QUALCOMM INC/DE, 10-Q, 1999-01-26

QUALCOMM INC/DE
10-Q, 1999-01-26
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

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================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 27, 1998

[ ] 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) IDENTIFICATION NO)

6455 LUSK BLVD., SAN DIEGO, CALIFORNIA 92121-2779
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(619) 587-1121
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

NOT APPLICABLE

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORTED)

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

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

Common Stock, $0.0001 per share par value, 71,433,704 shares
as of January 19, 1999.

<PAGE> 2

SIGNATURES

Pursuant to the requirements 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.

QUALCOMM Incorporated

/s/ ANTHONY S. THORNLEY
---------------------------------------
Anthony S. Thornley
Executive Vice President
& Chief Financial Officer

Dated: January 26, 1999

2
<PAGE> 3

QUALCOMM INCORPORATED

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheets................. 4
Condensed Consolidated Statements of Income........... 5
Condensed Consolidated Statements of Cash Flows....... 6
Notes to Condensed Consolidated Financial Statements.. 7-12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................. 13-22

PART II. OTHER INFORMATION........................................ 23
Item 6. Exhibits and Reports on Form 8-K
</TABLE>

3
<PAGE> 4

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUALCOMM INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 27,
1998 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 131,940 $ 175,846
Investments................................................. 105,483 127,478
Accounts receivable, net.................................... 852,488 612,209
Finance receivables......................................... 66,461 56,201
Inventories, net............................................ 335,072 386,536
Other current assets........................................ 171,418 178,950
---------- ----------
Total current assets................................ 1,662,862 1,537,220
PROPERTY, PLANT AND EQUIPMENT, NET............................ 631,048 609,682
FINANCE RECEIVABLES, NET...................................... 307,357 287,751
OTHER ASSETS.................................................. 161,508 132,060
---------- ----------
TOTAL ASSETS.................................................. $2,762,775 $2,566,713
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................... $ 657,338 $ 660,428
Unearned revenue............................................ 58,490 67,123
Bank lines of credit........................................ 288,000 151,000
Current portion of long-term debt........................... 3,057 3,058
---------- ----------
Total current liabilities........................... 1,006,885 881,609
LONG-TERM DEBT................................................ 3,116 3,863
OTHER LIABILITIES............................................. 36,032 25,115
---------- ----------
Total liabilities................................... 1,046,033 910,587
---------- ----------

COMMITMENTS AND CONTINGENCIES (NOTE 6)

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES................ 42,057 38,530
---------- ----------

COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST CONVERTIBLE
PREFERRED SECURITIES OF A SUBSIDIARY TRUST HOLDING SOLELY DEBT
SECURITIES OF THE COMPANY.................................... 660,000 660,000
---------- ----------

STOCKHOLDERS' EQUITY:
Preferred stock, $0.0001 par value.......................... -- --
Common stock, $0.0001 par value............................. 7 7
Paid-in capital............................................. 966,148 957,589
Retained earnings........................................... 48,530 --
---------- ----------
Total stockholders' equity.......................... 1,014,685 957,596
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $2,762,775 $2,566,713
========== ==========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

4
<PAGE> 5

QUALCOMM INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Communications systems...................................... $ 817,054 $ 676,885
Contract services........................................... 79,814 64,031
License, royalty and development fees....................... 44,355 44,938
--------- ---------
Total revenues...................................... 941,223 785,854
--------- ---------

OPERATING EXPENSES:
Communications systems...................................... 584,924 507,339
Contract services........................................... 57,466 46,276
Research and development.................................... 100,362 74,801
Selling and marketing....................................... 69,736 56,098
General and administrative.................................. 50,787 36,469
Other....................................................... -- 11,976
--------- ---------
Total operating expenses............................ 863,275 732,959
--------- ---------

OPERATING INCOME.............................................. 77,948 52,895

INTEREST INCOME............................................... 5,806 12,190
INTEREST EXPENSE.............................................. (3,315) (2,689)
NET GAIN ON SALE OF INVESTMENTS............................... 5,663 2,950
DISTRIBUTIONS ON TRUST CONVERTIBLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST ......................................... (9,799) (9,798)
MINORITY INTEREST IN (INCOME) LOSS OF CONSOLIDATED
SUBSIDIARIES ................................................ (3,698) 3,781
EQUITY IN LOSSES OF INVESTEES................................. (1,021) (2,772)
---------- ---------
INCOME BEFORE INCOME TAXES.................................... 71,584 56,557
INCOME TAX EXPENSE ........................................... (23,054) (19,795)
---------- ---------
NET INCOME.................................................... $ 48,530 $ 36,762
========= =========

NET EARNINGS PER COMMON SHARE:
Basic....................................................... $ 0.69 $ 0.54
========= =========
Diluted..................................................... $ 0.65 $ 0.50
========= =========
SHARES USED IN PER SHARE CALCULATION:
Basic....................................................... 70,722 68,475
========= =========
Diluted..................................................... 74,219 74,126
========= =========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

5
<PAGE> 6

QUALCOMM INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................ $ 48,530 $ 36,762
Depreciation and amortization ............................. 44,448 30,974
Acquired in-process research and development .............. -- 6,976
Non-cash charge for impaired assets ....................... -- 5,000
Gain on sale of available-for-sale securities ............. (5,663) --
Minority interest in income (loss) of consolidated
subsidiaries............................................ 3,698 (3,781)
Equity in losses of investees ............................. 1,021 2,772
Increase (decrease) in cash resulting from changes in:
Accounts receivable, net ............................... (240,279) (131,111)
Finance receivables, net ............................... (29,866) 44,899
Inventories, net ....................................... 51,464 (56,450)
Other assets ........................................... (4,812) 1,600
Accounts payable and accrued liabilities ............... (2,081) 127,433
Unearned revenue ....................................... (8,633) 685
Other liabilities ...................................... 3,877 2,467
--------- ---------
Net cash (used) provided by operating activities ............ (138,296) 68,226
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures ...................................... (62,884) (79,544)
Purchases of investments .................................. (10,363) (191,045)
Maturities of investments ................................. 32,358 195,672
Issuance of notes receivable .............................. (25,021) --
Collection of notes receivable ............................ 16,835 --
Purchases of intangible assets ............................ -- (11,099)
Proceeds from sale of available-for-sale securities ....... 7,163 --
Investments in other entities ............................. (7,500) (1,062)
--------- ---------
Net cash used by investing activities ....................... (49,412) (87,078)
--------- ---------
FINANCING ACTIVITIES:
Net borrowings (repayments) under bank lines of credit .... 137,000 (32,000)
Principal payments on long-term debt ...................... (748) (563)
Minority interest investment in consolidated
subsidiaries............................................ -- 233
Net proceeds from issuance of common stock ................ 7,550 11,885
--------- ---------
Net cash provided (used) by financing activities ............ 143,802 (20,445)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................... (43,906) (39,297)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 175,846 248,837
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 131,940 $ 209,540
========= =========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

6
<PAGE> 7

QUALCOMM INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 -- BASIS OF PRESENTATION

The accompanying interim condensed consolidated financial statements have
been prepared by QUALCOMM Incorporated (the "Company" or "QUALCOMM"), without
audit, in accordance with the instructions to Form 10-Q and, therefore, do not
necessarily include all information and footnotes necessary for a fair
presentation of its financial position, results of operations and cash flows in
accordance with generally accepted accounting principles. The condensed
consolidated balance sheet at September 27, 1998 was derived from the audited
consolidated balance sheet at that date which is not presented herein. The
Company operates and reports using a period ending on the last Sunday of each
month.

In the opinion of management, the unaudited financial information for the
interim periods presented reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 27, 1998. Operating results for interim periods are not necessarily
indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Revenue from communications systems and products is generally recognized at
the time the units are shipped and over the period during which message and
warranty services are provided, except for shipments under arrangements
involving significant acceptance requirements. Under such arrangements, revenue
is recognized when the Company has substantially met its performance
obligations. Other criteria considered for the purpose of revenue recognition
include the customer's financial condition, the amount and quality of financial
support provided by the customer's investors, and the political and economic
environment in which the customer operates. Revenue from long-term contracts and
revenue earned under license and development agreements with continuing
performance obligations is recognized using the percentage-of-completion method,
based either on costs incurred to date compared with total estimated costs at
completion or using a units of delivery methodology. Billings on uncompleted
contracts in excess of incurred cost and accrued profits are classified as
unearned revenue. Estimated contract losses are recognized when determined.
Non-refundable license fees are recognized when there is no material continuing
performance obligation under the agreement and collection is probable.

Royalty revenue is recorded as earned in accordance with the specific terms
of each license agreement when reasonable estimates of such amounts can be made.
Beginning with the second quarter of fiscal 1998, the Company began to accrue
its estimate of certain royalty revenues earned that previously could not be
reasonably estimated prior to being reported by its licensees.

Basic earnings per common share are calculated by dividing net income by the
weighted average number of common shares outstanding during the reporting
period. Diluted earnings per common share reflect the potential dilutive effect,
determined by the treasury stock method, of additional common shares that are
issuable upon exercise of outstanding stock options and warrants, as follows (in
thousands):

7
<PAGE> 8

<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Options 3,497 4,939
Warrants -- 712
----- -----
3,497 5,651
===== =====
</TABLE>

Options outstanding during the three months ended December 27, 1998 and
December 28, 1997, to purchase approximately 6,639,000 and 1,143,000 shares of
common stock, respectively, were not included in the computation of diluted EPS
because the options' exercise price was greater than the average market price of
the common stock during the period and, therefore, the effect would be
anti-dilutive. The conversion of the Trust Convertible Preferred Securities is
not assumed for all periods presented since its effect would be anti-dilutive.

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company has adopted in the first quarter of
fiscal 1999. This statement requires the Company to report in the financial
statements, in addition to net income, comprehensive income and its components
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. The Company has not reported comprehensive income in any of
the periods presented as items of other comprehensive income, primarily foreign
currency items, were not material to the financial statements.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," which the Company will be required to adopt for fiscal year 1999.
This statement establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under FAS 131, operating segments are to
be determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company has not determined the impact of the adoption of this
new accounting standard on its consolidated financial statement disclosures.

In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities,"
which the Company will be required to adopt for fiscal year 2000. This statement
establishes a new model for accounting for derivatives and hedging activities.
Under FAS 133, all derivatives must be recognized as assets and liabilities and
measured at fair value. The Company has not determined the impact of the
adoption of this new accounting standard on its consolidated financial position
or results of operations.

NOTE 2 -- SPIN-OFF OF LEAP WIRELESS INTERNATIONAL, INC.

On September 23, 1998, the Company completed the spin-off and distribution
(the "Distribution" or "Leap Wireless Spin-off") to its stockholders of shares
of Leap Wireless International, Inc., a Delaware corporation ("Leap Wireless").
As part of the Distribution, effective immediately after the close of market
trading on September 23, 1998, record holders of QUALCOMM common stock on
September 11, 1998 received a dividend of one share of common stock of Leap
Wireless for every four shares of common stock of QUALCOMM held by them as of
that date. QUALCOMM's distribution of the shares was treated as a dividend and
resulted in reducing the retained earnings balance to zero as of September 27,
1998.

In connection with the Distribution, the Company transferred to Leap Wireless
its joint venture and equity interests in the following domestic and
international emerging terrestrial-based wireless telecommunications operating
companies: Pegaso Telecommunicaciones, S.A. de C.V. ("Pegaso") (Mexico),
Metrosvyaz Limited (Russia), Orrengrove Investments Limited (Russia), Chilesat
Telefonia Personal, S.A. ("Chilesat PCS") (Chile), Chase Telecommunications,
Inc. (United States), OzPhone Pty. Ltd. (Australia), and certain other
development stage businesses. QUALCOMM and Leap Wireless also agreed that, if
certain events occur within 18 months after the

8
<PAGE> 9

Distribution, QUALCOMM will transfer to Leap Wireless its equity interests and
working capital loan related to Telesystems of Ukraine ("TOU"), a wireless
telecommunications company in Ukraine.

On September 23, 1998, the Company recorded a $17.1 million liability in
connection with its agreement to transfer its ownership interest in TOU and its
working capital loan to TOU to Leap Wireless if certain events occur within 18
months of the Leap Wireless Spin-off. During the first quarter of fiscal 1999,
the Company provided an additional $1.7 million working capital loan to TOU
offset by 100% of the losses of TOU, net of eliminations, which was recorded
because the other investors' equity interests are depleted. Accordingly, the
liability to transfer TOU was increased to approximately $17.8 million at
December 27, 1998 with a corresponding reduction to paid-in-capital.

NOTE 3 -- COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS

Accounts Receivable:

<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 27,
1998 1998
------------ -------------
<S> <C> <C>
Accounts receivable, net (in thousands):
Trade, net of allowance for doubtful
accounts of $22,221 and $21,933,
respectively ......................... $628,139 $459,324
Long-term contracts:
Billed ................................ 139,323 101,868
Unbilled .............................. 84,995 49,784
Other .................................... 31 1,233
-------- --------
$852,488 $612,209
======== ========
</TABLE>

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:

<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 27,
1998 1998
------------ -------------
<S> <C> <C>
Finance receivables ..................... $ 382,345 $ 348,907
Allowance for doubtful receivables ...... (8,527) (4,955)
--------- ---------
373,818 343,952
Current maturities ...................... 66,461 56,201
--------- ---------
Noncurrent finance receivables, net ..... $ 307,357 $ 287,751
========= =========
</TABLE>

Finance receivables result from sales under arrangements in which the Company
has agreed to provide customers with long-term interest bearing debt financing
for the purchase of equipment and/or services. Such financing is generally
collateralized by the related equipment.

In March 1998, the Company agreed to defer up to $100 million of contract
payments, with interest accruing at 5-3/4% capitalized quarterly, as customer
financing under its development contract with Globalstar L.P. ("Globalstar").
Financed amounts outstanding as of January 1, 2000, will be repaid in eight
equal quarterly installments commencing as of that date, with final payment due
October 1, 2001, accompanied by all then unpaid accrued interest. At December
27, 1998, contract payments of approximately $100 million were outstanding from
Globalstar as interest bearing financed amounts.

At December 27, 1998, commitments to extend long-term financing for possible
future sales to customers totaled approximately $364 million through fiscal
2004. Such commitments are subject to the customers meeting certain conditions
established in the financing arrangements. Commitments represent the estimated
amounts to be financed under these arrangements, however, actual financing may
be in lesser or greater amounts.

9
<PAGE> 10

Inventories:

<TABLE>
<CAPTION>
DECEMBER 27, SEPTEMBER 27,
1998 1998
------------ -------------
<S> <C> <C>
Inventories (in thousands):
Raw materials ....................... $160,016 $180,957
Work-in-progress .................... 78,461 81,479
Finished goods ...................... 96,595 124,100
-------- --------
$335,072 $386,536
======== ========
</TABLE>

NOTE 4 - INVESTMENTS IN OTHER ENTITIES

In November 1998, the Company and Microsoft Corporation entered into a joint
venture agreement pursuant to which each company obtained a 50% ownership
interest in a newly formed development stage entity, Wireless Knowledge LLC, a
Delaware limited liability company. Wireless Knowledge intends to form strategic
partnerships with computing, software and telecommunications companies, as well
as with wireless carriers, for the purpose of enabling secure and
airlink-independent internet access to mobile users. Pursuant to the joint
venture agreement, QUALCOMM made a capital contribution of $7.5 million during
the first quarter of fiscal 1999 and will be required to provide $17.5 million
in equity contributions through June 2000.

During the first quarter of fiscal 1999, the Company recognized a gain of
$5.7 million from the sale of available-for-sale securities.

NOTE 5 - INCOME TAXES

The Company's income tax provision for the three months ended December 27,
1998 reflects an adjustment for the retroactive reinstatement of the R&D tax
credit. Excluding this adjustment, the Company currently estimates its annual
effective income tax rate to be approximately 35% for fiscal 1999.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

LITIGATION

On September 23, 1996, Ericsson Inc. and Telefonaktiebolaget LM Ericsson
("Ericsson") filed suit against the Company in Marshall, Texas and on December
17, 1996, Ericsson also filed suit against the Company's subsidiary QUALCOMM
Personal Electronics ("QPE") in Dallas, Texas with both complaints alleging that
the Company's or QPE's CDMA products infringe one or more patents owned by
Ericsson. The suits were later amended to include a total of 11 Ericsson
patents. By order dated July 24, 1998, the Dallas action was transferred to
Marshall, Texas. In December 1996, QUALCOMM filed a countersuit alleging, among
other things, unfair competition by Ericsson based on a pattern of conduct
intended to impede the acceptance and commercial deployment of QUALCOMM's CDMA
technology and is seeking a judicial declaration that certain of Ericsson's
patents are not infringed by QUALCOMM and are invalid. That countersuit has been
consolidated with the Marshall, Texas action. On September 10, 1996, OKI
America, Inc. ("OKI") filed a complaint against Ericsson seeking a judicial
declaration that certain of OKI's CDMA subscriber products do not infringe 9
patents of Ericsson and that such patents are invalid. The 9 patents are among
the 11 patents at issue in the litigation between the Company and Ericsson. The
OKI case has not yet been set for trial. On October 14, 1998, Ericsson filed a
dismissal with prejudice of all of its claims under three of the patents at
issue in the Marshall, Texas case. The Marshall case is set for trial on April
6, 1999. Although there can be no assurances that an unfavorable outcome of the
Marshall case would not have a material adverse effect on the Company's results
of operations, liquidity or financial position, the Company believes the named
Ericsson patents are not required to produce IS-95 compliant systems and that
Ericsson's claims are without merit, and will continue to vigorously defend
against this action.

On March 5, 1997, the Company filed a complaint against Motorola, Inc.
("Motorola"). The complaint was filed in response to allegations by Motorola
that the Company's recently announced Q phone infringes design and utility

10
<PAGE> 11

patents held by Motorola as well as trade dress and common law rights relating
to the appearance of certain Motorola wireless telephone products. The complaint
denies such allegations and seeks a judicial declaration that the Company's
products do not infringe any patents held by Motorola. On March 10, 1997,
Motorola filed a complaint against the Company (the "Motorola Complaint"),
alleging claims based primarily on the above-alleged infringement. The Company's
motion to transfer the Motorola Complaint to the U.S. District Court for the
Southern District of California was granted on April 3, 1997. On April 24, 1997,
the court denied Motorola's motion for a preliminary injunction thereby
permitting the Company to continue to manufacture, market and sell the Q phone.
On April 25, 1997, Motorola appealed the denial of its motion for a preliminary
injunction. On January 16, 1998 the U.S. Court of Appeals for the Federal
Circuit denied Motorola's appeal and affirmed the decision of the U.S. District
Court for the Southern District of California refusing Motorola's request to
enjoin QUALCOMM from manufacturing and selling the Q phone. On June 4, 1997,
Motorola filed another lawsuit alleging infringement by QUALCOMM of 4 patents.
Three of the patents had already been alleged in previous litigation between the
parties. On August 18, 1997, Motorola filed another complaint against the
Company alleging infringement by the Company of 7 additional patents. All of the
Motorola cases have been consolidated for pretrial proceedings. The cases have
been set for a final pretrial conference on April 19, 1999. Although there can
be no assurance that an unfavorable outcome of the dispute would not have a
material adverse effect on the Company's results of operations, liquidity or
financial position, the Company believes Motorola's claims are without merit and
will continue to vigorously defend the action.

On October 27, 1998, the Electronics and Telecommunications Research
Institute of Korea ("ETRI") submitted to the International Chamber of Commerce a
Request for Arbitration (the "Request") of a dispute with the Company arising
out of a Joint Development Agreement dated April 30, 1992 ("JDA") between ETRI
and the Company. In the Request, ETRI alleges that the Company has breached
certain provisions of the JDA and seeks monetary damages and an accounting. The
Company filed an answer and counterclaims denying the allegations, seeking a
declaration establishing the termination of the JDA, and for monetary damages
and injunctive relief against ETRI. In accordance with the JDA, the arbitration
will take place in San Diego. No schedule for the arbitration proceedings has
been established. Although the ultimate resolution of this dispute is subject to
the uncertainties inherent in litigation or arbitration, the Company does not
believe that the resolution of these claims will have a material adverse effect
on the Company's results of operations, liquidity or financial position. The
Company believes that ETRI's claims are without merit and will vigorously defend
the action.

The Company is engaged in 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 results of operations, liquidity or
financial position.

LETTERS OF CREDIT AND FINANCIAL GUARANTEES

The Company provided a $58 million letter of credit on behalf of Chilesat PCS
in 1997, which required the Company to reimburse Chilesat PCS for a portion of
Chilean government fines if certain network build-out milestones were not met.
Chilesat PCS received notification from the Chilean Undersecretariat of
Telecommunications ("SUBTEL") that phases one and two of the network have passed
certain acceptance tests performed by SUBTEL. As a result, the obligations under
the Chilesat PCS letter of credit were released during the first quarter of
fiscal 1999.

The Company has issued a letter of credit on behalf of its equity investee
Globalstar, L.P. ("Globalstar") to support a guarantee of up to $22.5 million of
borrowings under an existing bank financing agreement. The guarantee will expire
in December 2000. The letter of credit is collateralized by a commensurate
amount of the Company's investments in debt securities. As of December 27, 1998,
Globalstar had no borrowings outstanding under the existing bank financing
agreement.

In addition to the letter of credit on behalf of Globalstar, the Company has
$51.7 million of letters of credit and $18.8 million of other financial
guarantees outstanding, respectively, as of December 27, 1998, none of which are
collateralized.

11
<PAGE> 12

PERFORMANCE GUARANTEES

The Company and its subsidiary, QPE, have entered into contracts that provide
for performance guarantees to protect customers against late delivery or failure
to perform. These performance guarantees, and any future commitments for
performance guarantees, are obligations entered into separately, and in some
cases jointly, with partners to supply CDMA subscriber and infrastructure
equipment. Certain of these obligations provide for substantial performance
guarantees that accrue at a daily rate based on percentages of the contract
value to the extent the equipment is not delivered by scheduled delivery dates
or the systems fail to meet certain performance criteria by such dates. The
Company is dependent in part on the performance of its suppliers and strategic
partners in order to provide equipment, which is the subject of the guarantees.
Thus, the ability to timely deliver such equipment may be outside of the
Company's control. If the Company and QPE are unable to meet their performance
obligations, the payment of the performance guarantees could amount to a
significant portion of the contract value and would have a material adverse
effect on product margins and the Company's results of operations, liquidity or
financial position.

LEAP WIRELESS CREDIT FACILITY

The Company has a funding commitment to Leap Wireless in the form of a $265.0
million secured credit facility. The credit facility consists of two
sub-facilities. The first sub-facility enables Leap Wireless to borrow up to
$35.2 million from QUALCOMM, solely to meet the normal working capital and
operating expenses of Leap Wireless, including salaries, overhead and credit
facility fees, but excluding, among other things, strategic capital investments
in wireless operators, substantial acquisitions of capital products, and/or the
acquisition of telecommunications licenses. The other sub-facility enables Leap
Wireless to borrow up to $229.8 million from QUALCOMM, solely to use as
investment capital to make certain identified portfolio investments. Amounts
borrowed under the credit facility will be due September 23, 2006. QUALCOMM will
have a first priority security interest in, subject to minor exceptions,
substantially all of the assets of Leap Wireless for so long as any amounts are
outstanding under the credit facility. Amounts borrowed under the credit
facility will bear interest at a variable rate equal to LIBOR plus 5.25% per
annum. Interest will be payable quarterly beginning September 30, 2001; and
prior to such time, accrued interest shall be added to the principal amount
outstanding. At December 27, 1998, $21.1 million is outstanding under this
facility.

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<PAGE> 13

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

This information should be read in conjunction with the condensed
consolidated financial statements and the notes thereto included in Item 1 of
Part I of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of Results
of Operations and Financial Condition for the year ended September 27, 1998
contained in the Company's 1998 Annual Report on Form 10-K.

Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. QUALCOMM Incorporated's ("QUALCOMM" or the "Company") future
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not specifically
limited to: the ability to develop and introduce cost effective new products in
a timely manner, avoiding delays in the commercial implementation of the Code
Division Multiple Access ("CDMA") technology; continued growth in the CDMA
subscriber population and the scale-up and operations of CDMA systems;
developments in current or future litigation; the Company's ability to
effectively manage growth and the intense competition in the wireless
communications industry; risks associated with vendor financing; timing and
receipt of license fees and royalties; the Company's ability to successfully
manufacture and sell significant quantities of CDMA infrastructure equipment on
a timely basis; failure to satisfy performance obligations; as well as the other
risks detailed in this section, in the sections entitled Results of Operations
and Liquidity and Capital Resources, and in the Company's 1998 Annual Report on
Form 10-K.

OVERVIEW

QUALCOMM is a leading provider of digital wireless communications products,
technologies and services. The Company generates revenues primarily from:
license fees and royalties paid by licensees of the Company's CDMA technology;
sales of CDMA subscriber, infrastructure and Application Specific Integrated
Circuits ("ASICs") products to domestic and international wireless
communications equipment suppliers and service providers; sales of OmniTRACS
terminals and related software and services to OmniTRACS users; and contract
development services, including the design and development of subscriber and
ground communications equipment for Globalstar L.P. ("Globalstar"), a
low-Earth-orbit satellite system utilizing CDMA technology (the "Globalstar
System"). In addition, the Company generates revenues from the design,
development, manufacture and sale of a variety of other communications products
and services.

The Company generates revenue from its CDMA licensees in the form of up-front
licenses as well as ongoing royalties based on worldwide sales by such licensees
of CDMA subscriber and infrastructure equipment. License fees are generally
nonrefundable and may be paid in one or more installments. Revenues generated
from license fees and royalties are subject to quarterly and annual
fluctuations. This is due to variations in the amount and timing of recognition
of CDMA license fees, pricing and amount of sales by the Company's licensees and
the Company's ability to estimate such sales, and the impact of currency
fluctuations, and risks associated with royalties generated from international
licensees.

The Company manufactures CDMA infrastructure products for sale to wireless
network operators worldwide. The Company has entered into agreements regarding
the manufacture and supply of CDMA infrastructure products with, among others,
Hitachi, Hughes and Nortel. The Company manufactures its CDMA subscriber
products primarily through QUALCOMM Personal Electronics ("QPE"), a joint
venture between the Company and a subsidiary of Sony Electronics, Inc. The
Company, through QPE, is one of the largest manufacturers of CDMA handsets. The
Company has also generated substantial revenue from the design and sale of CDMA
ASICs to its licensees for incorporation into their subscriber and
infrastructure products.

The Company's infrastructure business continues to incur losses, and the
recent financial crisis in developing markets has seriously impacted
infrastructure product sales in fiscal 1999. The infrastructure business has
been strategic to QUALCOMM in driving the acceptance of CDMA technology and the
deployment of CDMA networks around the world, which in turn has resulted in
royalties and phone and ASIC sales. The Company is reviewing several strategic
alternatives including developing programs to reduce costs and lower the
breakeven point for its

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<PAGE> 14

infrastructure business, as well as focusing business development activities on
markets with a high potential for near-term results.

The Company generates revenues from its domestic OmniTRACS business by
manufacturing and selling OmniTRACS terminals and related application software
packages and by providing ongoing messaging and maintenance services to domestic
OmniTRACS users. The Company generates revenues from its international OmniTRACS
business through license fees, sales of network products and terminals, and
service fees. International messaging services are provided by service providers
that operate network management centers for a region under licenses granted by
the Company.

The Company has entered into a number of development and manufacturing
contracts involving the Globalstar System. The Company's development agreement
provides for the design and development of the ground communications stations
("gateways") and user terminals of the Globalstar System. Under the agreement,
the Company is reimbursed for its development services on a cost-plus basis. In
addition, in April 1997 the Company was awarded a contract to manufacture and
supply commercial gateways for deployment in the Globalstar System. In March
1998, the Company entered into an agreement with Globalstar to manufacture and
supply portable and fixed CDMA handsets that will operate on the Globalstar
System.

The manufacture of wireless communications products is complex and precise
process involving specialized material, manufacturing and testing equipment and
processes. The majority of the Company's products are manufactured based upon a
forecast of market demand, which the Company cannot assure that its market
demand forecasts will be accurate or that it will be able to effectively meet
customer demand in a timely manner. Factors that could materially and adversely
affect the Company's ability to meet customer demand include defects or
impurities in the components or materials used, delays in the delivery of such
components or materials, equipment failures or other difficulties. The Company
may experience component 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 Company's
manufacturing capacity.

Revenues from customers outside of the U.S. accounted for approximately 34%
of total revenues in fiscal 1998. Sales of subscriber, infrastructure and ASICs
products, internationally, are subject to a number of risks, including delays in
opening of foreign markets to new competitors, exchange controls, currency
fluctuations, investment policies, repatriation of cash, nationalization, social
and political risks, taxation and other factors, depending on the country in
which such opportunity arises.

Wireless and satellite network operators, both domestic and international,
increasingly have required their suppliers to arrange or provide long-term
financing for them as a condition to obtaining or bidding on infrastructure
projects. In providing such financing, the Company is exposed to risk from
fluctuations in foreign currency and interest rates, which could impact the
Company's results of operations and financial condition. QUALCOMM's financing on
products and services is denominated in dollars and any significant change in
the value of the dollar against the national currency where QUALCOMM is lending
could result in the increase of costs to the debtors and could restrict the
debtors from fulfilling their contractual obligations. Any devaluation in the
local currency relative to the currencies in which such liabilities are payable
could have a material adverse effect on the Company. In some developing
countries, including Chile, Mexico, Brazil, Russia and Ukraine, significant
currency devaluation relative to the U.S. dollar have occurred and may occur
again in the future. In such circumstances, the Company may experience economic
loss with respect to the collectability of its receivables and the
recoverability of inventories as a result of exchange rate fluctuations.

The Russian and Ukraine economic and political environments recently have
experienced severe volatility which could negatively impact the Company's
prospects in those countries and have a material adverse effect on the Company's
business, results of operations, liquidity and financial position. The Company
currently has approximately $20 million in Russian/Ukrainian receivables and an
additional $33 million in products and deployment services placed with carriers
for which the Company has not yet recognized revenues. The Company cannot
guarantee that these carriers will have sufficient resources to complete their
planned projects. The failure of any of these emerging service carriers to
obtain sufficient financing to meet their regulatory obligations could adversely
affect the value of the Company's receivables and inventories residing with
these customers.

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<PAGE> 15

The Company is currently negotiating the transfer of its equity ownership in
Telesystems of Ukraine ("TOU") to Leap Wireless International ("Leap Wireless").
The viability of TOU is dependent upon the Company providing additional working
capital loans or vendor financing to TOU, which is subject to the occurrence of
specific management and ownership restructuring events under negotiation with
TOU. The Company has a net asset exposure of $30 million. Industry participants
and the International Telecommunications Union ("ITU"), an organization based in
Geneva, Switzerland, are currently considering a variety of standards for third
generation wireless networks which will fulfill the requirements of the ITU's
IMT-2000 concept. The Company is advocating the standardization of a single,
converged CDMA-based third generation standard that accommodates equally the two
dominant network standards in use today. There can be no assurance that the
Company will be successful in promoting the adoption of a single CDMA standard
or that such a standard, if adopted, will be compatible with today's cdmaOne
networks. The Company believes that its CDMA patent portfolio is applicable to
other CDMA proposals for other third generation standards and has informed
standards bodies and the ITU that it holds essential intellectual property
rights for third generation proposals submitted for IMT-2000 based on CDMA.
Further, the Company intends to vigorously enforce and protect its intellectual
property position against any infringement. However, there can be no assurance
that the Company's CDMA patents will be determined to be applicable to any
proposed standard or that the Company will be able to redesign its products on a
cost-effective and timely basis to incorporate next generation wireless
technology. The adoption of next generation standards which are incompatible
with cdmaOne or which are determined not to rely on the Company's intellectual
property could have a material adverse effect on the Company's business, results
of operations, liquidity and financial position.

The Company has indicated its willingness to license its intellectual
property rights on fair, reasonable and non-discriminatory terms for standards
meeting a set of technical criteria based on three fairness principles which
support convergence of all proposed third generation CDMA technologies. The
fairness principles are: (1) a single, converged worldwide CDMA standard should
be selected as the third generation standard; (2) the converged CDMA standard
must accommodate equally the two dominant network standards in use today; and
(3) disputes on specific technological points should be resolved by selecting
the proposal that either is demonstrably superior in terms of performance,
features, or cost, or in the case of alternatives with no demonstrable material
difference, the choice that is most compatible with existing technology.

A review of the Company's current litigation is disclosed in the Notes to
Condensed Consolidated Financial Statements (see Notes to Condensed Consolidated
Financial Statements -- Note 6 Commitments and Contingencies). The Company is
also engaged in 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 results of operations, liquidity or financial
position.

RECENT DEVELOPMENTS

During the commercial start-up of its system in Chile with Chilesat Telefonia
Personal, S.A. ("Chilesat PCS"), the Company's equipment experienced certain
problems relating to the performance of the system. As a result, Chilesat PCS
has claimed that the Company is in breach of contract. The Company has tested
and delivered a processor upgrade which the Company believes resolves the claim.
Although there can be no assurance that the Company's processor upgrade will
resolve the claim until the system is at specified capacity, the Company does
not believe that the resolution of this claim will have a material adverse
effect on the Company.

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<PAGE> 16

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentages of
total revenues represented by certain consolidated statements of operations
data:

<TABLE>
<CAPTION>
THREE MONTHS ENDED

DECEMBER 27, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Communications systems ................. 87% 86%
Contract services ...................... 8 8
License, royalty and development fees .. 5 6
---- ----
Total revenues ............................. 100% 100%
---- ----

Operating expenses:
Communications systems ................. 62% 65%
Contract services ...................... 6 6
Research and development ............... 11 9
Selling and marketing .................. 7 7
General and administrative ............. 5 5
Other .................................. -- 1
---- ----
Total operating expenses ................... 92% 93%
---- ----

Operating income ........................... 8 7
Interest income, net ....................... -- 1
Net gain on sale of investments ............ 1 --
Distributions on trust convertible preferred
securities of subsidiary trust ........ (1) (1)
Minority interest in (income) loss of
consolidated subsidiaries .............. -- --
Equity in losses of investees .............. -- --
---- ----
Income before income taxes ................. 8 7
Income tax expense ......................... 3 2
---- ----
Net income ................................. 5% 5%
==== ====
Communications systems costs as a percentage
of communications systems revenues ..... 72% 75%
Contract services costs as a percentage
of contract services revenues .......... 72% 72%
</TABLE>

Note: The operating expense percentages for the three months ended December
27, 1998 do not sum due to rounding.

FIRST QUARTER OF FISCAL 1999 COMPARED TO FIRST QUARTER OF FISCAL 1998

Total revenues for the first quarter of fiscal 1999 were $941 million, an
increase of $155 million or 20% compared to total revenues of $786 million for
the first quarter of fiscal 1998. Revenue growth was primarily due to the
significant growth in revenues related to communications systems.

Communications systems revenues, which consisted primarily of sales of CDMA
subscriber, infrastructure and ASICs products, the sale of OmniTRACS products
and services, and sales of commercial gateways for deployment in the Globalstar
System, were $817 million in the first quarter of fiscal 1999, an increase of
$140 million or 21% compared to $677 million for the same period in fiscal 1998.
The increase represents the higher volume of sales of CDMA subscriber and ASICs
products, increased revenues from the expansion of the installed OmniTRACS base
in the U.S., and sales of commercial gateways for deployment in the Globalstar
System. Revenue from the sale of Globalstar gateways will decline on a
sequential quarter basis in the second quarter, which will adversely affect
revenues.

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<PAGE> 17

Contract services revenues for the first quarter of fiscal 1999 were $80
million, a 25% increase compared to $64 million for the same period in fiscal
1998. The dollar increase resulted primarily from revenues from the development
agreement with Globalstar.

License, royalty and development fees for the first quarter of fiscal 1999
were $44 million, consistent with revenues of $45 million for the same period in
fiscal 1998. In the first quarter of 1999, shipments of CDMA equipment by
licensees increased, resulting in increased royalty payments to the Company.
This increase was offset by a decline in up-front license payments. Beginning
with the second quarter of fiscal 1998, the Company began to accrue its estimate
of certain royalty revenues earned that previously could not be reasonably
estimated prior to being reported by its licensees. License, royalty and
development fees may continue to fluctuate quarterly due to the timing and
amount of up-front fees on new licenses, royalties from sales by the Company's
licensees and changes in foreign currency exchange rates.

Costs of communications systems were $585 million or 72% of communications
systems revenues for the first quarter of fiscal 1999 compared to $507 million
or 75% of communications systems revenues for the first quarter of fiscal 1998.
The dollar increase in costs resulted primarily from the costs associated with
sales of commercial gateways in the first quarter of fiscal 1999. There were no
commercial gateway sales in the first quarter of 1998. The decrease in
communications systems costs as a percentage of communications systems revenues
primarily reflects operational efficiencies, design improvements, and volume
discounts obtained from suppliers. Communications systems costs as a percentage
of communications systems revenues may fluctuate in future quarters depending on
mix of products sold, competitive pricing and other factors.

Contract services costs for the first quarter of fiscal 1999 were $57 million
or 72% of contract services revenues, compared to $46 million or 72% of contract
services revenues for the first quarter of fiscal 1998. The dollar increase in
contract services costs was primarily related to increased sales under the
Globalstar development contract.

Research and development expenses were $100 million or 11% of revenues for
the first quarter of fiscal 1999, compared to $75 million or 9% of revenues for
the same period in fiscal 1998. The dollar increase resulted from increased
investments in the development of CDMA related infrastructure, ASICs and
subscriber products.

Selling and marketing expenses were $70 million or 7% of revenues for the
first quarter of fiscal 1999, compared to $56 million or 7% of revenues for the
same period in fiscal 1998. The dollar increase of selling and marketing expense
was due primarily to growth in personnel associated with increased national and
international marketing activities and increased marketing costs in connection
with sales of CDMA subscriber and ASICs products.

General and administrative expenses for the first quarter of fiscal 1999 were
$51 million or 5% of revenues, compared to $36 million or 5% of revenues for the
first quarter of fiscal 1998. The dollar increase was attributable to growth in
personnel and associated overhead expenses necessary to support the overall
growth in the Company's operations and increased patent and information
technology expenses.

During November 1997, the Company acquired, for $10 million, substantially
all of the assets of Now Software, Inc. In connection with this asset purchase,
acquired in-process research and development of $7 million, representing the
fair value of software products still in the development stage that had not yet
reached technological feasibility, was expensed at the acquisition date. This
expense was included in other operating expenses. Also during the first quarter
of fiscal 1998, the Company recorded a $5 million non-cash charge to operations
relating to the impairment of leased manufacturing equipment that is no longer
used in the manufacturing process. The $5 million charge represented the
estimated total cost of related lease obligations, net of estimated recoveries.

Interest income was $6 million for the first quarter of fiscal 1999, compared
to $12 million for the same period in fiscal 1998. In 1998, the Company had
higher cash balances as a result of completing the private placement of $660
million of 5 3/4% Trust Convertible Preferred Securities. Furthermore, the
Company is recognizing interest income on finance receivables which has
increased over the same period in fiscal 1998.

Interest expense was $3 million for the first quarter of fiscal 1999,
consistent with $3 million for the same period in fiscal 1998.

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<PAGE> 18

During the first quarter of fiscal 1999, the Company recognized a gain of $6
million on the sale of available-for-sale securities, as compared to a net gain
of $3 million during the same period in fiscal 1998, from the sale of, and other
investing activities related to, investments in other entities.

Distributions on Trust Convertible Preferred Securities of $10 million for
the first quarter of fiscal 1999 and 1998 relate to the $660 million of 5-3/4%
Trust Convertible Preferred Securities issued by the Company in March 1997.

The minority interest represents other parties' or stockholders' share of the
income or losses of consolidated subsidiaries, including QPE, a joint venture
with a subsidiary of Sony.

Income tax expense was $23 million for the first quarter of fiscal 1999,
compared to $20 million for the same period in fiscal 1998, resulting primarily
from higher pre-tax earnings in 1999. The income tax expense for the first
quarter of fiscal 1999 reflects the benefit for the reinstatement of the R&D tax
credit retroactive to July 1, 1998. The annual effective tax rate in 1999 is
currently estimated to be 35%, compared to 30% for fiscal 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company anticipates that the cash and cash equivalents and investments
balances of $237 million at December 27, 1998, including interest earned
thereon, will be used to fund working and fixed capital requirements, including
facilities related to the expansion of its operations, financing for customers
of its CDMA infrastructure products and investment in joint ventures or other
companies and other assets to support the growth of its business. The Company
contemplates raising additional funds from a combination of sources including
potential debt and equity issuances. The Company may also seek to expand its
bank credit lines. There can be no assurance that additional financing will be
available on acceptable terms or at all. In addition, the Company's Credit
Facility, as well as notes and indentures, place restrictions on the Company's
ability to incur additional indebtedness which could adversely affect its
ability to raise additional capital through debt financing.

On March 11, 1998, the Company and a group of banks entered into a credit
facility (the "Credit Facility") under which the banks are committed to make up
to $400 million in revolving loans to the Company and to extend letters of
credit on behalf of the Company. The Credit Facility expires in March 2001 and
may be extended on an annual basis thereafter, subject to approval of a
requisite percentage of the lenders. Letters of credit outstanding reduce the
amount available for borrowing. The Company is currently obligated to pay
commitment fees equal to 0.3% per annum on the unused amount of the Credit
Facility. The Credit Facility includes certain restrictive financial and
operating covenants. At December 27, 1998, $170 million in borrowings and $7.7
million letters of credit were outstanding under the Credit Facility.

In the first quarter of fiscal 1999, $138 million in cash was used by
operating activities, compared to $68 million provided by operating activities
in the first quarter of fiscal 1998. Cash used by operating activities in the
first quarter of fiscal 1999 and 1998 includes $230 million and $11 million,
respectively, of net working capital requirements offset by $92 million and $79
million, respectively, of net cash flow provided by operations. Net working
capital requirements of $230 million during the first quarter of fiscal 1999
primarily reflect increases in accounts receivable and finance receivables which
were offset by an increase in accounts payable and accrued liabilities and a
decrease in inventories. The increase in accounts receivable and finance
receivables in the first quarter of fiscal 1999 primarily reflects the continued
growth in products and component sales. The increase in accounts payable and
accrued liabilities are primarily attributable to the growth of the business.
The reduction in total inventory is primarily the result of inventory management
programs.

The Company has entered into strategic alliance agreements to support the
design and manufacture of CDMA infrastructure products. In one of these
agreements, in which QUALCOMM participates on a percentage basis with the prime
contractor, outstanding finance receivables of $26 million from the prime
contractor are being withheld subject to the end-customer's complete acceptance
of the total system. There is currently a dispute between the prime contractor
and the end-customer as to the contract language of the acceptance criteria. The
Company believes

18
<PAGE> 19

it has met its obligations and is entitled to payment under the contract. The
Company is exposed to the extent the prime contractor is not successful in
obtaining the customer's acceptance or negotiates a reduced payment.

Investments in capital expenditures, intangible assets and other entities
totaled $70 million in the first quarter of fiscal 1999, compared to $92 million
in the same period of fiscal 1998. Significant components in the first quarter
of fiscal 1999 consisted of the purchase of $63 million of capital assets, and
the investment of $8 million in a newly formed development stage entity. The
Company expects to continue making significant investments in capital assets,
including new facilities and building improvements throughout fiscal 1999.

In the first quarter of fiscal 1999, the Company's financing activities
provided $144 million. The Company and QPE borrowed net amounts of $90 million
and $47 million, respectively, on their outstanding credit facilities, and the
Company realized $8 million in proceeds from the issuance of common stock under
the Company's stock option and employee stock purchase plans. In the first
quarter of fiscal 1998, the Company's financing activities used net cash of $20
million. The first quarter of fiscal 1998 included $12 million from the issuance
of common stock under the Company's stock option and employee stock purchase
plans, offset by $32 million in net repayments on long-term debt.

During March 1998, the Company agreed to defer up to $100 million of contract
payments, with interest accruing at 5-3/4% capitalized quarterly, as customer
financing under its development contract with Globalstar. Financed amounts
outstanding as of January 1, 2000, will be repaid in eight equal quarterly
installments commencing as of that date, with final payment due October 1, 2001,
accompanied by all then unpaid accrued interest. At December 27, 1998, contract
payments of approximately $100 million were outstanding from Globalstar as
interest bearing financed amounts and are included in finance receivables.

At December 27, 1998, commitments to extend long-term financing for possible
future sales to customers totaled approximately $364 million through fiscal
2004. Such commitments are subject to the customers meeting certain conditions
established in the financing arrangements. Commitments represent the estimated
amounts to be financed under these arrangements. Actual financing may be in
lesser or greater amounts.

The Company is considering providing a guarantee of a working capital bank
loan of $100 million to its customer, Pegaso Telecommunications, S.A. de C.V.,
to facilitate its network launch and purchase of equipment from the Company.

The Company has issued a letter of credit to support a guarantee of up to
$22.5 million of Globalstar borrowings under an existing bank financing
agreement. The guarantee will expire in December 2000. The letter of credit is
collateralized by a commensurate amount of the Company's investments in debt
securities. As of December 27, 1998, Globalstar had no borrowings outstanding
under the existing bank financing agreement.

As part of the Company's strategy of supporting the commercialization and
sale of its CDMA technology and products, the Company may from time to time
enter into strategic alliances with domestic and international emerging wireless
telecommunications operating companies. These alliances often involve the
investment by QUALCOMM of substantial equity in the operating company, as well
as a commitment by the operating company to purchase CDMA equipment from
QUALCOMM. At December 27, 1998, the Company has investments in Shinsegi
Telecomm, Inc. (Korea) and Telesystems of Ukraine. At December 27, 1998, there
were no unfunded equity commitments related to these investments.

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<PAGE> 20

A consortium comprised of Bell Canada International Inc. (34.4%), QUALCOMM
Incorporated (16.2%), SLI Wireless S.A. (12.5%), Taquari Participaoes S.A.
(2.5%) and WLL International (34.4%) announced on January 15, 1999 that it has
won an operating license ("Mirror License") to provide fixed telephone services
in the northeast region of Brazil. QUALCOMM will invest approximately $6 million
over the next two years related to its 16.2% share of the license fee. In
addition, the Company expects to make equity contributions over the next three
years in amounts approximating $45 million.

QUALCOMM has a substantial funding commitment to Leap Wireless in the form of
a $265.0 million secured credit facility. The credit facility consists of two
sub-facilities. The first sub-facility enables Leap Wireless to borrow up to
$35.2 million from QUALCOMM, solely to meet the normal working capital and
operating expenses of Leap Wireless, including salaries, overhead and credit
facility fees, but excluding, among other things, strategic capital investments
in wireless operators, substantial acquisitions of capital products, and/or the
acquisition of telecommunications licenses. The other sub-facility enables Leap
Wireless to borrow up to $229.8 million from QUALCOMM, solely to use as
investment capital to make certain identified portfolio investments. Amounts
borrowed under the credit facility will be due on September 23, 2006. QUALCOMM
will have a first priority security interest in, subject to minor exceptions,
substantially all of the assets of Leap Wireless for so long as any amounts are
outstanding under the credit facility. Amounts borrowed under the credit
facility will bear interest at a variable rate equal to LIBOR plus 5.25% per
annum. Interest will be payable quarterly beginning September 30, 2001; and
prior to such time, accrued interest shall be added to the principal amount
outstanding. At December 27, 1998, $21.1 million was outstanding under this
facility.

YEAR 2000 READINESS

The Year 2000 ("Y2K") issue relates to the way computer systems and programs
define calendar dates. A system could fail or make miscalculations due to the
interpretation of a date including "00" to mean 1900 and not 2000. Also, other
systems and products that are not typically recognized as computer or
information technology related may contain embedded hardware or software that
would be affected by this issue.

The Company has developed a plan tied to specific completion dates. As of
December 27, 1998, the Company's Y2K Project ("Project"), designed to minimize
the impact of such computer problems on the results of operations, is proceeding
on schedule. However, the Company is unable to completely determine at this time
whether the consequences of Y2K failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The failure
to correct a material Y2K problem could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect the Company's results of operations,
liquidity and financial condition. This is due to the general uncertainty
inherent in the Y2K problems, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers, customers and utility services.

During fiscal 1997, the Company initiated a strategy to begin work on the
correction of Y2K problems. As part of this strategy, a Y2K Program Office was
formed consisting of a Program director, key individuals in the business units,
analysts and administrative support. The Program Office is directly focusing
attention and required resources on the Company's Y2K issues. The Company has
also engaged an outside consulting firm to assist with project management,
conversion and testing of Y2K issues. All Y2K efforts are being coordinated
through the Program Office to ensure consistency of approach and the ultimate
readiness of QUALCOMM. This strategy is expected to reduce the Company's level
of uncertainty about the Y2K problem and in particular, about the Y2K compliance
and readiness of the Company's material customers and suppliers. The Company
believes that with the completion of the Project as scheduled, the possibility
of significant interruptions of normal operations will be reduced.

The Y2K Company's Program Office is addressing the issues under four major
sections: Internal Readiness, Supply Chain Assessment, Product Compliance and
Customer Compliance. Each section is evaluated through four phases: Discovery,
Assessment, Remediation and Post-Remediation. Discovery is the process of
inventorying potential Y2K issues throughout the Company's business process.
Assessment is the process of categorizing issues that were identified in the
Discovery phase into "ready," "not ready" or "needs more study." Remediation is
the process of fixing and testing those items that must be ready for the Y2K.
Post-Remediation is the process of addressing Y2K issues that were not
previously or not adequately corrected.

20
<PAGE> 21

Internal Readiness includes the computing and communications infrastructure,
the tools and systems used to develop products and run the business, and
internal service organizations. As of December 27, 1998, the Company has
identified the majority of the systems and non-computer related items that
require remediation or replacement and these remediation efforts have begun.
Those items considered most critical to continuing operations are given the
highest priority, and all testing is scheduled to be complete by June 1999. The
Company has completed a dedicated Y2K compliance testing lab for testing the
Company's computing and communications infrastructure as well as the Company's
business tools. Non-compliant systems are scheduled to be retired, replaced, or
repaired by September 1999. At this time, no problems have been identified that
will not be corrected by year-end 1999.

Supply Chain Assessment involves evaluating the Y2K readiness of QUALCOMM's
suppliers and their ability to continue delivering materials and services after
1999. The Company has initiated formal communications with significant suppliers
to determine the Company's vulnerability to suppliers' Y2K issues. The Company
has requested that third party vendors represent their products and services to
be Y2K compliant and that they have a program to test for that compliance. As of
December 27, 1998, compliance information has been received from all critical
suppliers. On-site visits of key suppliers for the purpose of verifying Y2K
compliance status are planned to be conducted during the first calendar quarter
of 1999. The Company expects to identify all critical suppliers
state-of-readiness for Y2K compliance by March 30, 1999. At this date, if the
Company determines a critical supplier will not be Y2K compliant by June 1999,
the Company will continue to work with the supplier to assist them in achieving
compliance, while in parallel initiating a search for alternate solutions to
avoid supply chain interruptions. At this time, no critical suppliers have been
identified as non-compliant.

Product Compliance includes the review of QUALCOMM's products for Y2K
compliance. The Company's program office has been working with individual
business unit managers to review all QUALCOMM products for Y2K compliance. The
Company believes that the majority of its products are compliant with further
formal verification being initiated where required. All testing for Y2K product
compliance is scheduled for completion by June 1999. The Company estimates all
products will be Y2K compliant by September 1999 or an upgrade or migration path
will be available for legacy products. The Company is scheduled to issue a
definitive statement of Y2K readiness for its products before July 1999.

Customer Compliance reviews QUALCOMM's major customers for Y2K compliance.
The Program Office has organized a review targeted to cover a significant
portion of the Company's customers. Customer lists have been identified and
survey work has begun. The Company does not currently have sufficient
information concerning the Y2K compliance status of the Company's major
customers. The Company is continuing to request information from customers to
understand their state of readiness for Y2K compliance. The Company has
scheduled this process to be complete by June 1999.

While the Company expects these efforts will provide reasonable assurance
that material disruptions will not occur due to internal failure, the potential
for interruption still exists. The need for a contingency plan is recognized and
plans will be developed to deal with such issues as "at risk" suppliers and
interruption of utility and other services. The response of certain third
parties is beyond the control of the Company. If the Company does not receive
adequate Y2K compliant responses from its suppliers or customers prior to April
1999, contingency plans will be developed and scheduled for no later than April
1999. Contingency plans may include increasing inventory levels, securing
alternate sources of supply, adjusting alternate shutdown and start-up schedules
and other appropriate measures. At this time, the Company cannot estimate the
additional cost, if any, that might develop from the implementation of such
contingency plans.

The Company believes its critical systems will be Y2K compliant by June 1999.
However, there is no guarantee that these results will be achieved. Specific
factors giving to this uncertainty include failure to identify all susceptible
systems, non-compliance by third parties whose systems and operations impact the
Company and other similar uncertainties. A worst case scenario might include one
or more of the Company's internal systems, suppliers or customers being
non-compliant. An event such as this could result in a material disruption to
the Company's operations. Specifically, the Company could experience software
application, computer network, manufacturing products and telephone system
failures. Supply chain and product non-compliance could result in the failure of
the Company to perform on contracts, delayed delivery of products to customers
and inadequate customer service.

21
<PAGE> 22

Customer non-compliance could result in delayed payments for products and
services and build up of inventories. Should a worst case scenario occur, it
could, depending on its duration, have a material adverse effect on the
Company's business, results of operations, liquidity and financial position.

To become Y2K compliant, the Company's total cost associated with required
modifications is not expected to be material to the Company's financial
position. To date the Company has spent an estimated $7 million on this Project.
Total budgeted cost at this time is estimated at $28 million of which $20
million represents the cost of staff and consultants to perform the Project and
$8 million is the cost of software tools for discovery and testing as well as
expenditures to replace older equipment that cannot be made Y2K compliant. The
sources of funding for this Project are from fiscal operating and working
capital budgets. None of the Company's other mission critical information
projects have been delayed due to the implementation of the Y2K Project.

FUTURE ACCOUNTING REQUIREMENTS

MARKET RISK

A complete discussion and analysis of the Company's market risks is described
in the Company's 1998 Annual Report on Form 10-K. Such risks include unfavorable
movements in interest rates, equity prices, and foreign currency exchange rates.
At December 27, 1998, there have been no material changes to the market risks
described at September 27, 1998. Additionally, the Company does not anticipate
any near-term changes in the nature of its market risk exposures or in
management's objectives and strategies with respect to managing such exposures.

22
<PAGE> 23

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 6 of Notes to Condensed Consolidated Financial Statements.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
10.1 - Employment Agreement
27.0 - Financial Data Schedule

(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.

<PAGE> 1
EXHIBIT 10.1

May 15, 1997

John E. Major
49 Brinker Road
Barrington Hills, IL 60010

Dear John:

We are pleased to offer you a position to join QUALCOMM as an Executive Vice
President, QUALCOMM Incorporated and President Infrastructure Products Division
reporting to Irwin Jacobs, Chairman and Chief Executive Officer. The terms of
the offer are as follows:

1. A starting salary at an annual rate equal to Three Hundred Fifty
Thousand Dollars ($350,000).

2. A minimum guaranteed bonus for fiscal year 1997 equal to Fifty Thousand
Dollars ($50,000) payable in conjunction with our normal distribution of
bonuses to officers in December 1997.

3. A minimum guaranteed bonus for fiscal year 1998 equal to Two Hundred
Thousand Dollars ($200,000) payable in conjunction with our normal
distribution of bonuses to officers in December 1998.

4. A hiring bonus equal to Four Hundred Fifty Thousand Dollars ($450,000).
This amount will be paid in three installments as listed below.

First Year Two Hundred Thousand Dollars ($200,000)
Second Year One Hundred Twenty-five Thousand Dollars ($125,000)
Third Year One Hundred Twenty-five Thousand Dollars ($125,000)

The first payment will be made within ten (10) days of your date of hire
and the subsequent two payments will be made on the second and third
anniversaries of your date of hire.

<PAGE> 2

5. An opportunity to acquire One Hundred Seventy Five Thousand (175,000)
shares of QUALCOMM stock through our Stock Option Plan. The price of the
stock options will be set at the average of the highest and lowest price
at which the common stock was sold on the Thursday of the week you join
the company. These options become fully vested after five years, have a
10 year life and are subject to all terms and provisions of the Plan.
This grant is subject to approval by QUALCOMM's Compensation Committee
of the Board of Directors.

6. A contribution of Twenty Thousand (20,000) shares of stock will be
reserved in your QUALCOMM Executive Retirement Account. After ten (10)
years of employment with QUALCOMM, an additional contribution will be
made to this account based on the following table:

<TABLE>
<CAPTION>
MARKET PRICE ADDITIONAL
OF SHARES CONTRIBUTION

<S> <C> <C>
less than $100 40,000
less than $150 15,000
less than $200 5,000
greater than $200 zero.
</TABLE>

7. At your discretion, prior to but not after your date of hire, you may
elect to forego the Twenty Thousand (20,000) share contribution to your
Executive Retirement Plan and the other contributions referenced in item
(6) above in exchange for an additional One Hundred Twenty Five Thousand
(125,000) stock options. These additional options would be added to the
One Hundred Seventy Five Thousand (175,000) described in item 5 above
bringing your total option grant to Three Hundred Thousand (300,000).

8. A comprehensive benefits package for you and your dependents paid by
QUALCOMM. In addition to the standard package, you also will be provided
a supplemental health plan, which reimburses expenses not covered by our
primary medical and dental plan.

9. Eligibility to participate in the Executive Retirement Plan enabling you
to defer up to 100% of base salary and bonus on an annual basis.
Participants receive a 50% match in the form company stock on up to 15%
of base salary and bonus deferred, less the 401(k) contribution limit
allowed by the Plan. Deferred income is invested in your choice of seven
(7) mutual funds.

10. A special supplemental executive disability insurance policy will
provide approximately 80% of your base salary for life in the event a
permanent disability prevents you from continuing employment.

11. A supplemental executive life insurance policy in the amount of Five
Hundred Thousand Dollars ($500,000) will be provided in addition to the
standard three times your base salary coverage.

<PAGE> 3

12. QUALCOMM will facilitate the relocation of you and your family from
Barrington Hills to San Diego as follows:

12.1 Temporary living arrangements in San Diego while you are relocating
from Barrington Hills to San Diego will be provided. These
arrangements will include a furnished rental apartment for six (6)
months.

12.2 A relocation bonus in an amount equal to eight percent (8%) of the
sales price of your home in Barrington Hills. One half of this
amount will be paid upon close of escrow of the sale of your
current home and the other half will be paid upon close of escrow
on the purchase of a home in San Diego.

12.3 A resettlement allowance equal to Ten Thousand Dollars ($10,000)
for incidental relocation expenses.

12.4 Movement of your household goods including the transportation of
your automobiles.

12.5 A tax equalization payment for all relocation expenses subject to
local, state or federal taxes.

13. A special termination agreement effective for 36 consecutive months
following your date of hire will be provided. Payment will be made upon
involuntary termination of your employment for reason other than gross
misconduct or gross neglect of duty. The prorated payment will be as
follows:

$700,000 if termination occurs within 12 months of date of hire
$350,000 if termination occurs within 24 months of date of hire
$175,000 if termination occurs within 36 months of date of hire

In consideration of your employment, you acknowledge and agree that your
employment may be terminated, with or without cause, and with or without advance
notice, at any time at the option of either the Company or yourself. You
understand that no supervisor or representative of the Company other than the
Office of the Chairman has any authority to enter into any agreement for
employment for any specified period of time, or to make any agreement contrary
to the foregoing.

As required by the Immigration Reform and Control Act of 1986, this employment
offer is contingent upon your ability to provide proof of your identity and
legal right to work in the United States.

John, we are convinced you will make an excellent addition to QUALCOMM's
executive management team. Everyone who has met you has confidence that your
experience and talents will contribute in many significant ways to our future
successes. We also look forward to your family making a new home in San Diego
and joining the larger family of QUALCOMM.

<PAGE> 4

Assuming a positive response, please return a signed copy of this letter and
review the Employee Agreement which you will be requested to sign at the time
you join QUALCOMM.

Given the time sensitive nature of several terms in this offer and the
importance of organization planning relative to your key position at QUALCOMM,
this offer will expire unless accepted in writing by May 16, 1997, and unless
your employment start date is before June 9, 1997.

Congratulations and welcome to the QUALCOMM team!

Sincerely,

/s/ DANIEL L. SULLIVAN

Daniel L. Sullivan, Ph.D
Senior Vice President, Human Resources
QUALCOMM Incorporated

Offer accepted: /s/ JOHN MAJOR
----------------------
Proposed start date: 5/14/97
-----------------

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED DECEMBER 27, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> DEC-27-1998
<CASH> 131,940
<SECURITIES> 105,483
<RECEIVABLES> 941,170
<ALLOWANCES> 22,221
<INVENTORY> 335,072
<CURRENT-ASSETS> 1,662,862
<PP&E> 631,048
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,762,775
<CURRENT-LIABILITIES> 1,006,885
<BONDS> 27,083
660,000
0
<COMMON> 7
<OTHER-SE> 1,014,678
<TOTAL-LIABILITY-AND-EQUITY> 1,014,685
<SALES> 941,223
<TOTAL-REVENUES> 941,223
<CGS> 642,390
<TOTAL-COSTS> 642,390
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,315
<INCOME-PRETAX> 71,584
<INCOME-TAX> 23,054
<INCOME-CONTINUING> 48,530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,530
<EPS-PRIMARY> $0.69<F1>
<EPS-DILUTED> $0.65
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>

</TABLE>