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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended March 31, 2004

OR

For the transition period from              to             

Commission File Number

000-50669

SiRF TECHNOLOGY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

(408) 467-4010

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.    Yes  ¨    No  x  (1)

(1) The registrant has been subject to the filing requirements of the Securities Exchange Act of 1934 since the effective date of its Registration Statement on Form S-1 (April 21, 2004) and has filed all required reports since the effective date.

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

45,562,213 shares of the Registrant’s common stock were outstanding as of April 30, 2004.

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

SiRF TECHNOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying notes.

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SiRF TECHNOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes.

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SiRF TECHNOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Summary of Significant Accounting Policies

Organization

SiRF Technology Holdings, Inc. (“SiRF”) is the holding company for SiRF Technology, Inc. (“SiRF Technology”), which develops and markets semiconductor products designed to enable location awareness in high-volume mobile consumer devices and commercial applications. SiRF Technology was incorporated in the state of California in February 1995 and reincorporated in the state of Delaware in September 2000. SiRF was incorporated in the state of Delaware in June 2001 when all of SiRF Technology’s capital was exchanged for SiRF capital.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements of SiRF have been prepared in accordance with generally accepted accounting principles for interim financial information, consistent in all material respects with those applied in SiRF’s audited financial statements included in SiRF’s Form S-1 as filed with the Securities and Exchange Commission, and pursuant to instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 31, 2004, and results of operations and cash flows for all periods presented have been made. The condensed consolidated balance sheet at December 31, 2003, has been derived from the audited financial statements at that date. The condensed consolidated financial statements include SiRF and its wholly owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

These condensed consolidated financial statements should be read in conjunction with SiRF’s audited financial statements as included in SiRF’s Form S-1 as filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2004, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2004.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Such management estimates include, but are not limited to, the recognition of revenue, the provision for inventory write-downs, the allowance for doubtful accounts, the valuation of stock options, the provision for warranty claims and the valuation of goodwill and long-lived assets. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period presentations. Revenues recognized on license royalty agreements included in net revenue for the three-months ended March 31, 2003, have been separately presented in the statement of operations.

Revenue Recognition

We derive revenue primarily from sales of semiconductor chip sets and licenses of our intellectual property and premium software products. We recognize revenue when persuasive evidence of an arrangement exists, transfer of title and acceptance, where applicable, has occurred, the fee is fixed or determinable and collection is probable. Transfer of title occurs based on defined terms in customer purchase orders for all shipments. We defer the recognition of revenue and the related cost of revenue on shipments to distributors that have rights of return and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

price protection privileges on unsold merchandise until the merchandise is sold by the distributor to its customers. Price protection rights grant distributors the right to credit on future purchases in the event of decreases in the price of our products. We provide marketing incentives to certain distributors. Such payments are recorded as a reduction of revenue in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”

We license rights to use our intellectual property to allow licensees to integrate GPS technology into their products. We also license rights to use our premium software products to licensees to improve performance or to enable our chip sets to be integrated into their specific applications. Licensees pay ongoing royalties based on their sales of products incorporating our intellectual property or premium software. We recognize royalty revenue at the time products containing our intellectual property or premium software are sold by the licensee based on quarterly reports received from our licensees. Subsequent to the sale of such licenses, we have no obligation to provide any modification, customization, upgrades, or enhancements. The cost of revenue associated with licenses is insignificant.

Net Income (Loss) Per Share

Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) allocable to common stockholders by the weighted average number of common shares outstanding, excluding the weighted average unvested common shares subject to repurchase. Diluted net income (loss) per share is computed under the treasury stock method giving effect to all potential dilutive common stock including options, warrants, common stock subject to repurchase and convertible preferred stock. Common stock equivalents such as convertible preferred stock, preferred stock warrants, and stock options are excluded from the computation in loss periods as their effect would be antidilutive.

The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended March 31, 2004 and 2003, we had common stock equivalents outstanding, which could potentially dilute basic net income per common share in the future, but were excluded from the computation of diluted net income (loss) per common share in the periods presented. These common stock equivalents were excluded at March 31, 2004 and 2003, because their effect would have been anti-dilutive. Such outstanding securities consist of the following (in thousands):

Product Warranty

Our product warranty accrual includes specific accruals for known product issues and an accrual for an estimate of incurred but unidentified product issues based on historical activity. The warranty accrual and the related expense for known product issues were not significant for the three months ended March 31, 2004 and 2003. Due to effective product testing and the short time between product shipment and the detection and correction of product failures, the warranty accrual based on historical activity and the related expense were not significant as of and for the fiscal years or interim periods presented.

Research and Development and Software Development Costs

Research and development expenses are charged to operations as incurred. To the extent research and development costs include the development of embedded software, we believe that software development is an integral part of the semiconductor design and such costs are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Computer Software To Be Sold, Leased or Otherwise Marketed. The costs to develop such software have not been capitalized as we believe our current software development process is essentially completed concurrent with the establishment of technological feasibility.

We have generated engineering services income with various commercial customers that have enabled us to accelerate our product development efforts. Such development income has only partially funded our product development activities, and we retain ownership of the technology developed under these arrangements. As a result, we classify all development costs related to the underlying contracts as research and development expense, and income generated by them as a contra-expense. These services are billed in accordance with the terms and conditions of the related contracts, which may allow progress billings upon costs incurred, completion, or other billing arrangements. Engineering service income is recognized only if the customer accepts the delivery of a given milestone, and collectibility is probable. Advance contract billings include amounts that have been invoiced, but we have not yet received acceptance of the deliverable from the customer. The following table summarizes those services (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations in accounting for our employee and director stock options, and the disclosure-only alternative of the pro forma effect of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Under APB 25, no compensation expense is recorded for employee stock options granted at an exercise price equal to the market price of the underlying stock on the date of grant. We recognized compensation expense for any stock options granted with an exercise price less than the deemed fair value of the underlying common stock using a minimum value approach for all options granted prior to February 10, 2004 and using the Black-Scholes option pricing model for all options granted on or after February 10, 2004, on an accelerated basis, in accordance with FASB Interpretation No. 28. Prior to there being a public market for our common stock, the Board of Directors determined the deemed fair value of our common stock based on factors such as the sale of our preferred stock, our results of operations, and consideration of the fair value of comparable publicly traded companies.

We account for non-employee stock options in accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and related interpretations. Under EITF 96-18, compensation expense on non-employee stock options is calculated using the Black-Scholes option pricing model and is recorded as the shares underlying the options are earned. The unvested shares underlying the options are subject to periodic revaluation over the remaining vesting period.

Had compensation cost for our stock-based compensation plan been determined consistent with SFAS 123, our net income (loss) would have been as follows (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The information above regarding net income (loss) and net income (loss) per share was prepared in accordance with SFAS 123 and has been determined as if we accounted for our employee stock options under the fair value method as prescribed by SFAS 123. The fair value for options granted prior to the our initial filing of Form S-1 with the Securities and Exchange Commission on February 10, 2004, were estimated at the date of grant using the minimum value method with the weighted-average assumptions listed below. Options granted on or after February 10, 2004, the date of our initial filing of Form S-1 with the Securities and Exchange Commission, have been valued using the Black-Scholes option-pricing model with an expected stock volatility of 70% and the following weighted-average assumptions:

The weighted average fair value of options granted with an exercise price below the deemed fair value of our common stock during the quarter ended March 31, 2004, was $1.17. The weighted average fair value of options granted with an exercise price equal to the deemed fair value of our common stock during the quarter ended March 31, 2004, was $5.51. All options granted in the quarter ended March 31, 2003, had an exercise price equal to the deemed fair value of our common stock on the date of the grant. The weighted average fair value of options granted for the quarter ended March 31, 2003, was $0.47.

Indemnifications

From time to time we enter into types of contracts that contingently require us to indemnify parties against third party claims. These contracts primarily relate to: (i) real estate leases, under which we may be required to indemnify property owners for environmental and other liabilities, and other claims arising from our use of the applicable premises; (ii) agreements with our officers, directors and employees, under which we may be required to indemnify such persons from liabilities arising out of their employment relationship; and (iii) agreements with customers to license our intellectual property, under which we may indemnify customers for copyright or patent infringement related specifically to the use of such intellectual property.

Note 2. Acquisition of a Development-Stage Company

On March 28, 2003, we acquired Enuvis, a development-stage company specializing in wireless location technology. The aggregate purchase price of $11,140,000 consisted of 1,572,417 shares of Series H preferred stock valued at $10,221,000, immediately exercisable warrants to acquire 132,364 shares of Series H preferred stock valued at $767,000 and direct acquisition costs of approximately $152,000. The value of the series H preferred stock issued in the Enuvis transaction was determined based upon best estimates by management and SiRF’s Board of Directors through negotiations between SiRF and Enuvis’ former Board of Directors. Enuvis had no customers and was not generating revenue. Accordingly, we do not believe Enuvis met the criteria to be accounted for as the acquisition of a “business” under the requirements of SFAS 141, Business Combinations. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated on a proportionate basis to the assets acquired and no goodwill has been recorded in accordance with SFAS 142, Goodwill and Other Intangible Assets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the estimated fair values of the assets and liabilities assumed at the date of acquisition (in thousands):

The acquired identified intangible assets are being amortized on a straight-line basis. The acquired identified intangible assets include existing developed core technology of approximately $9,599,000 with a five-year weighted average useful life and assembled workforce of $524,000 with a two-year useful life.

Note 3. Cash Equivalents and Investments

The following is a summary of available-for-sale investments as of March 31, 2004 and December 31, 2003, (in thousands):

March 31, 2004

(Unaudited)

December 31, 2003

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The fair value of the Company’s investment in debt securities, by contractual maturity, is as follows (in thousands):

Note 4. Inventories

Inventories consist of the following (in thousands):

Note 5. Segment and Geographical Information

As of March 31, 2004 and December 31, 2003, substantially all of our long-lived assets are maintained in the United States of America. The following table summarizes net revenue by geographic region (in thousands):

Note 6. Customer Concentration

The following table summarizes net revenue and accounts receivables for customers, which accounted for 10% or more of net revenue or net accounts receivable:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The outstanding accounts receivable balance of customer D includes royalty revenue for the most recent quarter, which according to the contract is payable approximately 45 days from March 31, 2004.

Note 7. Identified Intangible Assets

Identified intangible assets at March 31, 2004, consisted of the following (in thousands):

Identified intangible assets at December 31, 2003, consisted of the following (in thousands):

Amortization expense of acquisition-related intangible assets was $1,158,000 for the three months ended March 31, 2004 and $613,000 for the three months ended March 31, 2003. Amortization of intellectual property assets was $37,000 for the three months ended March 31, 2004 and 2003, and was included in research and development. Based on the carrying value of identified intangible assets recorded at March 31, 2004, the annual amortization expense is expected to be as follows (in thousands):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Deferred Margin on Shipments to Distributors

Revenue on shipments made to distributors under agreements allowing right of return and price protection is deferred until the distributors sell the merchandise. Deferred revenue under these agreements and deferred cost of sales related to inventories held by distributors were as follows (in thousands):

Note 9. Long-Term Obligations

We have a litigation settlement obligation related to a lawsuit settled in September 2000. As of March 31, 2004, the balance of this litigation settlement obligation was approximately $3,014,000, of which $667,000 was classified as short-term. As of December 31, 2003, the balance of this litigation settlement obligation was approximately $3,275,000, of which $500,000 was classified as short-term.

We have an available short-term revolving line of credit under which we may borrow up to $4,000,000, including $2,500,000 in the form of letters of credit, with an interest rate of prime plus 1.0%, with a minimum of 5.25% (5.25% as of March 31, 2004). The line of credit is available through March 2006. As of March 31, 2004 and December 31, 2003, we had a $2.0 million standby letter of credit that was collateralized by our bank line of credit. The revolving line of credit is secured by substantially all of our assets. Other than the $2.0 million used to collateralize the standby letter of credit, there were no borrowings under this line of credit at March 31, 2004 and December 31, 2003.

Note 10. Stock Option and Employee Stock Purchase Plans

We have a stock option plan (the “1995 Plan”) under which incentive and non-qualified stock options to purchase shares of common stock at the fair market value on the date of issuance may be granted to employees and independent contractors. As of March 31, 2004, the Board of Directors and stockholders had approved 13,604,982 shares of common stock to be reserved for issuance under the 1995 Plan.

Options generally vest over a period of four years and generally become exercisable beginning six months from the date of employment or grant. Options expire ten years from the date of grant. Unvested common stock sold to employees, directors and consultants under stock purchase agreements is subject to repurchase at our option upon termination of their employment or services at the original purchase price. This right to repurchase expires ratably over the vesting period.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On March 31, 2004, the stockholders approved the adoption of the 2004 Stock Incentive Plan. Under the 2004 Stock Incentive Plan, 5,000,000 shares of common stock will be reserved for issuance upon the completion of an initial public offering. Under the 2004 Stock Incentive Plan, any shares not yet issued under the 1995 Stock Option Plan on the date of the initial public offering will no longer be available for grant. On January 1, of each year, starting with the year 2005, the number of shares in the reserve will automatically increase by the lesser of (i) 5,000,000 shares, (ii) 5% of the total number of shares of common stock at that time, or (iii) a number of shares determined by the Board of Directors. In general, if options or awards under the 2004 Stock Incentive Plan are forfeited, then those options or shares will again become available for awards under the 2004 Stock Incentive Plan.

On March 31, 2004, the stockholders approved the adoption of the 2004 Employee Stock Purchase Plan. Under the 2004 Employee Stock Purchase Plan, 1,000,000 shares will be reserved for issuance upon the completion of an initial public offering. On January 1 of each year, starting with the year 2005, the number of shares in the reserve will automatically increase by an amount equal to 1.5% of our issued and outstanding common stock, not to exceed 750,000 shares. Eligible employees are allowed to have salary withholdings of up to 15% of their cash compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock on the first trading day of the offering period or the fair market value on the purchase date. The initial offering period commences upon the effective date for the initial public offering of the Company’s common stock. For the first offering period, shares of common stock may be purchased at a price equal to 85% of the lower of the price per share in the initial offering or the market value on the purchase date.

Note 11. Deferred Stock Compensation Expense

In connection with options granted to employees to purchase common stock, we recorded deferred stock compensation of approximately $27,000 for the quarter ended March 31, 2004, and $10,092,000 for the year ended December 31, 2003. Such amounts represent, for employee stock options, the difference between the exercise price and the deemed fair market value of our common stock at the date of grant. No deferred stock compensation was recorded in 2002 as the options were granted at an exercise price equal to the deemed fair value. The deferred charges for employee options are being amortized to expense over the vesting period, using a multiple option valuation approach, on an accelerated basis in accordance with FASB Interpretation No. 28. We reversed previously recorded deferred stock compensation expense of $52,000 for the quarter ended March 31, 2004, and $278,000 for the quarter ended March 31, 2003, in connection with the termination of the related employees. Net stock compensation expense was $1,959,000 for the quarter ended March 31, 2004, and $211,000 for the quarter ended March 31, 2003. Except for amounts included in cost of product revenue, which were $225,000 and $40,000 for the quarters ended March 31, 2004 and 2003, respectively, we report amortization of deferred stock-based compensation as a separate line item in the accompanying condensed consolidated statement of operations.

Note 12. Related Party Transactions

We have some customers and/or suppliers who are also preferred stockholders and/or have a common board member which we consider as related parties. In connection with the purchase of the GPS semiconductor product line of Conexant in September 2001, we entered into an agreement with Conexant, which owned approximately 20% of SiRF as of March 31, 2004 and December 31, 2003, to manufacture certain GPS semiconductors. Under this agreement, no product was purchased during the three months ended March 31, 2004, and we purchased product for approximately $1,195,000 during the three months ended March 31, 2003. As of March 31, 2004 and December 31, 2003, we had an immaterial amount of trade payables to Conexant. This agreement expired in March 2003.

We have an agreement with Skyworks Solutions, Inc. (“Skyworks”) to manufacture certain GPS semiconductors. One of our board members, Moiz Beguwala, is also a board member of Skyworks. During the three

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months ended March 31, 2004, we purchased approximately $349,000 of product from Skyworks. No product was purchased from Skyworks during the three months ended March 31, 2003. As of March 31, 2004, we had approximately $137,000 of trade payables to Skyworks and non-cancelable purchase orders of approximately $959,000. At December 31, 2003, we had approximately $781,000 of trade payables to Skyworks and non-cancelable purchase orders of approximately $260,000.

Note 13. Subsequent Events

Offerings of Common Stock

On April 22, 2004, we completed an initial public offering in which we sold 7,000,000 shares of common stock at $12.00 per share. In addition, we sold 1,650,000 shares of common stock at $12.00 per share in connection with the exercise of the underwriters’ overallotment option. The total aggregate proceeds from these transactions were $103,800,000. Underwriters’ discounts and other related costs were approximately $9,466,000 resulting in net proceeds to SiRF of approximately $94,334,000. Upon the closing of our offering, all of our preferred stock, par value $0.0001 per share, automatically converted into 29,100,184 shares of common stock.

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This report on Form 10-Q contains forward-looking statements, including, but not limited to, statements about our expectations regarding our expenses, our anticipated cash needs, our estimates regarding our capital requirements, our needs for additional financing, our intellectual property and potential legal proceedings. These statements may be identified by such terms as “may”, “might,” “expect,” “will,” “intend,” “could,” “can,” or the negative of those terms or similar expressions intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties which may cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the development of the market for GPS-based location awareness technology, factors affecting our quarterly results, our sales cycle, our dependence on our foundries to manufacture our products, our ability to adequately forecast demand for our products, our customer relationships, our ability to compete successfully, the impact of our intellectual property indemnification practices and other risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting Our Operating Results” in this report. These forward-looking statements represent our estimates and assumptions only as of the date of this report. Unless required by law, we undertake no responsibility to update these forward-looking statements.

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

The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes in this report. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements.

Overview

We are a leading supplier of Global Positioning System, or GPS, semiconductor solutions designed to provide location awareness capabilities in high-volume mobile consumer and commercial systems. Location awareness capabilities allow a user to determine and use location information to gain access to applications and services, such as navigation or roadside assistance. Location awareness capabilities may be combined with wireless connectivity to enable a range of tracking and location applications, such as child and asset locators. Our products use the Global Positioning System, which is a system of satellites designed to provide longitude, latitude and time information to GPS-enabled devices virtually anywhere in the world.

Our products have been integrated into mobile consumer devices such as mobile phones, automobile navigation systems, personal digital assistants, handheld navigation devices and GPS-based peripheral devices, and into commercial systems such as fleet management and road-tolling systems. We have an intellectual property portfolio of 80 patents granted in the United States and 10 patents granted in foreign countries.

We market and sell our products to original equipment manufacturers, or OEMs, of four target platforms: wireless handheld devices, including mobile phones, automotive electronics systems, including navigation and telematics systems, portable computing devices, including personal digital assistants and notebook computers, and embedded consumer applications, such as recreational GPS handhelds, digital cameras and watches.

In February 2004, we announced three new products: (a) SiRFstarIII, our next generation GPS architecture with SiRFLoc client software, both in a chip set and intellectual property core form, (b) SiRFSoft with SiRFLoc client software, our GPS solution for signal processing in software on application processor powered wireless platforms and (c) SiRFLoc server, a multimode aiding platform that is deployed in wireless networks to improve the performance of GPS enabled devices. These products are not yet in commercial production and we do not expect to begin shipping these products in volume until the end of 2004. We do not own a fabrication facility, but use third-party contractors to perform manufacturing, assembly, and test functions.

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On April 22, 2004, we completed an initial public offering in which we sold 7,000,000 shares of common stock at $12.00 per share. In addition, we sold 1,650,000 shares of common stock at $12.00 per share in connection with the exercise of the underwriters’ overallotment option. The total aggregate proceeds from these transactions were $103,800,000. Underwriters’ discounts and other related costs were approximately $9,466,000 resulting in net proceeds to SiRF of approximately $94,334,000. Upon the closing of our offering, all of our preferred stock, par value $0.0001 per share, automatically converted into 29,100,184 shares of common stock.

We had an accumulated deficit of $87.3 million as of March 31, 2004. Although we recently became profitable, we may not be able to maintain profitability. Our limited operating history makes the prediction of future operating results very difficult. We believe that period-to-period comparisons of operating results should not be relied upon as predictive of future performance.

SiRF^®, SiRFStar^®, SiRFXtrac^® and the SiRF name and orbit design logo are our registered trademarks. The following are trademarks of SiRF Technology, Inc., some of which are pending registration as intent-to-use applications: SiRFstarIII^™, SiRFSoft ^™, SoftGPS ^™, SiRFstarII^™, SiRFLoc^™, SiRFDRive^™, WinSiRF^™, SiRFNAV^™, SnapLock^™, SnapStart^™, FoliageLock^™, SingleSat^™, TricklePower^™, Push-to-Fix^™, UrbanGPS^™ and Multimode Location Engine^™. This report on Form 10-Q also includes trade names, trademarks and service marks of other companies and organizations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our most critical policies include: (a) revenue recognition, which impacts the recording of revenue; (b) valuation of inventories, which impacts cost of revenue and gross margin, (c) stock option valuation, which impacts the disclosure and recognition of stock compensation, (d) accounts receivable allowance, which impacts general and administrative expense, (e) warranty reserve, which impacts gross margin and (f) the assessment of recoverability of long-lived assets including goodwill and other intangible assets, which impacts write-offs of goodwill and other intangibles. We also have other key accounting policies that are less subjective, and therefore, their application would not have a material impact on our reported results of operations. The following is a discussion of our most critical policies, as well as the estimates and judgments involved.

Revenue Recognition. Revenue from sales to our direct customers, both OEMs and value added manufacturers (“VAMs”), is recognized when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title as well as fixed or determinable pricing and probable collectibility. Transfer of title occurs based on defined terms in customer purchase orders for all shipments.

Sales to distributors are made under agreements providing price protection and rights of return under certain circumstances. We defer the recognition of revenue and the related cost of revenue on shipments to distributors that have rights of return and price protection privileges on unsold merchandise until the merchandise is sold by the distributor to its customers. In addition, we record allowances at the time of sale for estimated sales returns. We determine these allowances based upon historical rates of returns. Accounts receivable from distributors are recognized and inventory is released upon shipment as title to inventories generally transfers upon shipment at which point we have a legally enforceable right to collection under normal payment terms. Revenue recognition depends on notification from the distributor that product has been sold to the end customer. Information reported to us by the distributor includes quantity and end-customer shipment information, as well as our monthly inventory on hand at the distributor. Distributor month-end inventory quantities are subsequently reconciled to deferred revenue balances.

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We license rights to use IP cores and premium software to allow licensees to integrate GPS technology into their products. Licensees typically pay ongoing royalties based on their sales of products incorporating our intellectual property. We recognize royalty revenue as earned at the time products containing our licensed intellectual property are sold by the licensee. Revenue estimates are based on quarterly reports provided by the licensee.

Inventory. We continually assess the recoverability of our inventory based on assumptions about demand and market conditions. We write down our inventory for estimated lower of cost or market, obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required that could adversely affect our operating results. If actual market conditions are more favorable, we may have higher gross margins when products incorporating inventory that was previously written down are sold.

Stock Options. We have elected to follow the intrinsic value-based method prescribed by Accounting Principles Board Opinion 25, or APB 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for employee stock options rather than adopting the alternative fair value accounting provided under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. Therefore, we do not record any compensation expense for stock options we grant to our employees where the exercise price equals the deemed fair market value of the stock on the date of grant and the exercise price, number of shares eligible for issuance under the options and vesting period are fixed. We comply with the disclosure requirements of SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123, which require that we disclose our pro forma net income or loss and net income or loss per common share as if we had expensed the fair value of the options. In calculating such fair value, there are certain assumptions that we use, as disclosed in note 1 of our condensed consolidated financial statements, consisting of the stock price volatility, expected life of the option, risk-free interest rate and dividend yield.

Accounts Receivable Allowance. We maintain an allowance for doubtful accounts and for estimated losses resulting from the financial inability of our customers to make required payments. We continuously monitor collections and payments from our customers and management determines this allowance based upon our historical experience, our anticipation of uncollectible accounts receivable and any specific customer collection issues that we have identified. While our credit losses have historically been within our expectations and the allowance established, we might not continue to experience the same credit loss rates that we have in the past. Our receivables are concentrated in a relatively few number of customers. As of March 31, 2004, 67% of our receivables was concentrated in two customers. Therefore, a significant change in the liquidity or financial position of any one customer could make it more difficult for us to collect our accounts receivable and require us to record additional allowances that could adversely affect our operating results.

Warranty Reserve. We continuously monitor chip set returns for warranty failures and maintain a reserve for the related warranty expenses based on historical experience of similar products as well as various other assumptions that we believe to be reasonable under the circumstances. Our product warranty reserve includes specific accruals for known product issues and an accrual for an estimate of incurred but unidentified product issues based on historical activity. Due to effective product testing and the short time between product shipment and the detection and correction of product failures, the warranty accrual based on historical activity and the related expense were not significant as of and for the fiscal years or interim periods presented.

Assessment of Long-Lived and Other Intangible Assets and Goodwill. We are required to assess the impairment of identified intangibles, long-lived assets and goodwill on an annual basis, and potentially more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

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When we determine that the carrying value of intangibles, long-lived assets or goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure this impairment based on a projected discounted cash flow. Projecting these discounted cash flows requires us to make significant estimates regarding future revenues and expenses, projected capital expenditures, changes in our working capital and the relevant discount rate. Should actual results differ significantly from our current estimates, impairment charges will result.

Results of Operations

Revenue

We generate a substantial majority of our net revenue from chip set sales and have recently begun recognizing license royalty revenue from the licensing of our IP cores and premium software. We recognize revenue when persuasive evidence of an arrangement exists, transfer of title has occurred, the fee is fixed or determinable and collection is probable. We record allowances at the time of sale for estimated sales returns. We defer the recognition of revenue and the related cost of revenue on shipments to distributors that have rights of return and price protection privileges on unsold merchandise until the merchandise is sold by the distributor to its customers. License royalty revenue consists of fees from licensing our IP cores and premium software. Licensees typically pay ongoing royalties based on their sales of products incorporating our IP cores or premium software. We recognize royalty revenue as earned at the time products containing our licensed IP cores or premium software are sold by the licensee based on quarterly reports received from our licensees. Subsequent to the sale of premium software products, we have no obligation to provide modifications, customizations, upgrades, or other enhancements.

Net revenue for the periods reported were as follows (in thousands):

Net revenue increased in the quarter ended March 31, 2004, as compared with the quarter ended March 31, 2003, due to increases in both product revenue and license royalty revenue. The increase in product revenue resulted primarily from a 163% increase in unit shipments of our chip sets partially offset by a 17% decline in our average selling prices. License royalty revenue increased primarily due to a customer beginning to ship significant volume of product subject to an IP core licensing arrangement in the second half of 2003.

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Product revenue for the periods reported were as follows (in thousands):

License royalty revenue for the periods reported were as follows (in thousands):