SIRF TECHNOLOGY HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 June 30, 2004

¨	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

000-50669

SiRF TECHNOLOGY HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		94-3245315
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

148 E. Brokaw Road, San Jose, California		95112
(Address of principal executive office)		(Zip Code)

(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 x No ¨

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

45,631,402 shares of the Registrant’s common stock were outstanding as of July 30, 2004.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheet as of June 30, 2004 (Unaudited) and December 31, 2003	3
	Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2004 and 2003 (Unaudited)	4
	Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2004 and 2003 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40

PART II. OTHER INFORMATION
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Shares	42
Item 6.	Exhibits and Reports on Form 8-K	42
SIGNATURES		43
EXHIBIT INDEX		44

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

SiRF TECHNOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands)


	June 30, 2004 (Unaudited)			December 31, 2003 ⁽¹⁾
ASSETS
Current assets:
Cash and cash equivalents	$	92,142		$	16,715
Marketable securities		5,347			827
Accounts receivable, net of allowance for doubtful accounts of $191,000 and $329,000 as of June 30, 2004 and December 31, 2003, respectively		10,394			8,467
Inventories		6,042			7,968
Prepaid expenses and other current assets		2,133			1,457

Total current assets		116,058			35,434
Long-term investments		29,559			3,248
Property and equipment, net		2,860			2,531

Goodwill		28,052			28,052
Identified intangible assets, net		16,657			18,973
Other long-term assets		1,025			390

Total assets	$	194,211		$	88,628

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	4,521		$	5,602
Accounts payable to related parties		348			782
Accrued payroll and related benefits		2,312			1,410
Income taxes payable		37			244
Other accrued liabilities		1,529			1,850
Deferred margin on shipments to distributors		498			517
Advance contract billings		443			567
Current portion of long-term obligations		722			556

Total current liabilities		10,410			11,528
Long-term obligations		2,380			2,910

Total liabilities		12,790			14,438

Commitments and contingencies
Convertible preferred stock		—			138,213
Stockholders’ equity (deficit):
Common stock		5			1
Additional paid-in-capital		269,329			36,013
Deferred stock-based compensation		(5,167	)		(8,686	)
Accumulated other comprehensive income		(28	)		22
Accumulated deficit		(82,718	)		(91,373	)

Total stockholders’ equity (deficit)		181,421			(64,023	)

Total liabilities and stockholders’ equity (deficit)	$	194,211		$	88,628

⁽¹⁾	The condensed consolidated balance sheet information was derived from SiRF Technology Holdings, Inc. audited consolidated financial statements for the year ended December 31, 2003.

See accompanying notes.

SiRF TECHNOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2004			2003			2004			2003
Revenue:
Product revenue	$	26,618		$	13,647		$	50,924		$	24,887
License royalty revenue		3,832			91			7,884			136

Net revenue		30,450			13,738			58,808			25,023
Cost of revenue:
Cost of product revenue ^(a)		13,490			6,268			25,589			11,648

Gross profit		16,960			7,470			33,219			13,375
Operating expenses:
Research and development		5,322			3,638			10,433			6,680
Sales and marketing		2,517			2,094			5,162			4,283
General and administrative		1,937			1,056			3,297			2,039
Amortization of acquisition-related intangibles		1,158			1,158			2,316			1,771
Stock compensation expense ^(b)		1,401			488			3,135			659

Total operating expenses		12,335			8,434			24,343			15,432

Operating income (loss)		4,625			(964	)		8,876			(2,057	)
Interest income		240			46			294			92
Other expense, net		(32	)		(3	)		(59	)		(27	)

Other income, net		208			43			235			65

Net income (loss) before income tax provision (benefit)		4,833			(921	)		9,111			(1,992	)
Provision for (benefit from) income taxes		242			(57	)		456			(123	)

Net income (loss)		4,591			(864	)		8,655			(1,869	)
Deemed dividend to preferred stockholders		—			—			—			468

Net income (loss) applicable to common stockholders	$	4,591		$	(864	)	$	8,655		$	(2,337	)

Net income (loss) per share:
Basic	$	0.12		$	(0.13	)	$	0.39		$	(0.35	)

Diluted	$	0.09		$	(0.13	)	$	0.19		$	(0.35	)

Weighted average number of shares used in per share calculations
Basic		36,764			6,735			22,166			6,708

Diluted		49,427			6,735			45,466			6,708

^(a) Cost of product revenue includes:

Stock compensation expense	$	225		$	(386	)	$	450		$	(346	)


^(b) Stock compensation expense (net of amounts included in cost of product revenue):

Research and development		609			202			1,382			98
Sales and marketing		423			136			895			239
General and administrative		369			150			858			322

	$	1,401		$	488		$	3,135		$	659

See accompanying notes.

SiRF TECHNOLOGY HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2004			2003
Operating activities:
Net income (loss)	$	8,655		$	(1,869	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock compensation expense		3,695			324
Depreciation and amortization		879			931
Amortization of acquired identified intangible assets		2,316			1,771
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(1,927	)		(1,749	)
Inventories		1,926			(1,319	)
Prepaid expenses and other current assets		(398	)		130
Other long-term assets		(37	)		(2	)
Accounts payable		(1,515	)		2,904
Accrued payroll and related benefits		902			23
Income taxes payable		(207	)		—
Other accrued liabilities		(710	)		486
Advance contract billings		(124	)		146
Deferred margin on shipments to distributors		(19	)		129

Net cash provided by operating activities		13,436			1,905

Investing activities:
Net cash paid for acquisition of a development-stage company		—			(63	)
Purchase of available-for-sale investments		(31,409	)		(2,550	)
Maturities and sales of available-for-sale investments		528			4,050
Purchases of property and equipment		(1,133	)		(644	)

Net cash (used in) provided by investing activities		(32,014	)		793

Financing activities:
Payments on borrowings		—			(500	)
Principal payments under debt obligations		(26	)		(57	)
Payments on litigation settlement obligation		(552	)		(250	)
Proceeds from issuance of common stock, net of repurchases		94,583			113

Net cash provided by (used in) financing activities		94,005			(694	)

Net increase in cash and cash equivalents		75,427			2,004
Cash and cash equivalents at beginning of period		16,715			8,229

Cash and cash equivalents at end of period	$	92,142		$	10,233

Supplemental disclosure of cash flow information:
Deferred stock compensation	$	27		$	258

Preferred stock and related warrants issued in connection with acquisitions	$	—		$	10,988

See accompanying notes.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note

1. Organization and Summary of Significant Accounting Policies

Organization

SiRF Technology Holdings, Inc. (“SiRF” or the “Company”) 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, the accompanying condensed consolidated financial statements of SiRF and its consolidated subsidiaries contain all adjustments (which include only normal recurring adjustments) necessary to present fairly SiRF’s financial position as of June 30, 2004, its results of operations for the three and six months ended June 30, 2004 and 2003, and its cash flows for the six months ended June 30, 2004 and 2003. The condensed consolidated balance sheet as of December 31, 2003, is derived from the December 31, 2003 audited financial statements. All intercompany accounts and transactions are eliminated in consolidation.

The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with “Management’s discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and the Consolidated Financial Statements and notes thereto included in SiRF’s Form S-1 as filed with the Securities and Exchange Commission.

Use of Estimates

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

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to current period presentation. Revenue recognized on license royalty agreements included in net revenue for the three and six months ended June 30, 2003, have been separately presented in the statements of operations.

Revenue Recognition

SiRF derives revenue primarily from sales of semiconductor chip sets and licenses of its intellectual property and premium software products. Revenue is recognized when persuasive evidence of a sales arrangement exists, transfer of title and acceptance, where applicable, occurs, the sales price is fixed or determinable and collection is probable. Transfer of title occurs based on defined terms in customer purchase orders for all shipments. SiRF defers the

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. Price protection rights grant distributors the right to credit on future purchases in the event of decreases in the price of SiRF’s products. SiRF provides marketing incentives to certain distributors and 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). The company also records reductions to revenue for expected product returns based on the Company’s historical experience.

SiRF licenses rights to use its intellectual property to allow licensees to integrate GPS technology into their products. SiRF also licenses rights to use its premium software products to licensees to enable SiRF chip sets to be integrated into their specific applications. Licensees pay ongoing royalties based on sales of their products incorporating the licensed intellectual property or premium software. Royalty revenue is recognized at the time products containing the licensed intellectual property or premium software are sold by the licensee based on quarterly reports received from licensees. Subsequent to the sale, SiRF has 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 is calculated by dividing net income (loss) applicable 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 giving effect to all potential dilutive common stock including stock options, warrants, common stock subject to repurchase and convertible preferred stock. Common stock equivalents such as convertible preferred stock, stock options and preferred stock warrants are excluded from the computation in loss periods as their effect would be antidilutive.

The reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share was as follows for the three and six months ended June 30, 2004 and 2003:


	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004			2003
	(In thousands, except per share data)
Numerator:
Net income (loss)	$	4,591	$	(864	)	$	8,655		$	(1,869	)
Deemed dividend to convertible preferred stockholders		—		—			—			468

Net income (loss) applicable to common stockholders	$	4,591	$	(864	)	$	8,655		$	(2,337	)

Denominator:
Weighted average common shares outstanding		36,764		6,740			22,184			6,714
Less: Weighted average common shares outstanding subject to repurchase		—		(5	)		(18	)		(6	)

Weighted average shares used in net income (loss) per common share, basic		36,764		6,735			22,166			6,708
Dilutive potential common shares:
Weighted average of convertible preferred stock		6,790		—			18,007			—
Weighted average of repurchasable common stock outstanding		—		—			18			—
Weighted average of common stock options		5,434		—			4,907			—
Weighted average of preferred stock warrants		439		—			368			—

Total weighted average shares used in net income (loss) per common share, diluted		49,427		6,735			45,466			6,708

Net income (loss) per share:
Basic	$	0.12	$	(0.13	)	$	0.39		$	(0.35	)
Diluted	$	0.09	$	(0.13	)	$	0.19		$	(0.35	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the three and six months ended June 30, 2004 and 2003, the following common stock equivalents, which could potentially dilute basic net income per common share in future periods, were excluded from the computation of diluted net income (loss) per common share in the periods presented, as their effect would have been anti-dilutive:


	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Convertible preferred stock	—	29,097	—	29,097
Shares of common stock subject to repurchase	—	5	—	5
Outstanding options	114	6,273	313	6,273
Preferred stock warrants	—	844	—	844

Total	114	36,219	313	36,219

Product Warranty

SiRF provides for the estimated cost of product warranties at the time it recognizes revenue. 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 as of and for the three and six months ended June 30, 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 three and six months ended June 30, 2004 and 2003.

Research and Development and Software Development Costs

Research and development expense is 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 the current software development process is essentially completed concurrent with the establishment of technological feasibility.

SiRF generates engineering services income with various commercial customers that have enabled it to accelerate its product development efforts. SiRF retains ownership of the technology developed under these arrangements. Such development income has moderately contributed to the funding of SiRF’s product development activities. Development costs related to the underlying contracts are classified as research and development expense, and any income generated is classified as a reduction of research and development expense. Engineering 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 services 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, for which SiRF has not yet received acceptance of the deliverable from the customer, and result in the deferral of income until such time that specified milestones are achieved. The following table summarizes these services:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(In Thousands)
Gross research and development expense	$	5,344		$	3,774		$	10,555		$	6,991
Less recognized engineering services income		(22	)		(136	)		(122	)		(311	)

Net research and development expense	$	5,322		$	3,638		$	10,433		$	6,680

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-Based Compensation

SiRF applies the intrinsic-value-based method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for employee and director stock-based compensation, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosures. Under APB No. 25, SiRF recognizes compensation expense when it grants options with a discounted exercise price, and recognizes any resulting compensation expense over the associated service period, which is generally the option vesting term. SiRF recognizes compensation expense for stock options granted at a discount using a multiple option valuation approach in accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Prior to there being a public market for SiRF’s common stock, the Board of Directors determined the deemed fair value of the Company’s common stock based on factors such as the sale of SiRF’s preferred stock, results of operations and consideration of the fair value of comparable publicly traded companies.

SiRF accounts for equity instruments issued to non-employees in accordance with EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Under EITF Issue No. 96-18, compensation expense for 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.

The pro forma effect on net income (loss) and net income (loss) per share as if the fair value of stock-based compensation had been recognized as compensation expense was as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(In thousands, except per share data)
Net income (loss) applicable to common stockholders as reported	$	4,591		$	(864	)	$	8,655		$	(2,337	)
Add: Stock-based employee compensation expense included in reported net income (loss)		1,626			102			3,585			313
Deduct: Stock-based employee compensation expense determined under the fair value method for stock option grants		(2,766	)		(285	)		(4,932	)		(881	)

Pro forma net income (loss)	$	3,451		$	(1,047	)	$	7,308		$	(2,905	)

Net income (loss) per share
Basic:
As reported	$	0.12		$	(0.13	)	$	0.39		$	(0.35	)
Pro forma	$	0.09		$	(0.16	)	$	0.33		$	(0.43	)
Diluted:
As reported	$	0.09		$	(0.13	)	$	0.19		$	(0.35	)
Pro forma	$	0.07		$	(0.16	)	$	0.16		$	(0.43	)

The information above regarding net income (loss) and net income (loss) per share was prepared in accordance with SFAS No. 123 and has been determined as if the Company accounted for employee stock options and purchase rights under the 2004 Employee Stock Purchase Plan (“ESPP”), adopted in the second quarter of fiscal 2004, under the fair value method as prescribed by SFAS No. 123, and provisions of FASB Technical Bulletin 97-1, Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option. The fair value for options granted prior to February 10, 2004, SiRF’s initial filing date of its Form S-1 with the Securities and Exchange Commission, was estimated at the date of grant using the minimum value

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

method with the weighted-average assumptions listed below. Options granted on or after February 10, 2004, have been valued using the Black-Scholes option pricing model with an expected stock volatility of 70%. The fair value of stock options and purchase rights was estimated with the following weighted-average assumptions:


	Stock Options								ESPP
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,
	2004		2003		2004		2003		2004		2003
Risk-free interest rate	4.1	%	2.6	%	3.9	%	2.7	%	1.7	%	—
Average expected life of options (in years)	4.4		4.3		4.2		4.3		6 months		—
Volatility	70	%	—		67	%	—		70	%	—
Dividend yield	—		—		—		—		—		—

The weighted average fair value of options granted with an exercise price below the deemed fair value of common stock during the first half of fiscal 2004 was $1.57. The weighted average fair value of options granted with an exercise price equal to the deemed fair value of common stock during the three and six months ended June 30, 2004, was $7.51 and $6.67, respectively. No options were granted in second quarter of fiscal 2004 with an exercise price below the deemed fair value of common stock. The weighted average fair value of options granted with an exercise price below the deemed fair value of common stock during the three and six months ended June 30, 2003, was $0.82. The weighted average fair value of options granted with an exercise price equal to the deemed fair value of common stock was $0.47 for the six months ended June 30, 2003. No options were granted in the three months ended June 30, 2003, with weighted average fair value of options equal to the deemed fair value of common stock.

For purposes of pro forma disclosures, the estimated fair value of the 2004 ESPP purchase rights is amortized over the individual accumulation periods comprising the initial offering period, subject to modification on the date of purchase, on an accelerated basis, in accordance with FIN No. 28. The weighted average fair value of the ESPP purchase rights was $5.05 in the second quarter of fiscal 2004.

Indemnifications

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

Note 2. Initial Public Offering

On April 22, 2004, SiRF commenced trading of its common stock on the NASDAQ National market in an initial public offering with the sale of 8,650,000 shares of common stock (including the exercise of the over-allotment option of 1,650,000 shares) at $12.00 per share and realized net proceeds of $94.2 million, after deducting underwriters’ discounts and expenses. Concurrent with the closing of the offering, all of SiRF’s outstanding convertible preferred stock was converted into 29,100,184 shares of common stock.

Note 3. Acquisition of a Development-Stage Company

On March 28, 2003, SiRF 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 SiRF’s management and Board of Directors’ best

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

estimates through negotiations between SiRF and Enuvis’ former Board of Directors. Enuvis had no customers and was not generating revenue. Accordingly, the Company does not believe the Enuvis acquisition met the criteria to be accounted for as an acquisition of a “business” under the requirements of SFAS No. 141, Business Combinations. The excess of the purchase consideration over the fair value of the net assets acquired was allocated on a proportionate basis to the assets acquired and no goodwill was recorded in accordance with SFAS No. 142, Goodwill and Other Intangible Assets.

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


	(In thousands)
Current assets	$	156
Property and equipment		1,109
Identified intangible assets		10,123

Total assets acquired		11,388
Current liabilities assumed		(248	)

Net assets acquired	$	11,140

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. The acquired identified intangible assets are amortized on a straight-line basis.

Note 4. Cash Equivalents and Investments

The following is a summary of available-for-sale investments as of June 30, 2004 and December 31, 2003:

June 30, 2004

(Unaudited)

(In thousands)


	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Corporate notes and bonds	$	5,409	$	2	$	(4	)	$	5,407
Government agencies		7,271		—		(23	)		7,248
Auction rate securities		32,253		—		(3	)		32,250
Money market funds		79,896		—		—			79,896

Total	$	124,829	$	2	$	(30	)	$	124,801

Reported as:
Cash and cash equivalents	$	89,898	$	—	$	(3	)	$	89,895
Marketable securities		5,350		—		(3	)		5,347
Long-term investments		29,581		2		(24	)		29,559

Total	$	124,829	$	2	$	(30	)	$	124,801

December 31, 2003 (In thousands)

	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Corporate bonds	$	1,355	$	12	$	—		$	1,367
Government agencies		2,698		10		—			2,708
Money market funds		13,537		—		—			13,537

Total	$	17,590	$	22	$	—		$	17,612

Reported as:
Cash and cash equivalents	$	13,537	$	—	$	—		$	13,537
Marketable securities		820		7		—			827
Long-term investments		3,233		15		—			3,248

Total	$	17,590	$	22	$	—		$	17,612

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	June 30, 2004		December 31, 2003
	(In thousands)
Due in 1 year or less	$	15,347	$	827
Due in 1 to 5 years		6,308		3,248
Due after 10 years		23,250		—

	$	44,905	$	4,075

Note 5. Inventories

Inventories consist of the following:


	June 30, 2004		December 31, 2003
	(In thousands)
Work in process	$	192	$	345
Finished goods	$	5,850		7,623

	$	6,042	$	7,968

Note 6. Segment and Geographical Information

As of June 30, 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:


	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
	(In thousands)
Net revenue:
United States	$	8,920	$	1,445	$	16,533	$	3,039
Export sales from the United States:
Taiwan		11,313		3,737		19,728		7,427
China		496		1,933		5,184		3,822
Singapore		3,215		223		6,550		539
New Zealand		2,404		1,978		4,435		2,750
Germany		29		2,006		29		2,585
Europe (excluding Germany)		3,021		1,149		4,707		2,982
Other		1,052		1,267		1,642		1,879

Net revenue	$	30,450	$	13,738	$	58,808	$	25,023

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 7. Customer Concentration

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


	Net Accounts Receivable				Net Revenue
	June 30, 2004		December 31, 2003		Three Months Ended June 30,				Six Months ended June 30,
	June 30, 2004		December 31, 2003		2004		2003		2004		2003
Customer
A	3	%	32	%	2	%	14	%	7	%	15	%
B	3	%	—		15	%	8	%	12	%	7	%
C	9	%	7	%	16	%	10	%	13	%	12	%
D	40	%	49	%	21	%	1	%	25	%	3	%
E	—		—		—		11	%	—		7	%
F	14	%	—		17	%	7	%	15	%	9	%
G	6	%	—		3	%	11	%	5	%	8	%
H	—		—		—		14	%	—		8	%

The outstanding accounts receivable balances of customer D include royalty revenue for the second quarter of fiscal 2004 and fourth quarter of fiscal 2003, which according to the contract is payable approximately 45 days from June 30, 2004 and December 31, 2003, respectively.

Note 8. Identified Intangible Assets

Identified intangible assets at June 30, 2004, consist of the following:


	Gross Assets		Accumulated Amortization			Net
	(In thousands)
Acquisition-related developed and core technology	$	19,599	$	(5,837	)	$	13,762
Acquisition-related customer relationships		6,000		(3,300	)		2,700
Acquisition-related assembled workforce		524		(329	)		195
Intellectual property assets		300		(225	)		75

	$	26,423	$	(9,691	)	$	16,732

Identified intangible assets at December 31, 2003, consist of the following:


	Gross Assets		Accumulated Amortization			Net
	(In thousands)
Acquisition-related developed and core technology	$	19,599	$	(4,252	)	$	15,347
Acquisition-related customer relationships		6,000		(2,700	)		3,300
Acquisition-related assembled workforce		524		(198	)		326
Intellectual property assets		300		(150	)		150

	$	26,423	$	(7,300	)	$	19,123

Amortization expense of acquisition-related intangible assets was $1,158,000 and $2,316,000 for the three and six months ended June 30, 2004 and $1,158,000 and $1,771,000 for the three and six months ended June 30, 2003. Amortization of intellectual property assets was $38,000 and $75,000 for the three and six month periods ended 2004 and 2003, respectively, and was included in research and development.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Estimated future amortization expense related to identified intangible assets at June 30, 2004 is as follows:


Fiscal year:	(In thousands)
2004 (remaining 6 months)	$	2,391
2005		4,435
2006		4,070
2007		3,170
2008		1,730
Thereafter		936

Total	$	16,732

Note 9. 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 are as follows:


	June 30, 2004			December 31, 2003
	(In thousands)
Deferred revenue	$	1,006		$	1,523
Less inventory held at distributors		(508	)		(1,006	)

Deferred margin on shipments to distributors	$	498		$	517

Note 10. Long-Term Obligations

In September 2000, SiRF entered into an agreement to settle a lawsuit regarding certain patent rights, resulting in a litigation settlement obligation. As of June 30, 2004, the balance of this litigation settlement obligation was approximately $2,722,000, of which $677,000 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.

The Company established a short-term revolving line of credit under which it may borrow up to $4.0 million, including $2.5 million in the form of letters of credit, with an interest rate of prime plus 1.0%, and a minimum of 5.25% (5.25% as of June 30, 2004). The line of credit is available through March 2006 and is secured by substantially all of SiRF’s assets. There were no borrowings under the line of credit as of June 30, 2004 or December 31, 2003. As of December 31, 2003, the Company had a $2.0 million standby letter of credit that was collateralized by its short-term revolving line of credit. There were no letters of credit collateralized by the line of credit as of June 30, 2004.

Note 11. Stock Option and Employee Stock Purchase Plans

In March 1995, SiRF adopted the 1995 Stock Plan (the “1995 Plan”) to provide incentive and non-statutory stock options to purchase shares of common stock to employees and independent contractors. Under the 1995 Plan, the exercise price for incentive stock options is at least 100% of the stock’s fair market value on the date of grant for employees owning 10% or less of the voting power of all classes of stock, and at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock. For non-statutory stock options, the exercise price is also at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock and no less than 85% for employees owning 10% or less of the voting power of all classes of stock.

In March 2004, SiRF adopted the 2004 Stock Incentive Plan (the “2004 Plan”) and on April 22, 2004, the remaining 19,558 stock options not granted under the 1995 Plan were cancelled. Under the 2004 Plan, 5,000,000 shares of common stock were reserved for issuance upon the completion of the initial public offering. On January 1 of each year, starting in 2005, the aggregate number of shares reserved for issuance under the 2004 Plan increase automatically by the lesser of (i) 5,000,000 shares, (ii) 5% of the total number of shares of common stock outstanding at that time, or (iii) a number of shares determined by the Board of Directors. Forfeited options or

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

awards generally become available for future awards. Under the 2004 Plan, the exercise price for incentive stock options is at least 100% of the stock’s fair market value on the date of grant for employees owning 10% or less of the voting power of all classes of stock, and generally not available to employees owning more than 10% of the voting power of all classes of common stock. For non-statutory stock options, the exercise price is no less than 85% of the stock’s fair market value on the date of grant.

In March 2004, SiRF adopted the 2004 Employee Stock Purchase Plan (the “Purchase Plan”). Under the Purchase Plan, 1,000,000 shares are reserved for issuance upon the completion of the initial public offering. On January 1 of each year, starting in 2005, the number of shares reserved for issuance automatically increase by an amount equal to 1.5% of issued and outstanding common stock, not to exceed 750,000 shares. Eligible employees are allowed to have salary withholdings of up to 15% of 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 commenced on April 22, 2004, the effective date for the initial public offering of SiRF’s common stock. For the initial 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 public offering or the market value on the purchase date.

Note 12. Deferred Stock Compensation Expense

In connection with options granted to employees to purchase common stock, the Company recorded deferred stock compensation of approximately $27,000 for the six months ended June 30, 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 SiRF’s common stock at the date of grant. The deferred charges for employee options are amortized to expense over the vesting period, using a multiple option valuation approach, on an accelerated basis in accordance with FIN No. 28. The Company reversed previously recorded deferred stock compensation expense of $48,000 and $100,000 for the three and six months ended June 30, 2004, and $473,000 and $751,000 for the three and six months ended June 30, 2003, in connection with the termination of the related employees. Net stock compensation expense was $1,626,000 and $3,585,000 for the three and six months ended June 30, 2004, and $102,000 and $313,000 for the three and six months ended June 30, 2003. Except for amounts included in cost of product revenue SiRF reports amortization of deferred stock-based compensation as a separate line item in the accompanying condensed consolidated statement of operations.

Note 13. Related Party Transactions

In connection with the purchase of the GPS semiconductor product line of Conexant in September 2001, the Company entered into an agreement with Conexant, a significant stockholder of SiRF as of June 30, 2004 and December 31, 2003, to manufacture certain GPS semiconductors. Under this agreement, the Company purchased product for $1.3 million and $2.5 million in the three and six months ended June 30, 2003, respectively. No product was purchased during the three and six months ended June 30, 2004. As of June 30, 2004 and December 31, 2003, the Company had an immaterial amount of trade payables to Conexant. This agreement expired in March 2003.

The Company entered into an agreement with Skyworks Solutions, Inc. (“Skyworks”) to manufacture certain GPS semiconductors. One of the Company’s board members, Moiz Beguwala, is also a board member of Skyworks. In the three and six months ended June 30, 2004, SiRF purchased $1.0 million and $1.4 million of product from Skyworks. In the three and six months ended June 30, 2003, SiRF purchased $1.6 million of product from Skyworks. As of June 30, 2004, SiRF had $348,000 of trade payables to Skyworks and non-cancelable purchase orders of $1.0 million. At December 31, 2003, the Company had $781,000 of trade payables to Skyworks and non-cancelable purchase orders of $260,000.

This report on Form 10-Q contains forward-looking statements, including, but not limited to, statements about our expectations regarding the amount of our net revenue from sales to the Asia/Pacific region, our belief that a significant amount of the systems designed and manufactured by customers in the Asia/Pacific region are subsequently sold to OEMs outside of that region, the anticipated features, benefits and timing of volume shipments of our new products, 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 “anticipate”, “believe”, “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 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 (“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 85 patents granted in the United States and 12 patents granted in foreign countries.

We market and sell our products to original equipment manufacturers (“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 fiscal 2004. We do not own a fabrication facility, but use third-party contractors to perform manufacturing, assembly, and test functions.

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 $9,563,000 resulting in net proceeds to SiRF of approximately $94,237,000. 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 $82.7 million as of June 30, 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 assumptions 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.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. 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 footnote disclosure, as well as recognition of stock-based compensation which impacts cost of revenue, gross margin and operating expenses, (d) accounts receivable allowance, which impacts general and administrative expense, (e) warranty reserve, which impacts cost of revenue and gross margin, (f) the assessment of recoverability of long-lived assets including goodwill and other intangible assets, the write-off of which impacts operating expenses and (g) valuation of deferred income taxes. 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 distributors to their 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 monthly inventory on hand at the distributor. Distributor month-end inventory quantities are subsequently reconciled to deferred revenue balances.

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 record a write-down for inventories which have become obsolete or are in excess of anticipated demand or net realizable value. We perform a detailed review of inventory each period that considers multiple factors including demand forecasts, market conditions, product life cycle status, product development plans and current sales levels. If future demand or market conditions for our products are less favorable than forecasted, we may be required to record additional write-downs which would negatively impact gross margins in the period when the write-downs are recorded. 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 (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for employee and director stock-based compensation, and comply with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure . Therefore, we do not record compensation expense for stock options granted to our employees when 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. In accordance with SFAS No. 123 as amended by SFAS No. 148, we disclose our pro forma net income (loss) and net income (loss) per share as if we had expensed the fair value of the options. In calculating such fair value, we make certain assumptions, 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. Actual volatility, expected lives, interest rates and dividend yield may be different than our assumptions which would result in an actual value of the options being different than estimated.

Accounts Receivable Allowance. We make estimates of the collectibility of accounts receivable. We regularly review the adequacy of our allowance for doubtful accounts after considering the amount of aged accounts receivable, each customer’s ability to pay, and our collection history with each customer. While our credit losses have historically been within our expectations and the allowance established, we may 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 June 30, 2004, 54% 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 may require us to record additional charges that could adversely affect our operating results.

Warranty Reserve. We provide for the estimated cost of product warranties at the time revenue is recognized. We continuously monitor chip set returns for product failures and maintain a warranty reserve for the related expenses based on historical experience of similar products as well as 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 potential impairment of identified intangible assets, 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:

•

significant underperformance relative to historical or projected future operating results;

•

significant changes in the manner of our use of the acquired assets; and

•

significant negative industry or economic trends.

When we determine that the carrying value of intangible assets, 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 impairment based on a projected discounted cash flow, which requires us to make significant estimates and assumptions regarding future revenue 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 may result.

Valuation of Deferred Tax Assets. We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, resulting in a deferred tax asset.

In preparing our condensed consolidated financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. We establish a valuation allowance if we determine that it is more likely than not that some portion of the deferred tax assets will not be realized. Changes in the valuation allowance, when recorded, would be included in our consolidated statements of operations as a provision for (benefit from) income taxes. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets. As of June 30, 2004 and December 31, 2003, we have recorded a full valuation allowance against our deferred tax assets, consisting primarily of net operating loss carryforwards, because of uncertainty of their realizability. We have a history of losses and have only become profitable since the third quarter of fiscal 2003. If we were to determine that a decrease in our valuation allowance in the future is necessary, an adjustment to the valuation allowance would result in an income tax benefit in such period.

Results of Operations

Revenue


	Three months ended June 30,									Six months ended June 30,
	2004					2003				2004					2003
	Dollars			% of Net Revenue		Dollars		% of Net Revenue		Dollars			% of Net Revenue		Dollars		% of Net Revenue
	Dollars			% of Net Revenue		Dollars		% of Net Revenue		Dollars			% of Net Revenue		Dollars		% of Net Revenue
	(Dollars in thousands)
Product revenue	$	26,618		87	%	$	13,647	99	%	$	50,924		87	%	$	24,887	99	%
License royalty revenue		3,832		13	%		91	1	%		7,884		13	%		136	1	%

Net revenue	$	30,450				$	13,738			$	58,808				$	25,023

Increase, period over period	$	16,712								$	33,785

Percentage increase, period over period		122	%								135	%

Net revenue increased 122% and 135% in the second quarter and first half of fiscal 2004, respectively, compared to the corresponding prior year periods due primarily to an increase in product revenue, and to a lesser extent, an increase in license royalty revenue. The increase in product revenue in the second quarter of fiscal 2004 as compared to the prior year period resulted primarily from a 140% increase in unit shipments of chip sets partially offset by a 19% decline in average selling prices. The increase in product revenue in the first half of fiscal 2004 as compared to the corresponding prior year period was due primarily to a 150% increase in unit shipments of chip sets offset by an 18% decline in average selling prices. License royalty revenue increased significantly in the second quarter and first half of fiscal 2004 as compared to the prior year periods due primarily to introduction by one licensee of products incorporating our licensed intellectual property in the second half of fiscal 2003, as well as increased royalty revenue on premium software licenses.

Export sales from the United States to customers outside the United States accounted for 71% and 89% of net revenue in the second quarter of fiscal 2004 and 2003, respectively, and 72% and 88% of net revenue in the first half of fiscal 2004 and 2003, respectively. Export sales from the United States to the Asia/Pacific region accounted for approximately 60% and 66% of net revenue in the second quarter of fiscal 2004 and 2003, respectively, and approximately 63% and 65% in the first half of fiscal 2004 and 2003, respectively. We anticipate that a significant amount of our net revenue will continue to reflect sales to customers in that region as many of our VAM and contract manufacturer customers are located in Asia. Although a large percentage of our sales are made to customers in the Asia/Pacific region, we believe that a significant amount of the systems designed and manufactured by these customers are subsequently sold through to OEMs outside of the Asia/Pacific region. All of our sales are denominated in United States dollars.

Cost of Revenue and Gross Profit Margin

Cost of revenue consists primarily of finished units or silicon wafers and costs associated with the assembly, testing and inbound and outbound shipping of our chip sets, costs of personnel and occupancy associated with manufacturing support and quality assurance, all of which are associated with product revenue. As we do not have long-term, fixed supply agreements, our unit or wafer costs are subject to change based on the cyclical demand for semiconductor products. There was no cost of license royalty revenue for the periods reported. Total cost of revenue for the periods reported were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollars in thousands)
Cost of revenue	$	13,490		$	6,268		$	25,589		$	11,648

Percentage of net revenue		44	%		46	%		44	%		47	%

Increase, period over period	$	7,222					$	13,941

Percentage increase, period over period		115	%					120	%

Cost of revenue increased in the second quarter and first half of fiscal 2004 as compared to the corresponding prior year periods due to an increase in the volume of chip sets shipped and recognized as product

revenue. Cost of revenue as a percentage of net revenue decreased in both the second quarter and first half of fiscal 2004 as compared to the corresponding prior year periods due primarily to increased license royalty revenue, which has no cost of revenue.

Gross profit and gross profit margin for the periods reported were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollars in thousands)
Gross profit	$	16,960		$	7,470		$	33,219		$	13,375

Gross profit percentage		56	%		54	%		56	%		53	%

Increase, period over period	$	9,490					$	19,844

Percentage increase, period over period		127	%					148	%

Gross profit margin percentage increased in both the second quarter and first half of fiscal 2004 as compared to the corresponding prior year periods due primarily to license royalty revenue, which has no cost of revenue, becoming a greater percentage of total net revenue. This increase was partially offset by declines in average selling prices, moderated by decreased materials costs. In the future, our gross margin percentages may be affected by increased competition and related decreases in unit average selling prices (particularly with respect to older generation products), changes in the mix of products sold (including the extent of license royalty revenue), the availability and cost of products from our suppliers, manufacturing yields (particularly on new products), increased volume and related volume price breaks, timing of volume shipments of new products and potential delays in introductions of new products. As a result, we may experience declines in demand or average selling prices of our existing products, and our inventories on hand may become impaired, resulting in write-offs either for excess quantities or lower of cost or market considerations. Such a write-off, when determined, could have a material adverse effect on gross margins and results of operations.

Operating Expenses

Research and Development

Research and development expense consists primarily of salaries, bonuses and benefits for engineering personnel, depreciation of engineering equipment, costs of outside engineering services from contractors and consultants and costs associated with prototype wafers and mask sets. Some of our development costs have been offset by income on engineering services arrangements with certain customers. Engineering services income was $22,000 and $136,000 in the second quarter of fiscal 2004 and 2003, respectively, and $122,000 and $311,000 in the first half of fiscal 2004 and 2003, respectively. Research and development expenses, net, for the periods reported were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollars in thousands)
Research and development	$	5,322		$	3,638		$	10,433		$	6,680

Percentage of net revenue		17	%		26	%		18	%		27	%

Increase, period over period	$	1,684					$	3,753

Percentage increase, period over period		46	%					56	%

Research and development expense increased in both the second quarter and first half of fiscal 2004 as compared to prior year periods due primarily to increases in headcount and related expenses, mask design costs and professional services mostly related to the development of SiRFstarIII. We expect our research and development costs to increase in absolute dollars as we continue to develop new products in the future.

Sales and Marketing

Sales and marketing expense consists primarily of salaries, bonuses, benefits and related costs for sales and marketing personnel, sales commissions, customer support, public relations, tradeshows, advertising and other marketing activities. Sales and marketing expenses for the periods reported were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollars in thousands)
Sales and marketing	$	2,517		$	2,094		$	5,162		$	4,283

Percentage of net revenue		8	%		15	%		9	%		17	%

Increase, period over period	$	423					$	879

Percentage increase, period over period		20	%					21	%

Sales and marketing expense increased in both the second quarter and first half of fiscal 2004 as compared to the corresponding prior year periods due primarily to increases in headcount and related expenses, and to a lesser extent, increases in public relations, trade show, customer support and sales commission expenses. We expect sales and marketing expense to increase in absolute dollars as we hire additional personnel, expand our sales and marketing efforts and incur higher sales commissions with the anticipated growth of our business.

General and Administrative

General and administrative expense consists primarily of salaries, bonuses, benefits and related costs for finance and administrative personnel and for outside service expenses, including legal, accounting and recruiting. General and administrative expenses for the periods reported were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollars in thousands)
General and administrative	$	1,937		$	1,056		$	3,297		$	2,039

Percentage of net revenue		6	%		8	%		6	%		8	%

Increase, period over period	$	881					$	1,258

Percentage increase, period over period		83	%					62	%

General and administrative expense increased in both the second quarter and first half of fiscal 2004 as compared to the prior year periods due to increases in headcount and related expenses and professional services. We expect general and administrative expense to increase in absolute dollars as we hire additional personnel and incur costs related to the anticipated growth of our business, our operation as a public company and investments in our information technology infrastructure.

Amortization of Acquisition-Related Intangibles

Identified intangible assets other than goodwill consist of acquired developed technology, core technology, customer list and assembled workforce. These acquired identified intangibles are being amortized using the straight-line method over their expected useful lives, which range from two to eight years.


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollars in thousands)
Amortization of acquisition-related intangibles	$	1,158		$	1,158		$	2,316		$	1,771

Percentage of net revenue		4	%		8	%		4	%		7	%

Increase, period over period	$	—					$	545

Percentage increase, period over period		—						31	%

Amortization of acquisition-related intangible assets remained flat in the second quarter of fiscal 2004 as compared to the prior year period and increased in the first half of fiscal 2004 as compared to the first half of fiscal 2003. The increase in the first half of fiscal 2004 was due to the acquisition of purchased intangible assets related to the Enuvis acquisition at the end of the first quarter of fiscal 2003. See Note 3 to the condensed consolidated financial statements. Based upon the current balance of acquired intangible assets, we expect amortization of acquisition-related intangible assets to remain relatively constant through the rest of 2004.

Stock Compensation Expense

Stock compensation expense results from the grant of stock options at exercise prices lower than the deemed fair value of the underlying common stock on the grant date for directors, officers and employees and the deemed fair value of stock options granted to consultants. We recorded approximately $26,800 of additional deferred stock compensation in the first quarter of fiscal 2004 and approximately $10.1 million during the year ended December 31, 2003, from the grant of stock options to officers and employees. We are amortizing deferred stock compensation on an accelerated basis, using a multiple option valuation approach under Financial Accounting Standards Board (“FASB”), Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, over the vesting period, which is generally four years.


	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
	(Dollars in thousands)
Stock compensation expense	$	1,401		$	488		$	3,135		$	659

Percentage of net revenue		5	%		4	%		5	%		3	%

Increase, period over period	$	913					$	2,476

Percentage increase, period over period		187	%					376	%

Stock compensation expense increased in both the second quarter and first half of fiscal 2004, as compared to the corresponding prior year periods primarily due to amortization of deferred stock compensation associated with options granted during the second half of fiscal 2003. We expect to incur stock compensation expense of $2.5 million in the second half of fiscal 2004, $2.1 million in 2005, $525,000 in 2006 and $110,000 in 2007. Amortization expense is allocated among cost of product revenue and operating expense categories based on the primary activity of the individuals who received the option grants. Except for amounts included in cost of product revenue, we report amortization of deferred stock-based compensation as a separate line item in the accompanying condensed consolidated statement of operations.

Other Income, Net

Other income, net, consists of interest earned on our cash and investments, offset by interest expense associated with our debt obligations. Other income, net, was $208,000 and $235,000 in the second quarter and first half of fiscal 2004, respectively, and $43,000 and $65,000 in the second quarter and first half of fiscal 2003, respectively. The increase in other income, net, in both periods as compared to the corresponding prior year periods is attributable to higher average invested cash, short- and long-term investment balances resulting from our recent initial public offering, which yielded more interest income in the fiscal 2004 periods, and to a lesser extent a decrease in interest expense attributable to lower average debt balances.

Provision for (benefit from) Income Taxes

Provision for (benefit from) income taxes was $242,000 and $456,000 in the second quarter and first half of fiscal 2004, respectively, and $(57,000) and $(123,000) in the second quarter and first half of fiscal 2003, respectively. Provision for (benefit from) income taxes increased in both the second quarter and first half of fiscal 2004 compared to the corresponding prior year periods due to the amount of profit realized in fiscal 2004. Our estimated effective tax rate was 5% for the 2004 and 2003 fiscal years.

Liquidity and Capital Resources

Cash Flows

We have historically financed our operations primarily through private sales of our common and preferred stock, and to a lesser extent, through our bank line of credit and equipment lease lines, and have become profitable since the third quarter of fiscal 2003. Through June 30, 2004, we have raised approximately $177 million through equity financings. As of June 30, 2004, we had $97.5 million in cash, cash equivalents, and marketable securities and $105.6 million in working capital, as compared to cash, cash equivalents and marketable securities balance of $17.5 million and $23.9 million in working capital as of December 31, 2003. We use independent semiconductor manufacturers to fabricate our semiconductors. By outsourcing our manufacturing, we are able to focus more of our financial resources on product design and eliminate the high cost of owning and operating a semiconductor fabrication facility.

Operating Activities. Net cash provided by operating activities was $13.4 million in the first half of fiscal 2004 as compared to $1.9 million in the corresponding prior year period. Net cash provided by operating activities in the first half of fiscal 2004 resulted primarily from net income of $8.7 million which included non-cash reconciling items of $6.9 million in stock compensation expense and depreciation and amortization, as well as decreases in inventory of $1.9 million due to strong customer demand. Cash flow from operations was moderated by increases in accounts receivable of $1.9 million due to higher sales and decreases in accounts payable and other accrued liabilities of $2.2 million due to timing of payments. Net cash provided by operating activities in the first half of fiscal 2003 was attributable primarily to an increase in accounts payable of $2.9 million, net earnings of $1.2 million adjusted for non-cash items, and an increase in cash of $912,000 resulting from net changes in other operating assets and liabilities, moderated by increases in accounts receivable and inventory of $1.7 million and $1.3 million, respectively.

Investing Activities. Net cash used in investing activities was $32.0 million in the first half of fiscal 2004 as compared to net cash provided by investing activities of $793,000 in the corresponding prior year period. Cash used in investing activities in the current period was driven by purchases of available-for-sale investments of $31.4 million with proceeds from our initial public offering completed in April 2004 and purchases of property and equipment of $1.1 million. Cash provided by investing activities in the first half of fiscal 2003 was due primarily to maturities and sales of available-for-sale investments, net of investment purchases, of $1.5 million, offset by capital expenditures of $644,000.

Financing Activities. Net cash provided by financing activities was $94.0 million in the first half of fiscal 2004 as compared to net cash used in financing activities of $694,000 in the corresponding prior year period. Net cash provided by financing activities was driven by our initial public offering, in which we realized net proceeds of $94.2 million. In the first half of fiscal 2003, cash used by financing activities was due primarily to total payments on borrowings and a litigation settlement obligation of $750,000, moderated by proceeds from the exercise of options to purchase our common stock.

In March 2004, we renewed our bank line of credit for two additional years. As of June 30, 2004, we had no outstanding borrowings under our line of credit. We also have two capital lease agreements under which we had $69,000 in outstanding borrowings as of June 30, 2004. Borrowings under these capital lease agreements bear interest at annual effective rates ranging from 3.11% to 13.2% and are collateralized by the related equipment. One of the lenders, Pentech Financial Services, Inc., holds a warrant to purchase 4,782 shares of our series H preferred stock, which expires in 2008.

Capital expenditures were $1.1 million in the first half of fiscal 2004, and $1.4 million for the year ended December 31, 2003. These expenditures consisted primarily of computer, office equipment, software and test equipment purchases. We believe that additional research and development infrastructure resources are required to expand our core technologies and product offerings. Although we have no material commitments for capital expenditures, we anticipate an increase in capital expenditures and lease commitments consistent with our anticipated growth.

We expect to experience continued growth in our operating expenses for the foreseeable future in order to execute our business strategy. We believe that our existing cash, investments, amounts available under our bank line of credit, cash generated from operating activities and net proceeds of $94.2 million from our initial public offering, will be sufficient to meet our working capital and capital expenditure requirements for the foreseeable future. If we require additional capital resources to grow our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or convertible debt securities could result in more dilution to our stockholders.

As of June 30, 2004, our principal commitments consisted of amounts payable under equipment loans, capital and operating leases and the litigation settlement obligation.

The following summarizes our contractual obligations at June 30, 2004:


	Payments due by period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		> 5 Years
	(in thousands)
Capital lease obligations	$	74	$	47	$	27	$	—	$	—
Operating leases		4,249		2,324		1,876		49		—
Non-cancelable purchase orders		1,045		1,045		—		—		—
Litigation settlement obligation (1)		2,722		677		1,500		545		—

Total	$	8,090	$	4,093	$	3,403	$	594	$	—

(1)

The yearly litigation settlement payment may be higher depending upon future revenue levels. The settlement agreement provides for the greater of $125,000 per quarter or 1% of revenue. However, the total cumulative amount of the cash payments under the settlement agreement cannot exceed $5.0 million. The litigation settlement allows for a reduction in the $5.0 million cash obligation of the litigation settlement upon the occurrence of certain events, the first of which was our initial public offering. However, the settlement agreement provides that the combination of litigation obligation cash payments and net proceeds from the exercise and sale of 212,796 shares subject to a warrant received as part of the settlement agreement, must be at least $9.0 million.

FACTORS AFFECTING OUR OPERATING RESULTS

In evaluating SiRF Technology Holdings, Inc. and our business, you should carefully consider the following factors in addition to the other information in this quarterly report on Form 10-Q. Any one of the following risks could seriously harm our business, financial condition, and results of operations, causing the price of our stock to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

RISKS RELATED TO OUR BUSINESS

We have a history of losses, have only become profitable since the third quarter of fiscal 2003 and may not sustain or increase profitability in the future.

We have only become profitable since the third quarter of fiscal 2003 and may not sustain or increase profitability in the future. As of June 30, 2004, we had an accumulated deficit of approximately $82.7 million. We intend to significantly increase our research and development, sales and marketing and general and administrative expenses. We also expect to incur substantial stock-based compensation charges and charges related to amortization of acquired intangibles. If we do not sustain or increase profitability or otherwise meet the expectations of securities analysts or investors, the market price of our common stock will likely decline. The revenue and income potential of our business and market are unproven. Our revenue may not continue to increase at historical rates.

The market for Global Positioning System, or GPS-based location awareness capabilities in high-volume consumer and commercial applications is emerging, and if this market does not develop as quickly as we expect, the growth and success of our business will be limited.

The market for GPS-based location awareness technology in high-volume consumer and commercial applications is new and its potential is uncertain. Many of these GPS-based applications have not been commercially introduced or have not achieved widespread acceptance. Our success depends on the rapid development of this market. We cannot predict the growth rate, if any, of this market. The development of this market depends on several factors, including the development of location awareness infrastructure by wireless network operators and the availability of location-aware content and services. The failure of the market for high-volume consumer and commercial GPS-based applications to develop in a timely manner would limit the growth and success of our business.

If we are unable to fund the development of new products to keep pace with rapid technological change, we will be unable to expand our business.

The market for high-volume consumer and commercial GPS-based applications is characterized by rapidly changing technology, such as low power or smaller form factors. This requires us to continuously develop new products and enhancements for existing products to keep pace with evolving industry standards and rapidly changing customer requirements. We may not have the financial resources necessary to fund future innovations. If we are unable to successfully define, develop and introduce competitive new products and enhance existing products, we may not be able to compete successfully in our market.

Development and delivery schedules for technology products are difficult to predict, and if we do not achieve timely initial customer shipments of new products, our reputation may suffer and our net revenue may decline.

Our ability to develop and deliver new products successfully will depend on various factors, including our ability to:

•

accurately predict market requirements and evolving industry standards for the high-volume GPS-based applications industry;

•

anticipate changes in technology standards, such as wireless technologies;

•

develop and introduce new products that meet market needs in a timely manner; and

•

attract and retain engineering and marketing personnel.

If we do not timely deliver new products or if these products do not achieve market acceptance, our reputation may suffer and our net revenue may decline. For example, we recently introduced three new products: SiRFstarIII, SiRFSoft and SiRFLoc Server. These products are net yet in commercial production. If these or other products we introduce do not achieve market acceptance in a timely manner, our business would suffer.

Our quarterly revenue and operating results are difficult to predict, and if we do not meet quarterly financial expectations, our stock price will likely decline.

Our quarterly revenue and operating results are difficult to predict, and have in the past, and may in the future, fluctuate from quarter to quarter. It is possible that our operating results in some quarters will be below market expectations. This would likely cause the market price of our common stock to decline. Our quarterly operating results may fluctuate because of many factors, including:

•

our ability to successfully develop, introduce and sell new or enhanced GPS-based products in a timely manner;

•

changes in the relative volume of sales of our chip sets, our premium software offerings and our intellectual property cores, or IP cores, or other products, which have significantly different average selling prices and gross margins;

•

unpredictable volume and timing of customer orders;

•

the availability, pricing and timeliness of delivery of other components, such as flash memory and crystal oscillators, used in our customers’ products;

•

the timing of new product announcements or introductions by us or by our competitors;

•

seasonality in our various target markets;

•

product obsolescence and our ability to manage product transitions; and

•

decreases in the average selling prices of our products.

We base our planned operating expenses in part on our expectations of future revenue, and our expenses are relatively fixed in the short term. If revenue for a particular quarter is lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter.

Our lengthy sales cycle makes it difficult for us to forecast revenue and increases the variability of quarterly fluctuations, which could cause our stock price to decline.

We have a lengthy sales process in some of our target markets and our sales cycles typically range from six months to two years, depending on the market. We typically need to obtain a design win, where our product is incorporated into a customer’s initial product design. In some cases, due to the rapid growth of new GPS applications and products and our prospective customers’ inexperience with GPS technology, this process can be time-consuming and requires substantial investment of our time and resources. After we have developed and delivered a product to a customer, our customer often tests and evaluates our product before designing its own product to incorporate our technology. Our customers may need three to six months or longer to test and evaluate our technology and an additional 12 months or more to begin volume production of products that incorporate our technology. Because of this lengthy sales cycle, we may experience delays from the time we increase our operating expenses and our investments in committing capacity until the time that we generate revenue from these products. Also, a design win may never result in volume shipments. It is possible that we may not generate sufficient, if any, revenue from these products to offset the cost of selling and completing the design work.

Our success depends upon our customers’ ability to successfully sell their products incorporating our technology.

Even if a customer selects our technology to incorporate into its product, the customer may not ultimately market and sell its product successfully. A cancellation or change in plans by a customer, whether from lack of market acceptance of its products or otherwise, could cause us to lose sales that we had anticipated. Also, our business and operating results could suffer if a significant customer reduces or delays orders during our sales cycle or chooses not to release products that contain our technology.

Our operating results depend significantly on sales of our SiRFstarII product line.

We currently derive most of our revenue from sales of our SiRFstarII product line. If we fail to develop or achieve market acceptance of new GPS products, we will continue to depend on sales of our SiRFstarII product line. Any decline in sales of our SiRFstarII product line will adversely affect our net revenue and operating results.

The average selling prices of products in our markets have historically decreased rapidly and will likely do so in the future, which could harm our revenue and gross profits.

As is typical in the semiconductor industry, the average selling price of a product historically declines significantly over the life of the product. In addition, the products we develop and sell are used for high-volume applications. In the past, we have reduced the average selling prices of our products in anticipation of future competitive pricing pressures, new product introductions by us or our competitors and other factors. We expect that we will have to similarly reduce prices in the future for mature products. Reductions in our average selling prices to one customer could also impact our average selling prices to all customers. A decline in average selling prices would harm our gross margins. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by increasing our sales volumes, reducing our costs, adding new features to our existing products or developing new or enhanced products on a timely basis with higher selling prices or gross margins.

We have derived a substantial majority of our net revenue from sales to the automotive, mobile phone and consumer device markets. If we fail to generate continued revenue from these markets or from additional markets, our revenue could decline.

We believe that over 90% of our net revenue in the six months ended June 30, 2004, and during the 2003 fiscal year was attributable to products which were eventually incorporated into the automotive, mobile phone and consumer device markets. Consumer spending and the demand for our products in these markets is uncertain and may decline. If we cannot sustain or increase sales of our products into these markets or if we fail to generate revenue from additional markets, our net revenue could decline.

We depend primarily on three independent foundries to manufacture substantially all of our current products, and any failure to obtain sufficient foundry capacity could significantly delay our ability to ship our products and damage our customer relationships.

We do not own or operate a fabrication facility. We rely on third parties to manufacture our semiconductor products. Three outside foundries, NEC in Japan, Samsung in South Korea and STMicroelectronics in Italy, currently manufacture substantially all of our products.

Because we rely on outside foundries, we face several significant risks, including:

•

lack of manufacturing capacity and higher prices;

•

limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and

•

the unavailability of, or potential delays in obtaining access to, key process technologies.

The ability of each foundry to provide us with semiconductors is limited by its available capacity. We do not have a guaranteed level of production capacity with any of these foundries and it is difficult to accurately forecast our capacity needs. We do not have long-term agreements with any of these foundries and we place our orders on a purchase order basis. We place our orders on the basis of our customers’ purchase orders and sales forecasts; however, the foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that foundry customers that are larger and better financed than we are, or that have long-term agreements with the foundries, may induce our foundries to reallocate capacity to them. Any reallocation could impair our ability to secure the supply of semiconductors that we need.

Each of our semiconductor products is manufactured at only one foundry and if any one foundry is unable to provide the capacity we need, we may be delayed in shipping our products, which could damage our customer relationships and result in reduced revenue.

Although we use three separate foundries, each of our semiconductor products is manufactured at one of these foundries. If one of our foundries is unable to provide us with capacity as needed, we could experience significant delays delivering the semiconductor product being manufactured for us solely by that foundry. Also, if any of our foundries experiences financial difficulties, if they suffer damage to their facilities or in the event of any other disruption of foundry capacity, we may not be able to qualify an alternative foundry in a timely manner. If we choose to use a new foundry or process for a particular semiconductor product, we believe that it would take us several months to qualify the new foundry or process before we can begin shipping products. If we cannot accomplish this qualification in a timely manner, we may experience a significant interruption in supply of the affected products.

The facilities of the independent foundries upon which we rely to manufacture all of our semiconductors are located in regions that are subject to earthquakes and other natural disasters, as well as geopolitical risk and social upheaval.

The outside foundries and their subcontractors upon which we rely to manufacture all of our semiconductors are located in countries that are subject to earthquakes and other natural disasters, as well as geopolitical risks and social upheavals. For example, Japan, where one of our foundries is located, experienced a major earthquake in January 1995, which caused power outages and significant damage to Japan’s infrastructure. Any earthquake or other natural disaster in these countries could materially disrupt these foundries’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage, of our products. In addition, these facilities are subject to risks associated with uncertain political, economic and other conditions in Asia, such as political turmoil in the region and the outbreak of SARS, which could disrupt the operation of these foundries and in turn harm our business. For example, South Korea and Japan, countries where two of our foundries are located, have North Korea as a neighboring state. North Korea is currently in discussions

with the United States and other countries regarding its nuclear weapons program. Any geographical or social upheaval in these countries could materially disrupt the production capabilities of our foundries and could result in our experiencing a significant delay in delivery, or a substantial shortage of our products.

We place binding manufacturing orders based on our forecasts and if we fail to adequately forecast demand for our products, we may incur product shortages or excess product inventory.

Our third-party manufacturers require us to provide forecasts of our anticipated manufacturing orders and place binding manufacturing orders in advance of receiving purchase orders from our customers. This may result in product shortages or excess product inventory because we cannot easily increase or decrease our forecasts. Obtaining additional supply in the face of product shortages may be costly or impossible, particularly in the short term, which could prevent us from fulfilling orders. In addition, our chip sets have rapidly declining average selling prices. As a result, an incorrect forecast may result in substantial product in inventory that is aged and obsolete, which could result in writedowns of excess or obsolete inventory. Our failure to adequately forecast demand for our products could cause our quarterly operating results to fluctuate and cause our stock price to decline.

We may experience lower than expected manufacturing yields, which would delay the production of our semiconductor products.

The manufacture of semiconductors is a highly complex process. Minute impurities in a silicon wafer can cause a substantial number of wafers to be rejected or cause numerous die on a wafer to be nonfunctional. Semiconductor companies often encounter difficulties in achieving acceptable product yields from their manufacturers. Our foundries have from time to time experienced lower than anticipated manufacturing yields, including for our products. This often occurs during the production of new products or the installation and start-up of new process technologies. We may also experience yield problems as we migrate our manufacturing processes to smaller geometries. If we do not achieve planned yields, our product costs could increase, and product availability would decrease.

The loss of any of the three third-party subcontractors that assemble and test all of our current products could disrupt our shipments, harm our customer relationships and reduce our sales.

Three third-party subcontractors assemble and test all of our current chip sets either for our foundries or directly for us. As a result, we do not directly control our product delivery schedules, assembly and testing costs, quality assurance and control. If any of these subcontractors experiences capacity constraints or financial difficulties, if any subcontractor suffers any damage to its facilities or if there is any other disruption of assembly and testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner. We do not have long-term agreements with any of these subcontractors. We typically procure services from these suppliers on a per-order basis. Because of the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our semiconductor products. Any problems that we may encounter with the delivery, quality or cost of our products could damage our reputation and result in a loss of customers.

We use a third party to warehouse and ship a significant portion of our products and any failure to adequately store and protect our products or to deliver our products in a timely manner could harm our business.

We use a third party, JSI Shipping, located in Singapore, for a significant portion of our product warehousing and shipping. As a result, we rely on this third-party to adequately protect and ensure the timely delivery of our products. Our warehoused products are insured under a general insurance policy, including the portion of products warehoused by JSI. If our products are not delivered in a timely manner or are not sufficiently protected prior to delivery, our business could suffer.

We have relied, and expect to continue to rely, on a limited number of customers for a significant portion of our net revenue, and our net revenue could decline due to the delay or loss of significant customer orders.

We expect that a small number of customers may constitute a significant portion of our net revenue for the foreseeable future. We had 4 customers, Motorola, Promate, Leadtek and Gateway, which individually accounted for 10% or more of our net revenue in the second quarter and first half of fiscal 2004. These four customers accounted for approximately 69% and 65% of our net revenue in the second quarter and first half of fiscal 2004, respectively. If we fail to successfully sell our products to one or more of our significant customers in any particular period, or if a large customer, such as Motorola, purchases fewer of our products, defers orders or fails to place additional orders with us, our net revenue could decline, and our operating results may not meet market expectations.

If our value-added manufacturer customers do not provide sufficient support, our business could be harmed.

Our products are highly technical and, as a result, may require a high level of customer support. We rely on our value-added manufacturers to support our products. If these value-added manufacturers cannot successfully support our products, which are embedded in their products, our reputation could be harmed and future sales of our products could be adversely affected.

Our future success depends on building relationships with customers that are market leaders. If we cannot establish these relationships or if these customers develop their own systems or adopt a competitor’s products instead of buying our products, our business may not succeed.

We intend to continue to pursue customers who are leaders in our target markets. We may not succeed in establishing these relationships because these companies may develop their own systems or adopt one of our competitors’ products. These relationships often require us to develop new premium software that involves significant technological challenges. These types of customers also frequently place considerable pressure on us to meet their tight development schedules. We may have to devote a substantial amount of our limited resources to these relationships, which could detract from or delay our completion of other important development projects. Delays in development of these projects could impair our relationships with other customers and negatively impact sales of the products under development.

Because competition for qualified personnel is intense in our industry and in our geographic regions, we may not be able to recruit and retain necessary personnel, which could impact the development or sales of our products.

Our success will depend on our ability to attract and retain senior management, engineering, sales, marketing and other key personnel, such as GPS, radio frequency, or RF, and application-specific integrated circuit, or ASIC, engineers. Because of the intense competition for these personnel, particularly in the San Francisco Bay Area and Los Angeles, we may be unable to attract and retain key technical and managerial personnel. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. All of our key employees are employed on an “at will” basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm investors’ perception of our business. We may also incur increased operating expenses and be required to divert the attention of other senior executives to recruit replacements for key personnel. Also, we may have more difficulty attracting personnel as a public company because of the perception that the stock option component of our compensation package may not be as valuable.

If we fail to manage our growth or successfully integrate our management team, our business may not succeed.

We have recently expanded our management team. For example, Michael L. Canning, our President and Chief Executive Officer, Jamshid Basiji, our Vice President of Engineering, Joseph LaValle, our Vice President of Sales, and Atul Shingal, our Vice President of Operations, have all joined us within the last 18 months. If the integration of new members to our management team does not go as smoothly as anticipated, it could negatively affect our ability to execute our business plan.

We have also significantly expanded our operations in the United States and internationally, and we plan to continue to expand the geographic scope of our operations. To manage our growth, we must implement and improve additional and existing administrative, financial and operations systems, procedures and controls. Our failure to manage growth could disrupt our operations and could limit our ability to pursue potential market opportunities.

Defects in our products could result in a decrease of customers and revenue, unexpected expenses and loss of market share.

Our products are complex and must meet stringent quality requirements. Products as complex as ours may contain undetected errors or defects, especially when first introduced or when new versions are released. For example, our products may contain errors, which are not detected until after they are shipped because we cannot test for all possible scenarios. Errors or defects may not be detected until after commercial shipments. Any errors or defects in our products, or the perception that there may be errors or defects in our products, could result in customers’ rejection of our products, damage to our reputation, a decline in our stock price, lost revenue, diverted development resources and increased customer service and support costs and warranty claims.

The limited warranty provisions in our agreements with some customers expose us to risks from product liability claims.

Our agreements with some customers contain limited warranty provisions, which provide the customer with a right to damages if a defect is traced to our products or if we cannot correct errors reported during the warranty period. If our contractual limitations are unenforceable in a particular jurisdiction or if we are exposed to product liability claims that are not covered by insurance, a successful claim could require us to pay substantial damages.

We intend to evaluate acquisitions or investments in complementary technologies and businesses, and we may not realize the anticipated benefits of these acquisitions or investments.

As part of our business strategy, we plan to evaluate acquisitions of, or investments in, complementary technologies and businesses. For example, in September 2001, we acquired Conexant’s GPS chip set business, and in March 2003, we acquired Enuvis, a developer of wireless aided-GPS, or AGPS, technology. AGPS is an operational mode of a GPS receiver operating in a network that receives aiding from the network to help determine the user’s position. We may be unable to identify suitable acquisition candidates in the future or be able to make these acquisitions on a commercially reasonable basis, or at all. Any future acquisitions and investments would have several risks, including:

•

our inability to successfully integrate acquired technologies or operations;

•

diversion of management’s attention;

•

potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;

•

expenses related to amortization of intangible assets;

•

potential write-offs of acquired assets;

•

loss of key employees of acquired businesses; and

•

our inability to recover the costs of acquisitions or investments.

We may not realize the anticipated benefits of any acquisition or investment.

We may not obtain sufficient patent protection, which could harm our competitive position and increase our expenses.

Our success and ability to compete depends to a significant degree upon the protection of our proprietary technology. As of June 30, 2004, we had 85 patents granted in the United States, 107 patent applications pending in the United States, 12 patents granted in foreign countries and 82 foreign patent applications pending. Our patent applications may not provide protection of all competitive aspects of our technology or may not result in issued patents. Any patents issued may provide only limited protection for our technology and the rights that may be granted under any future patents that may be issued may not provide competitive advantages to us. Also, patent protection in foreign countries may be limited or unavailable where we need this protection. It is possible that competitors may independently develop similar technologies or design around our patents and competitors could also successfully challenge any issued patent.

We also rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and, if these rights are not sufficiently protected, it could harm our ability to compete and generate revenue.

We also rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and grow our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, and design code for our chip sets, documentation and other written materials under trade secret and copyright laws. We license our software and IP cores under signed license agreements, which impose restrictions on the licensee’s ability to utilize the software and IP cores. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. Our proprietary rights may not be adequately protected because:

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laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and

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policing unauthorized use of our intellectual property is difficult, expensive and time- consuming, and we may be unable to determine the extent of any unauthorized use.

The laws of other countries in which we market our products, such as some countries in the Asia/Pacific region, may offer little or no protection of our proprietary technologies. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which would harm our competitive position and market share.

Our intellectual property indemnification practices may adversely impact our business.

We have agreed to indemnify some customers for certain costs and damages of intellectual property infringement in some circumstances. This practice may subject us to significant indemnification claims by our customers or others. In addition to indemnification claims by our customers, we may also have to defend related third-party infringement claims made directly against us. In some instances, our GPS products are designed for use in devices used by potentially millions of consumers, such as cellular telephones, which could subject us to considerable exposure should an infringement claim occur. For example, we received a letter from a major customer in August 2003 informing us that this customer received notice from one of our competitors that the inclusion of our chip sets into our customer’s products requires the payment of patent license fees to the competitor. In April 2004, we received additional notices from this customer regarding reimbursement of these patent license fees with respect to certain previously purchased products and future products purchased. We cannot assure you that such claims will not be pursued or that these claims, if pursued, would not harm our business.

We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in our loss of significant rights.

Other parties may assert intellectual property infringement claims against us, and our products may infringe the intellectual property rights of third parties. For example, in 2000, we entered into a settlement and cross-licensing agreement with a third party regarding patent infringement under which we agreed to pay approximately $5.0 million and issued a warrant to purchase shares of our preferred stock.

From time to time, we and our customers receive letters, including letters from various industry participants, alleging infringement of patents. We may also initiate claims to defend our intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. If there is a successful claim of infringement, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Also, we may be unaware of filed patent applications that relate to our products. Parties making infringement claims may be able to obtain an injunction, which could prevent us from selling our products or using technology that contains the allegedly infringing intellectual property. Parties making infringement claims may also be able to bring an action before the International Trade Commission that could result in an order stopping the importation into the United States of our products. Any intellectual property litigation could have a material adverse effect on our business, operating results or financial condition.

Part of our business uses a royalty-based business model, which has inherent risks.

Although a substantial majority of our net revenue is derived from sales of our chip sets, in recent periods, we have had a portion of our net revenue from large customers in the wireless markets come from royalties paid by licensees of our technology. Royalty payments are based on the number of semiconductor chips shipped which contain our GPS technology or our premium software. We depend on our ability to structure, negotiate and enforce agreements for the determination and payment of royalties. We face risks inherent in a royalty-based business model, many of which are outside of our control, including, but not limited to, the following:

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the rate of adoption and incorporation of our technology by wireless handset makers and wireless infrastructure vendors;

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the demand for products incorporating our licensed technology; and

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the cyclicality of supply and demand for products using our licensed technology.

It is difficult for us to verify royalty amounts owed to us under our licensing agreements, and this may cause us to lose revenue.

The standard terms of our license agreements require our licensees to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. Although our standard license terms give us the right to audit books and records of our licensees to verify this information, audits can be expensive, time-consuming and potentially detrimental to our ongoing business relationship with our licensees. As a result, to date, we have relied exclusively on the accuracy of reports supplied by our licensees without independently verifying the information in them. Any significant inaccuracy in the reporting by our licensees or our failure to audit our licensees’ books and records may result in our receiving less royalty revenue than we are entitled to under the terms of our license agreements.

Some of our customers could eventually become our competitors.

Many of our customers are also large integrated circuit suppliers and some of our large customers already have GPS expertise in-house. These large customers have longer operating histories, significantly greater resources and name recognition, and a larger base of customers than we do. The process of licensing our technology and support of such customers to effectuate the transfer of technology may enable them to become a source of competition to us, despite our efforts to protect our intellectual property rights. We cannot sell to some customers

who compete with us. In addition, we compete with divisions within some of our customers. For example, we sell GPS chips to different divisions within Motorola, which has also been a competitor of ours. In addition, STMicroelectronics, a customer of ours, has internally developed a GPS solution for the automotive market in which we compete. Further, each new design by a customer presents a competitive situation. We in the past have lost design wins to divisions within our customers and this may occur again in the future. We cannot assure you that these customers will not continue to compete with us, that they will continue to be our customers or that they will continue to license products from us at the same volumes. Competition could increase pressure on us to lower our prices and profit margins.

Our operations are primarily located in California and, as a result, are subject to earthquakes and other catastrophes.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel, which are primarily located in San Jose, California and in Irvine, California. San Jose and Irvine exist on or near known earthquake fault zones. Should an earthquake or other catastrophe, such as a fire, flood, power loss, communication failure or similar event, disable our facilities, we do not have readily available alternative facilities from which to conduct our business.

Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

We prepare our financial statements to conform with generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or are under review. There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value these charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. Although standards have not been finalized, and the timing of a final statement has not been established, the Financial Accounting Standards Board has announced its support for recording expense for the fair value of stock options granted

RISKS RELATED TO OUR INDUSTRY

Because many companies sell in the market for GPS-based products, we must compete successfully to gain market share.

The market for our products is competitive and rapidly evolving. We expect competition to increase. Increased competition may result in price reductions, reduced margins or loss of market share. We may be unable to compete successfully against current or future competitors. Some of our customers are also competitors of ours. Within each of our markets, we face competition from public and private companies as well as our customers’ in-house design efforts. For chip sets, our main competitors include Analog Devices, Motorola, Philips, QUALCOMM, Sony, STMicroelectronics, Texas Instruments and Trimble, as well as some start-up companies. For modules based on our products, the main competitors are Furuno, JRC, Motorola, Sony and Trimble. For licensed IP cores, our competitors include QUALCOMM and Trimble. Licensees of our competitors’ products may also compete against us.

In the wireless market, we compete against products based on alternative location technologies that do not rely on GPS, such as wireless infrastructure-based systems. These systems are based on technologies that compute a caller’s location by measuring the differences of signals between individual base stations. If these technologies become more widely adopted, market acceptance of our products may decline. Competitors in these areas include

Andrew, Cambridge Positioning Systems and TruePosition. Further, alternative satellite-based navigation systems such as Galileo, which is being developed by European governments, may reduce the demand for GPS-based applications or cause customers to postpone decisions on whether to integrate GPS capabilities into their products.

Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do. We also believe that our success depends on our ability to establish and maintain relationships with established system providers and industry leaders. Our failure to establish and maintain these relationships, or the preemption of relationships by the actions of other competitors, will harm our ability to penetrate emerging markets.

Cyclicality in the semiconductor industry may affect our revenue and, as a result, our operating results could be adversely affected.

The semiconductor industry has historically been cyclical and is characterized by wide fluctuations in product supply and demand. From time to time, this industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product and technology cycles, excess inventories and declines in general economic conditions. This cyclicality could cause our operating results to decline dramatically from one period to the next. In addition to the sale of chip sets, our business depends on the volume of production by our technology licensees, which, in turn, depends on the current and anticipated market demand for semiconductors and products that use semiconductors. As a result, if we are unable to control our expenses adequately in response to lower revenue from our chip set customers and technology licensees, our operating results will suffer and we might experience operating losses.

We derive a substantial portion of our revenue from international sales and conduct some of our business internationally, and economic, political and other risks may harm our international operations and cause our revenue to decline.

We derived approximately 71% and 89% of our net revenue on export sales from the United States in the second quarter of fiscal 2004 and 2003, respectively, and approximately 72% and 88% in the first half of fiscal 2004 and 2003, respectively. Export sales from the United States to the Asia/Pacific region accounted for approximately 60% and 66% of our net revenue in the second quarter of fiscal 2004 and 2003, respectively, and approximately 63% and 65% in the first half of fiscal 2004 and 2003, respectively. We maintain sales offices in Europe and the Asia/Pacific region and may expand our international operations. Risks we face in conducting business internationally include:

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multiple, conflicting and changing laws and regulations, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;

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difficulties and costs in staffing and managing foreign operations as well as cultural differences;

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international terrorism, particularly in emerging markets;

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trade restrictions or high tariffs that favor local competition in some countries;

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laws and business practices favoring local companies;

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potentially adverse tax consequences, such as withholding tax obligations on license revenue that we may not be able to offset fully against our U.S. tax obligations, including the further risk that foreign tax authorities may recharacterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;

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potentially reduced protection for intellectual property rights, for example, in China;

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inadequate local infrastructure and transportation delays;

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financial risks, such as longer sales and payment cycles, greater difficulty collecting accounts receivable and exposure to foreign currency exchange and rate fluctuations;

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failure by us or our customers to gain regulatory approval for use of our products; and

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political and economic instability, including wars, acts of terrorism, political unrest, a recurrence of the SARS outbreak, boycotts, curtailments of trade and other business restrictions.

Also, there may be reluctance in some foreign markets to purchase products based on GPS technology, due to the control of GPS by the United States government. Any of these factors could significantly harm our future international sales and operations and, consequently, our business.

We may have difficulty in protecting our intellectual property rights in foreign countries, which could increase the cost of doing business or cause our revenue to decline.

Our intellectual property is used in a large number of foreign countries. There are many countries, such as China, in which we have no issued patents, or that may have reduced intellectual property protection. In addition, effective intellectual property enforcement may be unavailable or limited in some foreign countries. It may be difficult for us to protect our intellectual property from misuse or infringement by other companies in these countries. For example, if our foundries lose control of our intellectual property, it would be more difficult for us to take remedial measures because our foundries are located in countries that do not have the same protection for intellectual property that is provided in the United States. Furthermore, we expect this to become a greater problem for us as our technology licensees increase their manufacturing in countries, which provide less protection for intellectual property. Our inability to enforce our intellectual property rights in some countries may harm our business.

The GPS market could be subject to governmental and other regulations that may increase our cost of doing business or decrease demand for our products.

GPS technology is restricted and its export is controlled. The United States government may restrict specific uses of GPS technology in some applications for privacy or other reasons. The United States government may also block the civilian GPS signal at any time or in hostile areas. In addition, the policies of the United States government for the use of GPS without charge may change. The growth of the GPS market could be limited by government regulation or other action. These regulations or actions could interrupt or increase our cost of doing business.

Reallocation of the radio frequency bands used by GPS technology may harm the utility and reliability of our products.

GPS technology uses radio frequency bands that are globally allocated for radio navigation satellite services. International allocations of radio frequency bands are made by the International Telecommunications Union, a specialized technical agency of the United Nations. These allocations are further governed by radio regulations which have treaty status and which are subject to modification every two to three years by the World Radio Communication Conference. Any reallocation of radio frequency bands, including frequency band segmentation or spectrum sharing, may negatively affect the utility and reliability of GPS-based products. Also, unwanted emissions from mobile satellite services and other equipment operating in adjacent frequency bands or inband from licensed and unlicensed devices may negatively affect the utility and reliability of GPS-based products. The Federal Communications Commission continually receives proposals for new technologies and services which may seek to operate in, or across, the radio frequency bands currently used by the GPS and other public services. For example, in May 2000, the Federal Communications Commission issued a proposed rule for the operation of ultra-wideband radio devices on an unlicensed basis in the same frequency bands. These ultra-wideband devices might

cause interference with the reception of GPS signals. This could reduce demand for GPS-based products, which could reduce our sales and revenue. Adverse decisions by the Federal Communications Commission that result in harmful interference to the delivery of the GPS signals may harm the utility and reliability of GPS-based products.

Our technology relies on the GPS satellite network, and any disruption in this network would impair the viability of our business.

The satellites and ground support systems that provide GPS signals are complex electronic systems subject to electronic and mechanical failures and possible sabotage. The satellites were originally designed to have lives of six to seven years and are subject to damage by the hostile space environment in which they operate. However, some of the satellites currently deployed have already been in place for 15 years. Repairing damaged or malfunctioning satellites is currently not economically feasible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites, or they may not be replaced at all. A reduction in the number of operating satellites would impair the operations or utility of GPS, which would have a material negative effect on our business. The United States government may not remain committed to the maintenance of GPS satellites over a long period.

Personal privacy concerns may limit the growth of the high-volume consumer and commercial GPS-based applications and demand for our products.

GPS-based consumer and commercial applications rely on the ability to receive, analyze and store location information. Consumers may not accept some GPS applications because of the fact that their location can be tracked by others and that this information could be collected and stored. Also, federal and state governments may disallow specific uses of GPS technology for privacy or other reasons or could subject this industry to regulation. If consumers view GPS-based applications as a threat to their privacy, demand for some GPS-based products could decline.

We may experience a decrease in market demand due to uncertain economic conditions in the United States and in international markets, which has been further exacerbated by the concerns of terrorism, war and social and political instability.

Economic growth in the United States and international markets has slowed significantly, and the United States economy has recently been in a recession. The timing of a full economic recovery is uncertain. In addition, the terrorist attacks in the United States and turmoil in the Middle East have increased the uncertainty in the United States economy and may contribute to a decline in economic conditions, both domestically and internationally. Terrorist acts and similar events, or war in general, could contribute further to a slowdown of the market demand for goods and services, including demand for our products. If the economy declines as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States or elsewhere, we may experience decreases in the demand for our products, which may harm our operating results.

OTHER RISKS RELATED TO US

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.

We believe that our existing cash, investments, amounts available under our bank line of credit, cash generated from operating activities and the net proceeds from our initial public offering completed in April 2004, will be sufficient to meet our anticipated cash needs for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

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market acceptance of our products;

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the need to adapt to changing technologies and technical requirements;

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the existence of opportunities for expansion; and

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access to and availability of sufficient management, technical, marketing and financial personnel.

If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain additional financing, and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Our corporate actions are substantially controlled by officers, directors, principal stockholders and affiliated entities.

After our initial public offering, our directors, executive officers and their affiliated entities beneficially owned approximately 30.8 % of our outstanding common stock. These stockholders, if they acted together, could exert substantial influence over matters requiring approval by our stockholders, including electing directors and approving mergers or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by our other stockholders, including those who purchase shares in this offering.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

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the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors;

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the establishment of a classified board of directors requiring that not all members of the board be elected at one time;

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the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

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the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

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the ability of the board of directors to alter our bylaws without obtaining stockholder approval;

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the ability of the board of directors to issue, without stockholder approval, up to 5,000,000 shares of preferred stock with terms set by the board of directors, which rights could be senior to those of common stock;

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the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;

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the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to remove directors cause; and

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the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation, bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than they would without these provisions.

We will incur increased costs as a result of being a public company

The Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and Nasdaq, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, we will incur additional costs associated with our public reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these new rules, and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risks for changes in interest rates relates primarily to our investment portfolio. As of June 30, 2004, our cash equivalents and investment portfolio consisted of commercial paper, government bonds, auction rate securities and money market funds. Our marketable securities consist of high-quality debt securities with maturities beyond three months at the date of acquisition, which mature within one year or less. Our long-term investments consist of high-quality debt securities with maturities beyond one year. Our investments are considered to be available for sale. Due to the short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially impacted by the effect of a sudden change in market interest rates on our investment portfolio.

Foreign Currency Exchange Risk

Our exposure to adverse movements in foreign currency exchange rates is primarily related to our subsidiaries’ operating expenses, primarily in the United Kingdom, Japan and Taiwan, denominated in the respective local currency. A hypothetical change of 10% in foreign currency exchange rates would not have a material impact on our consolidated financial statements or results of operations. All of our sales are transacted in U.S. dollars.

Item 4: Controls and Procedures

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are

designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described in Item 15(a) above that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

(c) On April 26, 2004, we issued 4,250 shares of our common stock to John Balletto, pursuant to an exercise of a warrant held by Mr. Balletto. The warrant was exercisable for 5,240 shares of common stock, however 10%, or 524, of the shares subject to the warrant were not exercised but were held in escrow. In addition, the exercise price was paid for by net issuance exercise, in which Mr. Balletto relinquished his right to purchase 466 shares of common stock pursuant to the terms of the warrant. On June 25, 2004, we issued 17,098 shares of our common stock to the Beijing Technology Development Fund LDC, (“Beijing Technology”) pursuant to an exercise of a warrant by Beijing Technology. The warrant was exercisable for 32,563 shares of common stock. The exercise price was paid for by net issuance exercise, in which Beijing Technology relinquished its right to purchase 15,465 shares of common stock pursuant to the terms of the warrant.

The issuance of these securities was considered to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as a transaction by an issuer not involving a public offering. The warrant holders represented their intentions to acquire the securities for investment only and not with a view to or for sale with any distribution thereof, and appropriate legends were affixed to the share certificate issued in the transaction.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits


Exhibit No.		Exhibit
31.1		Certification of Michael P. Canning pursuant to Rule 13(a)-14(a)/15(d)-14(a)

31.2		Certification of Walter D. Amaral pursuant to Rule 13(a)-14(a)/15(d)-14(a)

32.1		Section 1350 Certification

⁽¹⁾

The material contained in this Exhibit 32.1 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.

(b)

Reports on Form 8-K

None

SiRF TECHNOLOGY HOLDINGS, INC.

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.


	SiRF Technology Holdings, Inc.

Date: August 13, 2004	By:	/s/ Michael L. Canning Michael L. Canning President and Chief Executive Officer (Duly authorized officer)

Date: August 13, 2004		/s/ Walter D. Amaral Walter D. Amaral Senior Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer)

Exhibit Index


Exhibit No.		Exhibit
31.1		Certification of Michael P. Canning pursuant to Rule 13(a)-14(a)/15(d)-14(a)

31.2		Certification of Walter D. Amaral pursuant to Rule 13(a)-14(a)/15(d)-14(a)

32.1		Section 1350 Certification

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