044)
   
   
 
 Total net deferred assets  1,142,599   101,955 
   
   
 
Purchased intangible assets  (1,680)  (4,022)
Deferred contract costs  (43,551)  (42,173)
Unrealized gain on marketable securities  (39,331)  (15,022)
Other basis differences  (40,567)  (33,889)
   
   
 
 Total deferred liabilities $(125,129) $(95,106)
   
   
 
         
  September 25,  September 26, 
  2005  2004 
Accrued liabilities, reserves and other $199  $139 
Deferred revenues  76   133 
Unrealized losses on marketable securities  5   5 
Unused net operating losses  13    
Capital loss carryover  161   249 
Tax credits  346   454 
Unrealized losses on investments  137   169 
       
Total gross deferred assets  937   1,149 
Valuation allowance  (69)  (139)
       
Total net deferred assets $868  $1,010 
       
         
Purchased intangible assets  (17)  (8)
Deferred contract costs  (18)  (26)
Unrealized gains on marketable securities  (50)  (33)
Other basis differences  (1)  (43)
       
Total deferred liabilities $(86) $(110)
       

F-22


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The Company reversed approximately $1.1 billion of its valuation allowance on substantially all of its United States deferred tax assets during fiscal 2003 as a credit to stockholders’ equity. The Company now believes, that it will 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. Although the majorityAs of foreign net operating losses will not expire,September 25, 2005, the Company continues to providehas provided a valuation allowance on substantially all of its foreign deferred tax assets totaling $494 million at September 30, 2003 because of uncertainty regarding their realization due to a history of losses from operations. The Company also provides a valuation allowance totaling $166 million at September 30, 2003 on all net capital losses generated afterof $62 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 $142 million from September 30, 2002 because26, 2004 to September 25, 2005 primarily due to the use of uncertainty regarding their realization. If any portiontax credits as a result of continued profitable operations in excess of tax benefits from stock option expense, partially offset by a decrease in the valuation allowance is removed, the release would be accounted for as a reduction of the income tax provision.

related to capital loss carryover.

     At September 30, 2003,25, 2005 and September 26, 2004, the Company had federal, state and foreign taxes payable of approximately $69 million and $27 million, respectively, included in other current liabilities.
     At September 25, 2005, the Company had unused federal and state income tax credits of $505$670 million and $118$93 million, respectively, generally expiring from 20042006 through 2023.2024. The Company does not expect these credits to expire unused.

F-24


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Cash amounts paid for income taxes, net of refunds received, were $125$168 million, $89$127 million and $75$125 million for fiscal 2003, 20022005, 2004 and 2001,2003, respectively. The income taxes paid primarily relate to foreign withholding taxes.

Note 7. Capital Stock

Preferred StockStock.

The Company has 8,000,000 shares of preferred stock authorized for issuance in one or more series, at a par value of $0.0001 per share. In conjunction with the distribution of Preferred Share Purchase Rights, 1,500,000preferred share purchase rights, 4,000,000 shares of preferred stock are designated as Series A Junior Participating Preferred Stock and reserved such shares are reserved for issuance upon exercise of the Preferred Share Purchase Rights.preferred share purchase rights. At September 30, 200325, 2005 and 2002,September 26, 2004, no shares of preferred stock were outstanding.

Preferred Share Purchase Rights PlanAgreement.

The Company has a Preferred Share Purchase Rights PlanAgreement (Rights Plan)Agreement) to protect stockholders’ rightsinterests in the event of a proposed takeover of the Company. Under the original Rights Plan,Agreement, adopted on September 26, 1995, the Company declared a dividend of one preferred share purchase right (a Right) for each share of the Company’s common stock outstanding. Pursuant to the Rights Plan,Agreement, as amended and restated on September 26, 2005, each Right entitles the registered holder to purchase from the Company a one one-hundredthone-thousandth share of Series A Junior Participating Preferred Stock, $0.0001 par value per share, subject to adjustment for subsequent stock splits, at a purchase price of $250. In November 1999, the Rights Plan was amended to provide that the purchase price be set at $400.$180. The Rights are exercisable only if a person or group (an Acquiring Person) acquires beneficial ownership of 15% or more of the Company’s outstanding shares of common stock.stock without Board approval. Upon exercise, holders, other than an Acquiring Person, will have the right, subject to termination, to receive the Company’s common stock or other securities, cash or other assets having a market value, as defined, equal to twice such purchase price. The Rights, which expire on September 25, 2005,2015, are redeemable in whole, but not in part, at the Company’s option at anyprior to the time such rights are triggered for a price of $0.005$0.001 per Right.

Stock Repurchase ProgramProgram.

On February 11, 2003,March 8, 2005, the Company authorized the expenditurerepurchase of up to $2 billion of the Company’s common stock under a program with no expiration date. During fiscal 2005, the Company repurchased and retired 27,083,000 shares of common stock for $953 million and sold put options under this program. At September 25, 2005, the Company had two outstanding put options, with expiration dates of December 7, 2005 and March 21, 2006, that may require the Company to purchase 11,500,000 shares of its common stock upon exercise for $411 million (net of the option premiums received). Any shares repurchased upon exercise of the put options will be retired. The recorded values of the put option liabilities totaled $7 million at September 25, 2005. During fiscal 2005, the Company recognized $16 million in investment income due to decreases in the fair values of the put options and $15 million in investment income from premiums received on a put option that expired unexercised. At September 25, 2005, $636 million remained authorized for repurchases under this program.

     On February 10, 2003, the Company had authorized the repurchase of up to $1 billion to repurchase shares of the Company’s common stock over a two yeartwo-year period. The Company did not repurchase any of the Company’s common stock under this program during fiscal 2004; however, the Company did sell put options. The Company repurchased all of the put options during fiscal 2004. The net gain recorded in investment income during fiscal 2004 related to the put options, including premiums received, was $5 million.

F-23


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     During fiscal 2003, the Company bought 4,915,000repurchased and retired 9,831,000 shares at a net aggregate cost of $158 million. At September 30, 2003, $834common stock for $166 million remainsand sold put options. The put options expired worthless during fiscal 2003. The $7 million in premiums received from the put options were recorded as paid-in capital.
Dividends.On March 2, 2004, the Company announced an increase in its quarterly dividend from $0.035 to be expended. Repurchased shares are retired upon repurchase.

Dividends

$0.050 per share on common stock. On July 13, 2004, the Company announced an increase in its quarterly dividend from $0.050 to $0.070 per share on common stock. On March 8, 2005, the Company announced an increase in its quarterly dividend from $0.070 to $0.090 per share on common stock. Cash dividends announced in fiscal 20032005 and 2004 were as follows (in thousands,millions, except per share data):

          
   Fiscal 2003
   
   Per Share Total
   
 
First quarter $  $ 
Second quarter $0.05   39,461 
Third quarter $0.05   39,546 
Fourth quarter $0.07   55,769 
   
   
 
 Total $0.17  $134,776 
   
   
 

                 
  2005  2004 
  Per Share  Total  Per Share  Total 
First quarter $0.070  $115  $0.070 (1) $112 
Second quarter  0.070   115   0.050   81 
Third quarter  0.090   147   — (2)   
Fourth quarter  0.090   147   0.070   114 
             
Total $0.320  $524  $0.190  $307 
             
(1) In the first quarter of fiscal 2004, the Company announced two dividends of $0.035 per share which were paid in the first and second quarters of fiscal 2004.
(2) The Company paid a dividend of $0.05 per share in the third quarter of fiscal 2004 that had been announced in the second quarter of fiscal 2004.
     On October 8, 2003,10, 2005, the Company announced a cash dividend of $0.07$0.09 per share on the Company’s common stock, payable on December 26, 2003January 4, 2006 to stockholders of record as of December 7, 2005, which will be reflected in the closefirst quarter of business on November 28, 2003.

fiscal 2006.

Note 8. Employee Benefit Plans

Employee Savings and Retirement PlanPlan.

The Company has a 401(k) plan that allows eligible employees to contribute up to 50% of their eligible compensation, subject to annual limits. The Company matches a portion of the employee contributions and may, at its discretion, make additional contributions based upon earnings. The Company’s contribution expense for fiscal 2005, 2004 and 2003 2002was $27 million, $21 million and 2001 was $20 million, $20 million and $19 million, respectively.

Stock Option PlansPlans.

F-25


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company may grant options to selected employees, directors and consultants to the Company to purchase shares of the Company’s common stock at a price not less than the fair market value of the stock at the date of grant. The 2001 Stock Option Plan (the 2001 Plan) was adopted and replaced the 1991 Stock Option Plan (the 1991 Plan), which expired in August 2001. Options granted under the 1991 Plan remain outstanding until exercised or cancelled. The shares reserved under the 2001 Plan arewere equal to the number of shares available for future grant under the 1991 Plan on the date the 2001 Plan was approved by the Company’s stockholders. At that date, 50,541,570approximately 101,083,000 shares were available for future grants under the 2001 Plan. In fiscal 2004, the Company reserved another 64,000,000 shares for future grants under the 2001 Plan. The Company may terminate the 2001 Plan at any time. The 2001 Plan provides for the grant of both incentive stock options and non-qualified stock options. Generally, options outstanding vest over periods not exceeding sixfive years and are exercisable for up to ten10 years from the grant date. At September 30, 2003,25, 2005, options for 62,972,000approximately 120,298,000 shares under both plans were exercisable at prices ranging from $2.19$1.93 to $172.38$86.19 per share for an aggregate exercise price of $1.7$2.6 billion.

     The Company has adopted the 2001 Non-Employee Directors’ Stock Option Plan (the 2001 Directors’ Plan), which replaces was adopted and replaced the 1998 Non-Employee Directors’ Stock Option Plan (the 1998 Directors’ Plan). Options granted under the 1998 Directors’ Plan remain outstanding until exercised or cancelled. The shares reserved under the 2001 Directors’ Plan are equal to the number of shares available for future grant under the 1998 Directors’ Plan on the date the 2001 Directors’ Plan was approved by the Company’s stockholders. At that date, 2,050,0004,100,000 shares were available for future grants under the 2001 Directors’ Plan. The Company may terminate the 2001 Directors’ Plan at any time. This plan provides for non-qualified stock options to be granted to non-employee directors at fair market value, vesting over periods not exceeding five years and are exercisable for up to ten10 years from the grant date. At September 30, 2003,25, 2005, options for 1,700,000approximately 3,393,000 shares under both plans were exercisable at prices ranging from $3.15$2.91 to $133.00$66.50 per share for an aggregate exercise price of $25$35 million.

F-24


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     In March 2000,fiscal 2005, the Company assumed 1,560,000723,000 and 42,000 of the outstanding stock options under the SnapTrack,Iridigm Display Corporation 2000 Stock Plan and the Spike Technologies, Inc. 19951998 Stock Option Plan, (the SnapTrack Plan), as amended with respectrespectively, related to the acquisition. The SnapTrack Planthose acquisitions (Note 11). Both plans expired on the datedates of acquisition,the acquisitions, and no additional shares may be granted under that plan. The SnapTrack Plan provided for the grant of boththose plans. Both incentive stock options and non-qualified stock options.options are outstanding under both plans. Generally, options outstanding vest over periods not exceeding fourfive years and are exercisable for up to ten10 years from the grant date. At September 30, 2003,25, 2005, options for 324,000approximately 559,000 shares under both plans were exercisable at prices ranging from $0.13$0.09 to $5.26$38.48 per share for an aggregate exercisepurchase price of $1$16 million.

     A summary of stock option transactions for the plans follows (number of shares in thousands):

F-26


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  
       Options Outstanding
       
   Options     Exercise Price Per Share
   Shares     
   Available Number     Weighted
   for Grant of Shares Range Average
   
 
 
 
Balance at September 30, 2000
  60,979   109,968  $0.02 to $172.38 $13.25 
 Additional shares reserved (a)  6        
 Options assumed (a)  (6)  6  0.02 to 5.30  1.32 
 Plan shares expired (b)  (58)       
 Options granted  (15,589)  15,589  45.54 to 100.50  71.17 
 Options cancelled  2,557   (2,557) 1.02 to 140.00  27.83 
 Options exercised     (14,831) 0.13 to 83.50  6.28 
   
   
         
Balance at September 30, 2001
  47,889   108,175  $0.02 to $172.38 $22.20 
 Plan shares expired (b)  (31)       
 Options granted  (26,525)  26,525  25.61 to 60.04  48.70 
 Options cancelled  3,101   (3,101) 1.02 to 141.62  50.80 
 Options exercised     (14,325) 0.02 to 51.82  5.68 
   
   
         
Balance at September 30, 2002
  24,434   117,274  $0.13 to $172.38 $29.45 
 Plan shares expired (b)  (2)       
 Options granted  (16,832)  16,832  29.10 to 45.73  34.83 
 Options cancelled  4,273   (4,273) 1.58 to 147.87  48.30 
 Options exercised     (23,347) 0.29 to 39.13  6.56 
   
   
         
Balance at September 30, 2003
  11,873   106,486  $0.13 to $172.38 $34.56 
   
   
         

                 
  Options Options Outstanding
  Shares     Exercise Price Per Share
  Available Number     Weighted
  for Grant of Shares Range Average
Balance at September 29, 2002
  48,868   234,548  $0.07 to $86.19 $14.73 
Plan shares expired  (4)         
Options granted  (33,664)  33,664   14.55 to 22.87   17.42 
Options cancelled  8,546   (8,546)  0.79 to 73.94   24.15 
Options exercised     (46,694)  0.15 to 19.57   3.28 
                 
Balance at September 28, 2003
  23,746   212,972  $0.07 to $86.19 $17.28 
Additional shares reserved  64,000          
Options granted  (31,252)  31,252   21.50 to 40.40   27.19 
Options cancelled  4,420   (4,420)  2.30 to 70.00   28.15 
Options exercised     (36,220)  0.14 to 37.34   7.85 
                 
Balance at September 26, 2004
  60,914   203,584  $0.07 to $86.19 $20.25 
Additional shares reserved (a)  765          
Options assumed (a)  (765)  765   0.09 to 38.48   24.32 
Plan shares expired (b)  (57)         
Options granted  (34,434)  34,434   33.01 to 44.55   38.51 
Options cancelled  5,821   (5,821)  1.60 to 70.00   31.16 
Options exercised     (30,168)  0.07 to 43.00   11.52 
                 
Balance at September 25, 2005
  32,244   202,794  $0.09 to $86.19 $24.35 
                 
(a) Represents activity related to options that were assumed as a result of the acquisitionacquisitions of SnapTrackIridigm in March 2000.October 2004 and Spike in November 2004 (Note 11).
 
(b) Represents shares available for future grant cancelled pursuant to the SnapTrack escrow agreement.Iridigm and Spike acquisitions.

     Net stock options, after forfeitures and cancellations, granted during fiscal 2005, 2004 and 2003 represented 1.8%, 1.7% and 1.6% of outstanding shares as of the beginning of each fiscal year, respectively. Total stock options granted during fiscal 2005, 2004 and 2003 represented 2.1%, 1.9% and 2.1% of outstanding shares as of the end of each fiscal year, respectively.
     Information about fixed stock options outstanding at September 30, 200325, 2005 follows (number of shares in thousands):
                       
    Options Outstanding        
    
        
        Weighted     Options Exercisable
        Average     
        Remaining Weighted     Weighted
        Contractual Average     Average
Range of Number Life Exercise Number Exercise
Exercise Prices of Shares (In Years) Price of Shares Price

 
 
 
 
 
$0.13 to $5.72  17,153   2.38  $4.48   17,091  $4.48 
$5.75 to $7.02  15,561   4.46   6.65   14,534   6.65 
$7.03 to $19.25  11,029   4.55   10.51   10,247   10.25 
$23.83 to $34.94  15,819   8.97   32.63   2,487   31.63 
$34.96 to $49.68  16,164   8.48   42.61   4,621   44.90 
$50.75 to $66.33  16,961   7.74   59.18   7,331   58.92 
$66.35 to $172.38  13,799   6.80   85.19   8,684   86.12 
     
           
     
     106,486   6.24  $34.56   64,995  $26.83 
     
           
     

F-25


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     
  Options Outstanding  
      Weighted      
      Average     Options Exercisable
      Remaining Weighted     Weighted
      Contractual Average     Average
Range of Number Life Exercise Number Exercise
Exercise Prices of Shares (In Years) Price of Shares Price
    $0.09 to $3.51  28,805   2.16  $3.08   28,792  $3.08 
  $3.52 to $16.47  34,168   5.27   11.88   24,165   10.07 
$16.63 to $22.44  31,515   7.53   20.11   13,500   19.72 
$22.77 to $29.21  31,604   5.99   27.20   23,334   27.14 
$29.31 to $33.57  29,899   8.35   33.05   8,412   32.64 
$33.69 to $42.16  31,137   7.31   39.19   15,392   38.31 
$42.25 to $44.55  11,585   6.95   43.27   6,823   43.07 
$45.56 to $86.19  4,081   4.51   58.65   4,073   58.66 
                     
   202,794   6.14  $24.35   124,491  $21.11 
                     
     There were 68,938,000approximately 124,650,000 options exercisable with a weighted average exercise price of $17.93$17.41 per share at September 30, 2002.26, 2004. There were 60,748,000approximately 129,990,000 options exercisable with a weighted average exercise price of $11.52$13.42 per share at September 30, 2001.

F-27


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

28, 2003.

     Information about stock options outstanding at September 30, 200325, 2005 with exercise prices less than or above $41.65,$44.76 per share, the closing price at September 30, 2003,25, 2005, follows (number of shares in thousands):
                         
  Exercisable Unexercisable Total
  
 
 
      Weighted     Weighted     Weighted
      Average     Average     Average
  Number Exercise Number Exercise Number Exercise
Stock Options of Shares Price of Shares Price of Shares Price

 
 
 
 
 
 
Less than $41.65  45,890  $9.00   21,929  $31.98   67,819  $16.43 
Above $41.65  19,105   69.68   19,562   63.13   38,667   66.37 
   
       
       
     
Total outstanding  64,995  $26.83   41,491  $46.67   106,486  $34.56 
   
       
       
     

                         
  Exercisable  Unexercisable  Total 
      Weighted      Weighted      Weighted 
      Average      Average      Average 
  Number  Exercise  Number  Exercise  Number  Exercise 
Stock Options of Shares  Price  of Shares  Price  of Shares  Price 
Less than $44.76  120,418  $19.84   78,295  $29.48   198,713  $23.64 
Above $44.76  4,073   58.66   8   54.32   4,081   58.65 
                      
Total outstanding  124,491  $21.11   78,303  $29.48   202,794  $24.35 
                      
Employee Stock Purchase PlansPlans.

The Company has two employee stock purchase plans for all eligible employees to purchase shares of common stock at 85% of the lower of the fair market value on the first or the last day of each six-month offering period. Employees may authorize the Company to withhold up to 15% of their compensation during any offering period, subject to certain limitations. The 2001 Employee Stock Purchase Plan (the 2001 Purchase Plan) was adopted and replaces the 1991 Employee Stock Purchase Plan, which expired in August 2001. The 2001 Purchase Plan authorizes up to 12,155,000approximately 24,309,000 shares to be granted until the Company terminates the 2001 Purchase Plan.granted. The 1996 Non-Qualified Employee Stock Purchase Plan authorizes up to 200,000400,000 shares to be granted at anytime.granted. During fiscal 2005, 2004 and 2003, 2002approximately 1,786,000, 2,205,000 and 2001,2,744,000 shares totaling 1,372,000, 1,150,000 and 758,000 were issued under the plans at an average price of $26.39, $31.45$29.63, $18.60 and $50.16$13.20 per share, respectively. At September 30, 2003, 9,718,00025, 2005, approximately 15,446,000 shares were reserved for future issuance.

Executive Retirement PlansPlans.

The Company has voluntary retirement plans that allow eligible executives to defer up to 100% of their income on a pre-tax basis. On a quarterly basis, the Company matches up to 10% of the participants’ deferral in Company common stock based on the then-current market price, to be distributed to the participant upon eligible retirement. The income deferred and the Company match held in trust are unsecured and subject to the claims of general creditors of the Company. Company contributions begin vesting based on certain minimum participation or service requirements and are fully vested at age 65. Participants who terminate employment forfeit their unvested shares. All shares forfeited are used to reduce the Company’s future matching contributions. The plans authorize up to 800,0001,600,000 shares to be allocated to participants at anytime.any time. During fiscal 2005, 2004 and 2003, 2002approximately 92,000, 108,000 and 2001, 45,000, 44,000 and 33,00089,000 shares, respectively, were allocated under the plans. The Company’s matching contribution net of amounts forfeitedCompany recorded $3 million, $5 million and $2 million in compensation expense during fiscal 2005, 2004 and 2003, 2002 and 2001 amountedrespectively, related to approximately $2 million, $2 million and $3 million, respectively.its net matching contributions to the plans. At September 30, 2003, 219,000 shares, including 40,000 issued and unallocated forfeited25, 2005, approximately 238,000 shares were reserved for future allocation.

F-26


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Commitments and Contingencies

Litigation

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

F-28


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Court granted the Company’s motion to dismiss 61 of the remaining 67 plaintiffs from the lawsuit. The Company subsequently resolved the matters with the remaining plaintiffs. Those plaintiffs whose claims were dismissed have appealed. Although there can be no assurance that an unfavorable outcome of the dispute 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 action.

Hanig et al. v. QUALCOMM, Boesel, et al v. QUALCOMM, Stone et al v. QUALCOMM, Ortiz et al v. QUALCOMM, Shannon et al. v. QUALCOMM, Deshon et al v. QUALCOMM, Earnhart et al. v. QUALCOMM.These cases were filed in San Diego County Superior Court by over 100 former employees, alleging claims for declaratory relief, breach of contract, intentional/negligent fraud, concealment, rescission, specific performance, work, labor and services, breach of the implied covenant of good faith and fair dealing, violation of California Business & Professions Code Section 17200 and unjust enrichment, claiming that they were entitled to full vesting of unvested stock options as a result of the sale of the Company’s infrastructure business to Ericsson in 1999. The Company has answered the complaints, which have been consolidated. Although there can be no assurance that an unfavorable outcome of the dispute 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 action.

GTE Wireless Incorporated (GTE) v. QUALCOMM:On June 29, 1999, GTE filed an action against the Company in the United States District Court for the Eastern District of Virginia seeking damages and injunctive relief and asserting that wireless telephones sold by the Company infringe a single patent allegedly owned by GTE. On September 15, 1999, the Court granted the Company’s motion to transfer the action to the United States District Court for the Southern District of California. On February 14, 2002, the District Court granted QUALCOMM’s motion for summary judgment that QUALCOMM’s products did not infringe GTE’s asserted patent and denied GTE’s motion seeking summary judgment of infringement. On July 14, 2003, the parties entered into a settlement agreement dismissing all claims and counterclaims with prejudice.

     Durante, et al v. QUALCOMM:QUALCOMM: On February 2, 2000, three former QUALCOMM employees filed a putative class action against the Company, ostensibly on behalf of themselves and those former employees of the Company whose employment was terminated in April 1999. Virtually all of the purported class of plaintiffs received severance packages at the time of the termination of their employment, in exchange for a release of claims, other than federalalleging unlawful age discrimination claims, against the Company. The complaint was filed in California Superior Courttheir selection for layoff in 1999, and for the County of Los Angeles and purports to state ten causes of action including breach of contract, age discrimination, violation of Labor Code Section 200, violation of Labor Code Section 970, unfair business practices, intentional infliction of emotional distress, unjust enrichment, breach of the covenant of good faith and fair dealing, declaratory relief and undue influence. The complaint seeks an order accelerating all unvested stock options for the members of the class, plus economic and liquidatedseeking monetary damages of an unspecified amount. On June 27, 2000, the case was ordered transferred from Los Angeles County Superior Court to San Diego County Superior Court. On July 3, 2000, the Company removed the case to the United States District Court for the Southern District of California, and discovery commenced. On May 29, 2001, the Court dismissed all plaintiffs’ claims except for claims arising under the federal Age Discrimination in Employment Act. On July 16, 2001, the Court granted conditional class certification on the remaining claims, to be revisited by the Court at the end of the discovery period. On April 15, 2003, the Court granted the Company’s summary judgment motions as to all remaining class members’ disparate impact claims.based thereon. On June 18, 2003, the Court ordered decertification of the class and dismissed theall remaining claims of the opt-in plaintiffs without prejudice. Plaintiffs have filed an appeal.plaintiffs. On August 1, 2005, the Ninth Circuit Court of Appeals upheld the judgment in favor of the Company. On June 20, 2003, 76 of the opt-in plaintiffs filed, anbut did not serve, a new action in Federal District Court for the Southern District of California,same court, alleging violations of the Age Discrimination in Employment Act as a result of their layoffs in 1999. To date, the complaint has not been served. Although there can be no assurance that an unfavorable outcome of these disputes would notAll plaintiffs have a material adverse effect onnow dismissed all remaining claims in exchange for the Company’s operating results, liquidity or financial position, the Company believes the claims are without merit and will vigorously defend the actions.

agreement not to seek litigation costs against them.

     Zoltar Satellite Alarm Systems, Inc. v. QUALCOMM, Inc. and SnapTrack:SnapTrack, Inc.: On March 30, 2001, Zoltar Satellite Alarm Systems, Inc. (Zoltar) filed suit against QUALCOMM and its subsidiary SnapTrack, a QUALCOMM wholly-owned subsidiary,Inc. in the United States District Court for the Northern District of California seeking monetary damages and injunctive relief and allegingbased on the alleged infringement of three patents. On August 27, 2001,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 an amended complaint adding Sprint Corp.

F-29


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

as a named defendantnotice of appeal, and narrowing certain infringement claims against QUALCOMM and SnapTrack. Since then, Zoltar has dismissed Sprint Corp. as a defendant. On September 23, 2002, the court denied Zoltar’s motion for summary judgment that the accused products infringe. Since then, the court has denied a second motion for summary judgment by Zoltar and denied summary judgment motions by QUALCOMM with leave to renew the motions at trial. The court is also considering further claim construction and will consider further evidence on invalidity prior to trial. Trial is currently set for February 24, 2004. Although there can be no assurance that an unfavorable outcome of this dispute would not have a material adverse effect on QUALCOMM’s operating results, liquidity or financial position, the Company believesand SnapTrack filed a responsive notice and motion to dismiss. Zoltar’s appeal was dismissed and the claims are without merit and will vigorously defendissue of reaching a final judgment on issues aside from non-infringement is pending before the action.

district court.

     Texas Instruments:QUALCOMM Incorporated v. Maxim Integrated Products, Inc.:On July 25, 2003,December 2, 2002, the Company filed an action in Delaware Superiorthe United States District Court for the Southern District of California against Texas Instruments Incorporated for breachMaxim alleging infringement of a patent portfolio license agreement between the parties,three patents and seeking monetary damages and other relief.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 September 23, 2003, Texas InstrumentsMay 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 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 Delaware Chancerythe United States District Court for the District of New Jersey against the companyCompany alleging breachviolations of the same agreement,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 other relief. Although there can be no assurance that an unfavorable outcome ofinjunctive relief based thereon. Discovery has commenced in the action brought by Texas Instruments would not have a material adverse effect on QUALCOMM’s operating results, liquidity or financial position,actions.
QUALCOMM Incorporated v. Broadcom Corporation:On July 11, 2005, the Company believesfiled an action in the claims are without meritUnited 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 will vigorously defendseeking monetary damages and injunctive relief based thereon. On September 23, 2005, Broadcom answered and counterclaimed, alleging infringement of six patents. Discovery has yet to begin in the action.

F-27


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUALCOMM Incorporated v. Broadcom Corporation:On October 14, 2005, the Company filed an action in the United States District Court for the Southern District of California against Broadcom alleging infringement of two patents, each of which relates to video encoding and decoding for high-end multimedia processing, and seeking monetary damages and injunctive relief based thereon. Broadcom has yet to answer.
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, (Inincluding In re Wireless Telephone Frequency Emissions Products Liability Litigation, United States District Court for the District of Maryland),Maryland, and in several individually filed actions, seeking personal injury, economic and/or punitivemonetary damages arising out of its sale of cellular phones. On March 5, 2003, the Court granted the defendantsdefendants’ motions to dismiss five of the consolidated cases (Pinney, Gimpleson, Gillian, Farina and Naquin) on the grounds that the claims were preempted by federal law. On April 2, 2003,March 21, 2005, the plaintiffs filed a notice4th Circuit Court of appeal of this orderAppeals reversed the ruling by the District Court and ordered the Court’s order denying remand.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,cases.
     On October 28, 2005, it was reported that six telecommunications companies (Broadcom, Nokia, Texas Instruments, NEC, Panasonic and Ericsson) filed complaints with the judge responsible for the multi-district litigation proceedings recently made such a ruling (which was upheld on appeal) in another case to whichEuropean Commission, alleging that the Company isviolated European Union competition law in its WCDMA licensing practices. To date, the Company has not a party.been formally served with the complaints.
     Although there can be no assurance that an unfavorable outcomeoutcomes in any of these and other disputesthe foregoing matters would not have a material adverse effect on the Company’s operating results, liquidity or financial position, the Company believes the claims made by other parties 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, in the Company’s judgment, no longer material to the Company’s operating results, liquidity or financial position.

Long-Term Financing.The Company agreed to provide certain CDMA customers of Telefonaktiebolaget LM Ericsson (Ericsson) with long-term interest bearing debt financing for the purchase of equipment and/or services. At September 25, 2005, the Company had 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 LeasesLeases.

The Company leases certain of its facilities and equipment under noncancelable operating leases, with terms ranging from twoless than 1 year to ten26 years and with provisions for cost-of-living increases.increases for certain leases. Rental expense for fiscal 2005, 2004 and 2003 2002 and 2001 was $48$39 million, $61$31 million and $28$34 million, respectively. Rental expense includes $14 million and $19 million in fiscal 2003 and 2002, respectively, as a result of the consolidation of Vésper Holding (Note 11). Future minimum lease payments in each of the next five years from fiscal 20042006 through 20082010 are $42$67 million, $32$51 million, $25 million, $17$24 million and $8$16 million, and $13 million respectively, and $11$22 million thereafter.

Purchase ObligationsObligations.

The Company has agreements with suppliers and other parties to purchase inventory, and other goods and services and long-lived assets and estimates its noncancelable obligations under these agreements for fiscal 2006 to 2009 to be approximately $307$750 million, $200 million, $86 million and $6 million, respectively. The Company’s noncancelable obligations are insignificant in fiscal 2004 and $13 million in fiscal 2005. The Company also has2010. Of these amounts, commitments to purchase telecommunications servicesintegrated circuit product inventories for approximately $20fiscal 2006 to 2009 comprised $634 million, in fiscal 2004, $20$177 million, in fiscal 2005$82 million and $17$5 million, in fiscal 2006.respectively.

F-28

Letters of Credit and Other Financial Commitments

F-30


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In addition to the financing commitments to Ericsson (Note 3) and the Inquam bridge loan and guarantee commitments (Note 4), the Company had $1 million of letters of credit outstanding as of September 30, 2003, which was not collateralized.

Note 10. 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-basedCDMA and WCDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning systems 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 products;products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA and/or the CDMA TDD standards and their derivatives, and collects license fees and royalties in partial consideration for such licenses;
 
 QUALCOMM Wireless & Internet (QWI) – comprised of:
 oQUALCOMM Internet Services (QIS) - provides technology to support and accelerate the convergence of the wireless data Internet and voice services,market, including its BREW product and services;services, QChat and QPoint;
 
 oQUALCOMM Government Technologies (QGOV) – formerly QUALCOMM Digital Media, (QDM) - provides development, hardware and analytical expertise to United States government agencies involving wireless communications technologies and develops technologies to support the processing, transmission and management of content for a variety of media applications, including the delivery of digitized motion pictures (Digital Cinema);technologies; and
 
 oQUALCOMM Wireless Business Solutions (QWBS) - provides satellite and terrestrial-based two-way data messaging, applicationposition reporting and position reportingwireless application services to transportation companies, private fleets, and construction equipment fleets.
QUALCOMM Strategic Initiatives (QSI) - manages the Company’s strategic investment activities. QSI makes strategic investments to promote the worldwide adoption of CDMA productsfleets and services for wireless voice and Internet data communications.other enterprise companies.

     Effective as

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 beginningfirst quarter of fiscal 2004,2005, the Company expectsreorganized its MediaFLO USA business into the QSI segment. The operating expenses related to present the revenues and operating resultsMediaFLO USA business were included in reconciling items through the end of its wholly-owned subsidiary, SnapTrack, Inc.,fiscal 2004. During the first quarter of fiscal 2005, the Company also reorganized a developer of wireless position location technology,division in the QWI operating segment. The revenuessegment that develops and operating resultssells test tools to support the design, development, testing and deployment of SnapTrack, Inc. are currently presented ininfrastructure and subscriber products into the QCT operating segment. Prior periods will be restatedperiod segment information has been adjusted to conform to the fiscal 2004new segment presentation in future reports.

presentation.

     The Company evaluates the performance of its segments based on earnings (loss) before income taxes and accounting changes (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.

F-29


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The table below presents revenues, EBT and EBTtotal assets for reportedreportable segments (in thousands)millions):

F-31


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                         
                  Reconciling    
  QCT QTL QWI QSI Items Total
  
 
 
 
 
 
2003
                        
Revenues $2,424,194  $1,000,196  $485,466  $124,260  $(63,480) $3,970,636 
EBT  796,724   896,621   27,176   (448,234)  12,860   1,285,147 
Total assets  310,796   154,887   92,598   839,156   7,424,999   8,822,436 
2002
Revenues $1,590,829  $847,092  $438,682  $126,477  $36,480  $3,039,560 
EBT  440,523   756,173   (9,467)  (506,978)  (219,126)  461,125 
Total assets  290,598   168,777   107,453   1,754,957   4,184,263   6,506,048 
2001
Revenues $1,364,687  $781,939  $426,066  $  $107,094  $2,679,786 
EBT  305,546   705,794   33,484   (1,125,206)  (375,258)  (455,640)
Total assets  296,638   180,276   109,443   1,294,278   3,789,098   5,669,733 

                         
                  Reconciling    
  QCT*  QTL  QWI*  QSI*  Items*  Total* 
2005
                        
Revenues $3,290  $1,839  $644  $  $(100) $5,673 
EBT  852   1,663   57   10   227   2,809 
Total assets  518   16   153   442   11,350   12,479 
2004
                        
Revenues $3,111  $1,331  $571  $  $(133) $4,880 
EBT  1,048   1,195   19   (31)  82   2,313 
Total assets  564   8   117   400   9,731   10,820 
2003
                        
Revenues $2,428  $1,000  $484  $1  $(66) $3,847 
EBT  805   897   15   (168)  16   1,565 
Total assets  311   155   92   839   7,425   8,822 
*As adjusted
     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. The net book value of long-lived assets located outside of the United States was $44 million, $21 million and $117 million at September 25, 2005, September 26, 2004 and September 28, 2003, respectively. Long-lived assets located outside of the United States were primarily in Brazil at September 28, 2003 and related to discontinued operations (Note 12). The net book value of long-lived assets located in the United States was $978 million, $654 million and $505 million at September 25, 2005, September 26, 2004 and September 28, 2003, respectively.
     QSI assets includeincluded $89 million, $106 million and $203$116 million related to investments in equity method investees at September 30,25, 2005, September 26, 2004 and September 28, 2003, and 2002, respectively.

     Revenues from each of the Company’s divisions aggregated into the QWI reportable segment for the years ended September 30 were as follows (in thousands)millions):
                 
  QWBS QDM QIS Other
  
 
 
 
2003 $356,067  $48,625  $54,318  $26,456 
2002 $337,454  $38,777  $47,287  $15,164 
2001 $345,560  $61,796  $6,256  $12,454 
             
Fiscal Year QWBS  QGOV  QIS* 
2005 $441  $50  $153 
             
2004 $414  $41  $116 
             
2003 $356  $49  $79 
*As adjusted.

F-30


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Other reconciling items for the years ended September 30 were comprised as follows (in thousands)millions):
              
   2003 2002 2001
   
 
 
Revenues
            
Elimination of intersegment revenue $(119,066) $(80,409) $(62,114)
Other products  55,586   116,889   169,208 
   
   
   
 
 Reconciling items $(63,480) $36,480  $107,094 
   
   
   
 
Earnings before income taxes
            
Unallocated goodwill amortization $  $(245,278) $(245,409)
Unallocated amortization of other acquisition-related intangible assets  (7,210)  (13,295)  (10,965)
Unallocated research and development expenses  (35,864)  (22,865)   
Other unallocated selling, general, and administrative expenses  (37,726)  (13,128)  (36,734)
Other unallocated corporate expenses        (125,044)
EBT from other products  (19,545)  (6,410)  (91,319)
Unallocated interest expense  (1,751)  (377)  (9,557)
Unallocated investment income, net  126,738   89,138   139,226 
Intracompany eliminations  (11,782)  (6,911)  4,544 
   
   
   
 
 Reconciling items $12,860  $(219,126) $(375,258)
   
   
   
 

             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003* 
Revenues
            
Elimination of intersegment revenue $(148) $(153) $(122)
Other products  48   20   56 
          
Reconciling items $(100) $(133) $(66)
          
Earnings (loss) before income taxes
            
Unallocated research and development expenses $(42) $(23) $(36)
Unallocated selling, general, and administrative expenses  (15)  (41)  (45)
EBT from other products  (56)  (39)  (20)
Unallocated investment income, net  339   192   125 
Intracompany eliminations  1   (7)  (8)
          
Reconciling items $227  $82  $16 
          
*As adjusted.
     Generally, revenues between operating segments are based on prevailing market rates for substantially similar products and services or an approximation thereof. Certain charges are allocated to the corporate functional department in the Company’s management reports based on the decision that those charges should not be used to

F-32


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

evaluate the segments’ operating performance. Unallocated charges include amortization of acquisition-related intangible assets,certain investment income and research and development expenseexpenses and marketing expenses related to the development of the CDMA market that were not deemed to be directly related to the businesses of the operating segments. During fiscal 2003, the Company pursued numerous potential new business opportunities that contributed to the growth of unallocated research and development and marketing expenses as compared to fiscal 2002 and 2001. Beginning in fiscal 2004, the Company will begin allocating certain of these unallocated research and development and marketing expenses to the reportable segments.

     Other unallocated corporate expenses for fiscal 2001 primarily included $62 million related to an arbitration decision against the Company and $57 million related to Globalstar (Note 4).

     Specified items included in segment EBT for years ended September 30 were as follows (in thousands)millions):
                 
  QCT QTL QWI QSI
  
 
 
 
2003
                
Revenues from external customers $2,422,413  $897,506  $470,871  $124,260 
Intersegment revenues  1,781   102,690   14,595    
Interest income  166   1,770   984   50,701 
Interest expense  156   45   256   28,473 
Equity in losses of investees        148   125,867 
2002
                
Revenues from external customers $1,586,864  $780,410  $428,920  $126,477 
Intersegment revenues  3,965   66,682   9,762    
Interest income  1,724   1,672   1,013   32,793 
Interest expense  41   214   108   24,939 
2001
                
Revenues from external customers $1,360,427  $727,564  $422,587  $ 
Intersegment revenues  4,260   54,375   3,479    
Interest income  2,366   122   888   108,183 
Interest expense  38   6   27   74 

     All

                 
  QCT*  QTL  QWI*  QSI* 
Fiscal 2005
                
Revenues from external customers $3,281  $1,710  $634  $ 
Intersegment revenues  9   129   10    
Interest income     5   2   4 
Interest expense     1   1    
Fiscal 2004
                
Revenues from external customers $3,107  $1,200  $553  $ 
Intersegment revenues  4   131   18    
Interest income     3   1   14 
Fiscal 2003
                
Revenues from external customers $2,423  $898  $469  $1 
Intersegment revenues  5   102   15    
Interest income     2   1   45 
*As adjusted.
     Effectively all equity in losses of investees (Note 5) werewas recorded in QSI in fiscal 20022005, 2004 and 2001.2003. In fiscal 2004 and 2003, interest expense (Note 5) was predominantly recorded as corporate expense in reconciling items.

F-31


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     The Company distinguishes revenues from external customers by geographic areas based on customer location. Sales information by geographic area for the years ended September 30 was as follows (in thousands)millions):
             
  2003 2002 2001
  
 
 
United States $874,564  $913,776  $942,579 
South Korea  1,723,772   1,133,481   937,504 
Japan  586,324   534,312   576,958 
China  310,976   73,592   8,902 
Brazil  158,823   146,943   24,575 
Other foreign  316,177   237,456   189,268 
   
   
   
 
  $3,970,636  $3,039,560  $2,679,786 
   
   
   
 

     Segment assets are comprised of accounts receivable, finance receivables and inventory for QCT, QTL and QWI. The QSI segment assets include marketable securities, accounts receivable, finance receivables, notes receivable, other investments and all assets of consolidated investees, including Vésper Holding (Note 11). Total segment assets

F-33


             
  Year Ended 
  September 25,  September 26,  September 28, 
  2005  2004  2003 
United States $1,015  $1,016  $875 
South Korea  2,083   2,091   1,724 
Japan  1,210   877   586 
China  394   260   311 
Brazil  40   31   36 
Other foreign  931   605   315 
          
  $5,673  $4,880  $3,847 
          
QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

differ from total assets on a consolidated basis as a result of unallocated corporate assets primarily comprised of cash, cash equivalents, marketable debt securities, property, plant and equipment, and goodwill. The net book value of long-lived assets located outside of the United States, primarily in Brazil, was $117 million, $251 million and $10 million at September 30, 2003, 2002 and 2001, respectively.

Note 11. Acquisitions

Vésper Holding, Ltd.

     In

     During fiscal 1999,2005, the Company acquired the following four entities for a total cost of $295 million, which was paid primarily in cash:
Iridigm Display Corporation (Iridigm), a California-based display technology company.
Trigenix Limited, a United Kingdom-based developer of user interfaces for mobile phones.
Spike Technologies, Inc., a semiconductor design services company based primarily in India.
ELATA, Ltd., a United Kingdom-based developer of mobile content delivery and device management software systems.
     An additional $4 million in consideration is payable in cash through November 2006 if certain performance and other milestones are reached. Goodwill recognized in those transactions amounted to $216 million, of which $81 million is expected to be deductible for tax purposes. Goodwill was assigned to the QMT, QIS and QCT segments in the amounts of $128 million, $81 million and $7 million, respectively. Technology-based intangible assets recognized in the amount of $36 million have a weighted-average useful life of seven years.
     On August 11, 2005, the Company announced its intention to acquire all of the outstanding capital stock of Flarion Technologies, Inc. (Flarion), a privately held developer of Orthogonal Frequency Division Multiplexing Access (OFDMA) technology. Upon completion of the acquisition, which is anticipated in the first half of fiscal 2006, pending regulatory approval and other customary closing conditions, the Company estimates that it will pay approximately $545 million in consideration, consisting of approximately $272 million in shares of QUALCOMM stock, $235 million in cash, and the exchange of Flarion’s existing vested options and warrants with a fair value of approximately $38 million. Upon achievement of certain agreed upon milestones on or prior to the eighth anniversary of the close of this transaction, the Company may issue additional aggregate consideration of $205 million, consisting of approximately $173 million payable in cash to Flarion stockholders and $32 million in shares of QUALCOMM stock, which will be issued to Flarion option holders and warrant holders upon or following the exercise of such options and warrants. The acquisition of Flarion is intended to broaden the Company’s ability to effectively support operators who may prefer an interestOFDMA or a hybrid OFDM/CDMA/WCDMA network alternative for differentiating their services. The addition of Flarion’s intellectual property and engineering resources will also supplement the resources that the Company has already dedicated over the years towards the development of OFDM/OFDMA technologies.
Note 12. Discontinued Operations in the QSI Segment
     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 or collectively, Vésper). The Vésper Operating Companies were formed by a consortiumCompanies), consolidated subsidiaries of investors to provide wireless and wireline telephone services in the northern, northeast and eastern regions of Brazil and in the state of São Paulo. In addition, the Company extended long-term financing to Vésper related to the Company’s financing arrangement with Ericsson (Note 3) in fiscal 2000. In November 2001, QUALCOMM consummated a series of transactions as part of an overall financial restructuring (the Restructuring) of the Vésper Operating Companies, which resulted in the Company obtaining a controlling financial interest in Vésper.

     Pursuant to the Restructuring, the Company and VeloCom, Inc. (VeloCom) invested $266 million and $80 million, respectively, in a newly formed holding company called Vésper Holding, Ltd. (Vésper Holding). Vésper Holding acquired certain liabilities of the Vésper Operating Companies from their vendors for $135 million and the issuance of warrants to purchase an approximate 7% interest in Vésper Holding, and the vendors released in full any claims that they might have against the Company, VeloCom, Vésper, its direct and indirect parent companies and other related parties arising from or related to the acquired liabilities. In a series of related transactions, Vésper Holding agreed to contribute the acquired liabilities to the Vésper Operating Companies in exchange for equity securities and to cancel the contributed liabilities. The purchase price allocation, based on the estimated fair values of acquired assets and liabilities assumed, included $308 million for property, plant and equipment, $39 million for licenses and $31 million for other intangible assets. Property, plant and equipment are depreciated over useful lives ranging from 2 to 18 years. Licenses and other intangible assets are amortized over their useful lives of 15 to 18 years and 3 to 18 years, respectively.

     On November 29, 2001, the Company forgave $119 million under a debt facility with VeloCom and converted its remaining $56 million convertible promissory note into equity securities of VeloCom in conjunction with its acquisition of Vésper Holding. The conversion increased the Company’s equity interest in VeloCom to 49.9%. The Company used the equity method to account for its investment in VeloCom. On July 2, 2003, the Company transferred to VeloCom all of its equity interest in VeloCom in exchange for (a) 49.9% of the shares of Vésper Holding held by VeloCom, which represented approximately 11.9% of the issued and outstanding shares of Vésper Holding, and (b) elimination of VeloCom’s minority consent rights with respect to Vésper Holding. The Company recorded a net loss of $7 million on the exchange resulting primarily from the recognition of cumulative translation losses, previously included in stockholders’ equity, in the statement of operations during the fourth quarter of fiscal 2003. After giving effect to the exchange, the Company owns an approximate 83.9% direct interest in Vésper Holding and holds no continuing interest in VeloCom at September 30, 2003.

     Due to a series of adverse regulatory developments that negatively affected Vésper’s prospects, the Company is pursuing an expedited exit strategy whereby Vésper and/or its assets will be sold or otherwise disposed of. In accordance with this strategy, on September 25, 2003, Embratel Participações S.A. (Embratel) entered into an agreement to acquire for nominal consideration the Vésper Operating CompaniesQSI segment, (the Embratel sale transaction), excluding the tower and rooftop antennae assets for no consideration. The Vésper

F-32


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Companies’ existing communication towers and related interests in tower site property leases (Tower Sites). Concurrent with the closing, Vé(Vésper will enter into a multi-year arrangement whereby it pays a monthly fee to the Company to use the Tower Sites. The sum of these fees, net of certain pass through expenses, is expected to exceed $77 million over the life of the arrangement. The SMP licenses (Note 3) also areTowers) were not included in the Embratel sale transaction, except forand as such, the Company effectively retained, through a right of first refusal of Embratel to purchase the SMP licenses in the event of a sale to a third party or returnnew wholly-owned subsidiary (TowerCo), ownership and control of the SMP licenses to Anatel, the telecommunications regulatory agency in Brazil.Vésper Towers. The Company is evaluating its options with respect to the SMP licenses, includingrealized a possible returnnet loss of the licenses to Anatel.

F-34


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The closing of$52 million on the Embratel sale transaction is contingent uponduring fiscal 2004, partially offset by a number$40 million net gain which resulted from the subsequent sale of events being completed priorTowerCo. As a result of the disposition of the remaining operations and assets related to or concurrent with closing, including regulatory approval by Anatel. Given the uncertainty regarding the closing contingencies,Vésper Operating Companies, the Company has not presenteddetermined that the results of operations and cash flows related to the Vésper-related assetssper Operating Companies, including the results related to TowerCo and liabilities as “held for sale” in its September 30, 2003 balance sheet. Further, the Company does not expect to present Vésper’s historical operationsgains and losses realized on the Embratel and TowerCo sales transactions, should be presented as discontinued operations in its consolidated statements of operations in future financial statements because of its expectation of continuing involvement in the Vésper business by way of an on-going tower usage arrangement.

     As a result of adverse regulatory developments, and after an evaluation of the potential acquirers and the valuations that they may ascribe Vésper given the regulatory situation,cash flows. At September 25, 2005, the Company recorded a $160 million impairment loss on its long-livedhad no remaining assets related to Vésper during the second quarter of fiscal 2003. The impairment loss recognized was the difference between the assets’ carrying values and their estimated fair values at that date. At September 30, 2003, the carrying values of assets andor liabilities related to Vésper totaled $265 million and $307 million, respectively.

     Assuming the requisite government approvals are received and all conditions to close are satisfied, the Company anticipates providing approximately $40 million to $45 million in aggregate funding by the closing date to facilitate the Embratel sale transaction. The Company expects to recognize cumulative foreign currency translation losses, previously included in stockholders’ equity, as part of the gain or loss on a sale or other disposition of Vésper. The Company expects to record an approximate $35 million to $45 million loss if and when the transaction closes, including the cumulative foreign currency translation losses.

     The Company consolidates all assets and liabilities of Vésper Holding, including bank loans and capital lease obligations. The balances of the bank loans and capital lease obligations, including accrued interest, at September 30, 2003 were $68 million and $47 million, respectively. The bank loans, which are denominated in Brazilian real, bear interest at the Certificate of Deposit Inter Bank (CDI) rate (the LIBOR rate equivalent in Brazil) plus 1.5% (approximately 21.21% at September 30, 2003). The lease obligations bear interest at fixed and variable rates ranging from 6.0% to 21.56% at September 30, 2003. These debt facilities are collateralized by certain assets of Vésper. During May 2003, the Vésper Operating Companies failed to make interestor TowerCo recorded on its consolidated balance sheet. Revenues of $36 million and certain lease payments owed to six of their local bank creditors. As a result of these defaults, certain provisions$123 million were reported in the bank loans and leases were triggered making all of the bank loans and certain leases callable. Those bank loans and leases are presented on the Company’s balance sheet as current liabilities at September 30, 2003. The Company is working, in conjunction with Vésper, with the banks to structure arrangements which would, if implemented, provide for forbearance by the banks on payments under the loans and leases until a contemplated sale of Vésper could be effected. There is no certainty that such arrangements with the banks, or any such sale transaction, will be implemented. The Vésper Operating Companies were charged a 2% default penalty and are being charged an additional 1% interest rate per month on the amount in default until the default is cured. The aggregate amounts of debt maturities and minimum capital lease payments for each of the three yearsloss from discontinued operations during fiscal 2004 through 2006 are $103 million, $1 million and $4 million, respectively, and $7 million thereafter.

     During the first quarter of fiscal 2003, the Company acquired wireless licenses in Brazil for approximately $82 million. Approximately $8 million of the purchase price was paid in December 2002. The remaining Brazilian real-denominated wireless license obligation is financed by the Brazilian government at an interest rate of 12% per annum, plus an adjustment for inflation. At September 30, 2003, the outstanding license fee obligation was approximately $111 million, having increased as a result of interest and the strengthening of the Brazilian real against the U.S. dollar. The license fee obligation is payable annually in $17 million installments starting in fiscal 2006, until the obligation is fully repaid.

     Cash amounts paid for interest were $12 million, $22 million and $11 million in fiscal 2003, 2002 and 2001, respectively. Cash paid for interest in fiscal 2003 and 2002 is primarily related to the Vésper Holding bank loans and capital leases. Cash paid for interest in fiscal 2001 included $8 million related to an arbitration decision against the Company.

     Due to the Company’s practice of consolidating foreign subsidiaries one month in arrears, the consolidated financial statements for fiscal 2003 and 2002 included $238 million and $130 million in losses, net of minority interest, respectively, of Vésper Holding from September 1, 2002 through August 31, 2003 and from November 13, 2001 (the acquisition date) through August 31, 2002, respectively. The consolidated financial statements for fiscal

F-35


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2003 and 2002 also included $24 million and $30 million of equity in losses of the Vésper Operating Companies (pre-acquisition) and VeloCom. Pro forma operating results for the Company, assuming the acquisition of Vésper Holding had been made at the beginning of the periods presented, are as follows (in thousands, except per share data):

         
  2002 2001
  
 
  (Unaudited)
Revenues $3,059,398  $2,805,266 
   
   
 
Net income $335,746  $(974,221)
   
   
 
Basic earnings (loss) per common share $0.44  $(1.29)
   
   
 
Diluted earnings (loss) per common share $0.41  $(1.29)
   
   
 

     These pro forma results have been prepared for comparative purposes only and may not be indicative of the results of operations that actually would have occurred had the combination been in effect at the beginning of the respective periods or of future results of operations of the consolidated entities.

     The Vésper Operating Companies’ summarized financial information, derived from its unaudited financial statements for the periods prior to the Company obtaining its controlling interest in Vésper Holding, is as follows (in thousands):

     
  2001
  
Revenues $125,480 
   
 
Gross loss  (187,898)
   
 
Net loss $(877,017)
   
 

Alcatel Mobicom

     In September 2003, a European subsidiary of the Company acquired certain assets and assumed certain liabilities of Alcatel Mobicom. Due to the Company’s practice of consolidating foreign subsidiaries one month in arrears, the acquisition will be reflected in the Company’s consolidated financial statements during the first quarter of fiscal 2004. The preliminary allocation of purchase price, based on the estimated fair values of acquired assets and liabilities assumed, reflects acquired goodwill and intangible assets of $8 million and $5 million, respectively. The Company is in the process of finalizing the purchase price allocation and does not anticipate material adjustments to the preliminary allocation. In accordance with FAS 142, amounts allocated to goodwill are not amortized. Amounts allocated to intangible assets will be amortized over their expected useful lives. Pro forma results have not been presented because the effect of this acquisition is not material.

Note 12.13. Auction Discount Voucher

     The Company was awarded a $125 million Auction Discount Voucher (ADV) by the Federal Communications Commission (FCC) in June 2000 as the result of a legal ruling. The ADV iswas fully transferable and, may, subject to certain conditions, could be used in whole or in part by any entity in any FCC spectrum auction over a period of three years, including those in which QUALCOMMthe Company is not a participant.
     During November 2002,fiscal 2004, the FCC amended the terms of the ADV to allow the Company to use the ADV to satisfy existing FCC debt of other companies. During April 2003, the FCC granted the Company’s request for a one-year extension of the ADV. As a result, the ADV expires in June 2004.

     The Company transferred approximately $58 million of the ADV’s value to three wireless operators during fiscal 2003 for $57 million in cash and approximately $11$18 million of the ADV’s value to a wireless operator during fiscal 2001for approximately $17 million in exchange for a note receivable.cash. As a result of the transfers during fiscal 2003,this transfer, the Company recorded $47an additional $17 million in other operating income in the QSI segment; an additional $10segment during fiscal 2004. During fiscal 2004, the Company also recorded $4 million will be recognized as earned asin other operating income and $4 million in selling, general and administrative expenses in the

F-36


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company incurs QSI segment for cooperative marketing expenses pursuant to a concurrent agreement with one of the wireless operators through December 2003incurred, with no effect on net income.

income, related to an arrangement under which a portion of the ADV was transferred to a wireless operator prior to fiscal 2004. The Company recorded $47 million in other income in the QSI segment during fiscal 2003 related to transfers of the ADV’s value to wireless operators.

     The Company also used approximately $8$30 million of the ADV during fiscal 2004 as a downfinal payment for wireless licenses granted in fiscal 2004 in which the Company was the highest bidder in a FCC auction held during fiscal 2003 and expects to use another $302003. On a cumulative basis, the Company used $38 million of the ADV’s value to makeADV as payment for these wireless licenses, for which the final payment when the licenses are granted in fiscal 2004. The remaining value of the ADV at September 30, 2003 was approximately $48 million. The Company had no cost basis in the ADV at September 30, 2003.26, 2004. The ADV had no remaining value at September 25, 2005.

F-33

F-37


QUALCOMM Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13.14. Summarized Quarterly Data (Unaudited)

     The following financial information reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results of the interim periods.

     The table below presents quarterly data for the years ended September 30, 200325, 2005 and 2002September 26, 2004 (in thousands,millions, except per share data):
                 
  1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
  
 
 
 
2003
                
Revenues $1,097,169  $1,043,043  $921,608  $908,816 
Operating income  446,718   231,480   335,822   296,215 
Net income  241,334   103,016   191,689   291,402 
Basic net earnings per common share (1) $0.31  $0.13  $0.24  $0.37 
Diluted net earnings per common share (1) $0.30  $0.13  $0.23  $0.35 
2002
                
Revenues $698,642  $696,115  $770,917  $873,886 
Operating income  182,081   99,804   138,618   252,765 
Net income (loss)  139,233   43,930   (13,768)  190,282 
Basic net earnings (loss) per common share (1) $0.18  $0.06  $(0.02) $0.24 
Diluted net earnings (loss) per common share (1) $0.17  $0.05  $(0.02) $0.23 

                 
  1st Quarter  2nd Quarter  3rd Quarter  4th Quarter (3) 
2005
                
Revenues (1) $1,390  $1,365  $1,358  $1,560 
Operating income (1)  584   572   560   670 
Net income (1)  513   532   560   538 
                 
Basic earnings per common share (2) $0.31  $0.32  $0.34  $0.33 
Diluted earnings per common share (2) $0.30  $0.31  $0.33  $0.32 
                 
2004
                
Revenues (1) $1,207  $1,216  $1,341  $1,118 
Operating income (1)  568   577   622   362 
Income from continuing operations (1)  411   441   486   387 
Net income (1)  352   488   486   393 
                 
Basic earnings per common share from continuing operations (2) $0.26  $0.27  $0.30  $0.24 
Basic earnings per common share (2) $0.22  $0.30  $0.30  $0.24 
                 
Diluted earnings per common share from continuing operations (2) $0.25  $0.26  $0.29  $0.23 
Diluted earnings per common share (2) $0.21  $0.29  $0.29  $0.23 
(1) Revenues, operating income, income from continuing operations and net income are rounded to millions each quarter. Therefore, the sum of the quarterly amounts may not equal the annual amounts reported.
(2)Earnings (loss) per share are computed independently for each quarter and the full year based upon respective average shares outstanding. Therefore, the sum of the quarterly net earnings (loss) per share amounts may not equal the annual amounts reported.
(3)Prior to the fourth quarter of fiscal 2004, the Company recorded royalty revenues from certain licensees based on estimates of royalties during the period they were earned. Starting in the fourth quarter of fiscal 2004, the Company began recognizing royalty revenues solely based on royalties reported by licensees during the quarter (Note 1). 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.

F-34

F-38


SCHEDULE II

QUALCOMM INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS


(In thousands)

                       
        (Charged)            
    Balance at Credited to         Balance at
    Beginning of Costs and         End of
    Period(A) Expenses Deductions Other Period(A)
    
 
 
 
 
Year ended September 30, 2001                    
 Allowances:                    
  — trade receivables $(9,610) $(10,412) $4,266  $  $(15,756)
  — finance receivables  (11,144)  (601,986)  39   (90,857) (B)  (703,948)
  — notes receivable     (155,107)        (155,107)
 Inventory reserves  (20,834)  (65,268)  8,817      (77,285)
 Valuation allowance on deferred tax assets  (596,017)  (192,551)     (438,889) (C)  (1,227,457)
     
   
   
   
   
 
  $(637,605) $(1,025,324) $13,122  $(529,746) $(2,179,553)
     
   
   
   
   
 
Year ended September 30, 2002                    
 Allowances:                    
  — trade receivables $(15,756) $(42,160) $82,133  $(45,864) (D) $(21,647)
  — finance receivables  (703,948)  (189,674)  843,093       (50,529)
  — notes receivable  (155,107)  (19,263)  132,898       (41,472)
 Inventory reserves  (77,285)  (9,649)  8,856      (78,078)
 Valuation allowance on deferred tax assets  (1,227,457)  144,519      (440,106) (E)  (1,523,044)
     
   
   
   
   
 
  $(2,179,553) $(116,227) $1,066,980  $(485,970) $(1,714,770)
     
   
   
   
   
 
Year ended September 30, 2003                    
 Allowances:                    
  — trade receivables $(21,647) $(14,253) $23,772  $(224)(F) $(12,352)
  — finance receivables  (50,529)  31,093   1,389      (18,047)
  — notes receivable  (41,472)  (27,387)  33      (68,826)
 Inventory reserves  (78,078)  (3,798)  12,164      (69,712)
 Valuation allowance on deferred tax assets  (1,523,044)  (252,986)  10,114   1,105,640(G)  (660,276)
     
   
   
   
   
 
  $(1,714,770) $(267,331) $47,472  $1,105,416  $(829,213)
     
   
   
   
   
 

millions)

                         
      (Charged)                
  Balance at  Credited to              Balance at 
  Beginning of  Costs and              End of 
  Period  Expenses  Deductions  Other      Period 
Year ended September 28, 2003 Allowances:                        
— trade receivables $(22) $(14) $24  $      $(12)
— finance receivables  (51)  32   1          (18)
— notes receivable  (41)  (28)            (69)
Inventory reserves  (78)  (4)  12          (70)
Valuation allowance on deferred tax assets  (1,523)  (253)  10   1,106   (A)  (660)
                    
  $(1,715) $(267) $47  $1,106      $(829)
                    
Year ended September 26, 2004 Allowances:                        
— trade receivables $(12) $(3) $8  $2   (B) $(5)
— finance receivables  (18)  10   7          (1)
— notes receivable  (69)  (30)  53          (46)
Inventory reserves  (70)  7   13          (50)
Valuation allowance on deferred tax assets  (660)  27   20   474   (B)  (139)
                    
  $(829) $11  $101  $476      $(241)
                    
Year ended September 25, 2005 Allowances:                        
— trade receivables $(5) $(2) $5  $      $(2)
— finance receivables  (1)  1              
— notes receivable  (46)  (41)  24          (63)
Inventory reserves  (50)  (10)  14          (46)
Valuation allowance on deferred tax assets  (139)  76      (6)  (C)  (69)
                    
  $(241) $24  $43  $(6)     $(180)
                    
(A)The Company’s fiscal year ends on the last Sunday of September.
(B)The reduction in finance receivables related to equity in losses related to the Company’s original 16% ownership interest in the Vésper Operating Companies (see Note 11 to the Consolidated Financial Statements.) This amount includes $31,757 previously disclosed as a charge to costs and expenses.
(C)Of this amount, $64,171 was charged against the tax benefit as a component of comprehensive loss related to the Company’s temporary losses on marketable securities and $374,718 was charged to paid-in-capital (see Note 6 to the Consolidated Financial Statements).
(D)Of this amount, $54,708 related to acquisitions (see Note 11 of the Consolidated Financial Statements), offset by an increase of $8,844 related to translation adjustments due to changes in foreign currency rates primarily attributable to the Vésper Operating Companies.
(E)Of this amount, $329,742 related to acquisitions and $153,957 was charged to paid-in capital (see Note 7 of the Consolidated Financial Statements), offset by a $43,593 reduction recorded as a component of comprehensive loss related to the Company’s temporary losses on marketable securities.
(F)This amount related to foreign currency translation adjustments attributable to the Vésper Operating Companies.
(G)(A) This amount related to the reversal of the Company’s valuation allowance on substantially all of its United States deferred tax assets during fiscal 2003 as a credit to stockholders’ equity.
(B)This amount related to the disposition of the Vésper Operating Companies (See Note 12 of the Consolidated Financial Statements).
(C)This amount related to the acquisitions of Trigenix and ELATA (See Note 11 of the Consolidated Financial Statements).

S-1