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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004.

OR

For the transition period from              to             

Commission File Number: 000-30615

SIRENZA MICRODEVICES, INC.

(Exact name of registrant as specified in its charter)

(303) 327-3030

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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) had 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 Act).    Yes  ¨    No  x

As of October 31, 2004 there were 34,920,936 shares of registrant’s Common Stock outstanding.

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SIRENZA MICRODEVICES, INC.

INDEX

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Part I. Financial Information

Item 1. Financial Statements

SIRENZA MICRODEVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY

See accompanying notes.

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SIRENZA MICRODEVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See accompanying notes.

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SIRENZA MICRODEVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes.

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Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for any subsequent period or for the year as a whole.

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the disclosures required by accounting principles generally accepted in the United States for complete financial statements.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Sirenza Microdevices, Inc. (the Company) for the year ended December 31, 2003, which are included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on March 24, 2004.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated.

Prior to 2004, the Company operated on thirteen-week fiscal quarters ending on the Sunday closest to the end of the calendar quarter, with the exception of the fourth quarter, which ended on December 31. Effective January 1, 2004, the Company changed its reporting period to a calendar year with each of the fiscal quarters now ending on the last day of the calendar quarter. The adoption of this change did not have a material impact on the Company’s financial position or results of operations for the quarter ended September 30, 2004. The Company’s third quarter of fiscal year 2003 ended on September 28, 2003, however, for purposes of convenience, the quarter end date is presented as September 30.

Stock-Based Compensation

The Company has elected to account for its employee stock plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25), as amended by Financial Accounting Standards Board (FASB) Interpretation No. 44 (FIN 44), “Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25,” and to adopt the disclosure-only provisions as required under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (FAS 123). The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation, as amended by Statement of Financial Accounting Standards No. 148 “Accounting for Stock Based Compensation, Transition and Disclosures” (in thousands, except per share data):

Note 2: Amortizable acquisition-related intangible assets

Amortization of acquisition-related intangible assets aggregated $354,000, $1.2 million, $431,000, and $782,000 in the three and nine-month periods ended September 30, 2004 and 2003, respectively.

The Company’s acquisition-related intangible assets at September 30, 2004 and December 31, 2003 were as follows (in thousands):

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As of September 30, 2004, the Company’s estimated amortization expense of acquisition-related intangible assets over the next five years is as follows (in thousands):

Note 3: Goodwill

There were no changes in the carrying amount of goodwill during the three and nine-month periods ended September 30, 2004.

We conducted our 2004 annual goodwill impairment analysis in the third quarter of 2004 and no goodwill impairment was indicated.

Note 4: Inventories

Inventories are stated at the lower of standard cost, which approximates actual (first-in, first-out method), or market (estimated net realizable value).

The Company plans production based on orders received and forecasted demand and must order raw material components and build inventories in advance of product shipments. The valuation of inventories at the lower of cost or market requires the use of estimates regarding the amounts of current inventories that will be sold. These estimates are dependent on the Company’s assessment of market conditions and current and expected orders from its customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. Because the Company’s markets are volatile, and are subject to technological risks and price changes as well as inventory reduction programs by the Company’s customers and distributors, there is a risk that the Company will forecast incorrectly and produce excess inventories of particular products. This inventory risk is compounded because many of the Company’s customers place orders with short lead times. As a result, actual demand will differ from forecasts, and such a difference has in the past and may in the future have a material adverse effect on actual results of operations.

In 2001, the Company recorded a provision for excess inventories totaling $7.8 million. This excess inventory charge was due to the cancellation of several key customer programs and an overall decrease in forecasted demand for the Company’s products.

In the first, second and third quarters of 2004, the Company sold previously written-down inventory products with an original cost of approximately $273,000, $192,000, $155,000, respectively. In the first, second and third quarters of 2003, the Company sold previously written-down inventory products with an original cost of approximately $439,000, $394,000 and $340,000, respectively. As the cost basis for written-down inventories is less than the original cost basis when such products are sold, cost of revenues associated with the sale will be lower, which results in a higher gross margin on that sale. For example, had this inventory been valued at its original cost when sold, the Company’s gross margin would have decreased by 1% for the three months ended September 30, 2004. The Company may sell previously written-down inventory products in future periods, which would have a similarly positive impact on the Company’s results of operations.

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The components of inventories, net of written-down inventories and reserves, are as follows (in thousands):

Note 5: Investment in GCS

The Company accounts for its investment in Global Communication Semiconductors, Inc. (GCS), a privately held semiconductor foundry, in accordance with the cost method of accounting and has classified the investment as a non-current asset on its consolidated balance sheet. The Company’s President and CEO is a member of GCS’ seven-member board of directors.

On a quarterly basis, the Company evaluates its investment in GCS to determine if an other than temporary decline in value has occurred. Factors that may cause an other than temporary decline in the value of the Company’s investment in GCS would include, but not be limited to, a degradation of the general business environment in which GCS operates, the failure of GCS to achieve certain performance milestones, a series of operating losses in excess of GCS’ current annual business plan, the inability of GCS to continue as a going concern or a reduced valuation as determined by a new financing event. There is no public market for securities of GCS, and the factors mentioned above may require management to make significant judgments about the fair value of the GCS securities. Additionally, the fair value estimated by management may not be reflective of the value in a third party financing event.

The realizability of the Company’s investment in GCS is ultimately dependent on the Company’s ability to sell its GCS shares, for which there is currently no public market, and may be dependent on market conditions surrounding the wireless communications industry and the related semiconductor foundry industry, as well as public markets receptivity to liquidity events such as initial public offerings or merger and acquisition activities. Even if the Company is able to sell its GCS shares, the sale price may be less than carrying value of the investment, which could have a material adverse effect on the Company’s consolidated results of operations.

Note 6: Restructuring Activities

2003 Restructuring Activities

In connection with the acquisition of Vari-L Company, Inc. (Vari-L), the resulting new strategic focus of Sirenza and a new management structure, the Company incurred a restructuring charge of approximately $1.0 million in the second quarter of 2003, primarily related to a workforce reduction and costs of exiting excess facilities. All excess facilities were exited prior to June 30, 2003. Management with the appropriate level of authority approved and committed the Company to a plan of employee termination and exiting of excess facilities, which included the benefits terminated employees would receive. In addition, the termination benefits were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their individual severance benefits.

The $1.0 million restructuring charge consisted almost entirely of severance and fringe benefits. This charge is reflected on the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2003 as “Restructuring and special charges” and is net of a 2001 restructuring liability adjustment of $596,000 (see 2001 Restructuring Activities below).

The $1.0 million of severance and fringe benefits resulted from 50 employees that were terminated. All of these employees were terminated as of September 30, 2003. Of the 50 terminations, 22 were engaged in manufacturing activities, 12 were engaged in research and development activities, five were engaged in sales and marketing activities and 11 were engaged in general and administrative activities. In addition, of the 50 terminations, 41 were from sites located in the United States and nine were from the Company’s Canadian design center. None of the employees terminated were required to render service until their respective dates of termination in order to receive their termination benefits.

The workforce reductions began in the second quarter of 2003 and were completed in the third quarter of 2003. Approximately $871,000 of severance and fringe benefits was paid in 2003. The remaining $151,000 of cash expenditures related to the severance and fringe benefits were paid in the first quarter of 2004.

Acquisition-Related Restructuring Costs Capitalized in Fiscal 2002 as a Cost of Acquisition

During the third quarter of 2002, in connection with the acquisition of Xemod, the Company’s management approved and initiated plans to restructure the operations of the Xemod organization. The Company recorded $393,000 to eliminate certain duplicative facilities and for employee termination costs. These costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire Xemod and, accordingly, have been included as an increase to goodwill.

Of the restructuring cost, $28,000 related to severance, resulting from the termination of one employee located in the United States and engaged in general and administrative activities. The employee was terminated in the third quarter of 2002.

Of the restructuring cost, $365,000 related to costs of exiting duplicative facilities related to noncancelable lease costs. The Company estimated the cost of duplicative facilities based on the contractual terms of its noncancelable lease agreement. Given the then current and expected real estate market conditions, the Company assumed that the exited facility would not be subleased.

Subsequently, the Company began subleasing the duplicative facility. The Company expects to receive a total of $122,000 over the remaining term of

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the lease, which expires in February 2005, from its sublessee. Accordingly, the Company reduced its accrued restructuring liability and goodwill by this amount as of December 31, 2002. Any further changes to the estimates of costs associated with executing the currently approved plans of restructuring for the Xemod organization will be recorded as an increase or decrease to “restructuring” on the income statement.

2002 Restructuring Activities

As a result of the continued softness in the wireless telecommunications industry, the Company revised its cost structure in the fourth quarter of 2002 and incurred a restructuring charge of $391,000 related to a workforce reduction and exiting excess facilities. Management with the appropriate level of authority approved and committed the Company to a plan of employee termination and consolidation of excess facilities, which included the benefits terminated employees would receive. In addition, the termination benefits were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their individual severance benefits.

Of the restructuring cost, $120,000 related to severance and fringe benefits resulting from the termination of nine employees. Of the nine terminations, seven were engaged in research and development activities and two were engaged in sales and marketing activities. All of the terminated employees were from the United States. The workforce reductions began and were concluded in the fourth quarter of 2002 with all of the severance and fringe benefits paid in the fourth quarter of 2002.

Of the restructuring cost, $271,000 related to costs of exiting excess facilities primarily related to noncancelable lease costs. The Company estimated the cost for excess facilities based on the contractual terms of its noncancelable lease agreements. Given the then current and expected real estate market conditions, the Company assumed none of the excess facilities would be subleased. To date, none of the facilities have been subleased.

2001 Restructuring Activities

In 2001, companies throughout the worldwide telecommunication industry announced slowdowns or delays in the build out of new wireless and wireline infrastructure. This resulted in lower equipment production volumes by the Company’s customers and efforts to lower their component inventory levels. These actions by the Company’s customers resulted in a slowdown in shipments and a reduction in visibility regarding future sales and caused the Company to revise its cost structure given the then revised revenue levels. As a result, in the fourth quarter of 2001, the Company incurred a restructuring charge of $2.7 million related to a worldwide workforce reduction and consolidation of excess facilities. Management with the appropriate level of authority approved and committed the Company to a plan of termination and consolidation of excess facilities, which included the benefits terminated employees would receive. In addition, the termination benefits were communicated to employees in detail sufficient to enable them to determine the nature and amounts of their individual severance benefits.

Of the restructuring cost, $481,000 related to severance and fringe benefits resulting from the termination of 27 employees. Of the 27 terminations, 12 were engaged in manufacturing activities, seven were engaged in research and development activities, five were engaged in sales and marketing activities and three were engaged in general and administrative activities. In addition, of the 27 terminations, 23 were from sites located in the United States, three were from the Company’s Canadian design center and one was from the Company’s European sales office. The workforce reductions began and were concluded in the fourth quarter of 2001 with substantially all of the severance and fringe benefits paid in the fourth quarter of 2001.

Of the restructuring cost, $2.2 million related to costs of exiting excess facilities primarily related to noncancelable lease costs. The Company estimated the cost for excess facilities based on the contractual terms of its noncancelable lease agreements. Given the then current and expected real estate market conditions, the Company assumed none of the excess facilities would be subleased.

At each balance sheet date, the Company evaluates its restructuring accrual for appropriateness. In the third quarter of 2002, the Company determined that $112,000 of its 2001 restructuring liability accrual was no longer appropriate as of September 30, 2002 and adjusted its restructuring liability accordingly. Of the $112,000 restructuring liability adjustment, $95,000 related to a noncancelable, operating lease that the Company determined would not be abandoned. The remaining $17,000 related to termination benefits that were never redeemed by terminated employees. The $112,000 restructuring liability adjustment was recorded through the same statement of operations line item that was used when the liability was initially recorded, or “Restructuring.”

In addition, in the second quarter of 2003, the Company reoccupied one of its excess facilities as a result of the acquisition of Vari-L and relocation of its Sunnyvale, California manufacturing facility to Broomfield, Colorado. As a result, the Company determined that $596,000 of its 2001 restructuring liability accrual was no longer necessary as of June 30, 2003 and adjusted its restructuring liability accordingly. The $596,000 restructuring liability adjustment was recorded through the same statement of operations line item that was used when the liability was initially recorded, or “Restructuring.”

In the third quarter of 2004, the Company entered into a sublease for a portion of one of its exited facilities. The Company expects to receive net proceeds of $98,000 over the remaining term of the lease, which expires in June 2006 from its sublessee. Accordingly, the Company reduced its accrued restructuring liability by this amount as of September 30, 2004. The $98,000 restructuring liability adjustment was recorded through the same statement of operations line item that was used when the liability was initially recorded, or “Restructuring.”

The following table summarizes the activities related to the Company’s accrued restructuring balance during the third quarter of 2004 (in thousands):

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The following table summarizes the Company’s restructuring costs and activities through September 30, 2004 (in thousands):

The remaining cash expenditures related to the noncancelable lease commitments are expected to be paid over the respective lease terms, the latest of which ends in 2006.

Note 7: Stockholders’ Equity

In the second quarter of 2004, the Company granted 100,000 shares of non-vested common stock (stock awards) to an employee under the 1998 Stock Plan. The stock awards were granted at par value ($0.001) and vest on a cliff basis, three years from the date of grant. However, fifty percent (50%) of the stock awards will immediately vest in the event that the closing trading price of the Company’s Common Stock on The Nasdaq National Market is greater than or equal to $6.396 for five consecutive trading days.

The Company measured the fair value of the stock awards based upon the fair market value of the Company’s common stock on the date of grant. Compensation cost of $382,900 will be recognized on a straight-line basis over the vesting period of the stock awards, or sooner, to the extent vesting accelerates. The Company recorded approximately $32,000 of compensation cost in the third quarter of 2004 as general and administrative expenses.

Under the Company’s 1998 Stock Plan, a total of 310,441 stock options were exercised in the nine months ended September 30, 2004. Under the Company’s 2000 Employee Stock Purchase Plan, a total of 313,391 shares of common stock were purchased in the nine months ended September 30, 2004.

Note 8: Net Income (Loss) Per Share

The Company computes basic net income (loss) per share by dividing the net income (loss) for the period by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of Common Stock and potential Common Stock equivalents outstanding during the period, if dilutive. Potential Common Stock equivalents include incremental shares of Common Stock issuable upon the exercise of stock options and employee stock awards.

The shares used in the computation of the Company’s basic and diluted earnings per common share are as follows (in thousands):

Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options.

The effect of options to purchase 5,207,707 shares of Common Stock at an average exercise price of $1.76 for the three and nine months ended September 30, 2003 has not been included in the computation of diluted net loss per share as the effect would have been antidilutive.

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Note 9: Comprehensive Income (Loss)

The Company’s comprehensive net income (loss) was the same as its net income (loss) for the three and nine months ended September 30, 2004 and September 30, 2003.

Note 10: Segments of an Enterprise and Related Information

The Company operates in two business segments. The first segment is the Amplifier Division. This business segment consists of our amplifier, power amplifier, power module and discrete product lines. The second segment is the Signal Source Division. This business segment consists of our signal processing and aerospace and defense product lines. The Company’s reportable segments are organized as separate functional units with separate management teams and separate performance assessment. The Company’s chief operating decision maker (CODM), who is the Chief Executive Officer of the Company, evaluates performance and allocates resources based on the operating income (loss) of each segment.

The accounting policies of each segment are the same as those described in Note 1: Organization and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements as reflected in the Company’s Form 10-K filed with the SEC on March 24, 2004. There are no intersegment sales. Non-segment items include certain corporate manufacturing expenses, advanced research and development expenses, certain sales expenses, certain general and administrative expenses, amortization of deferred stock compensation, amortization of acquisition related intangible assets, acquired in-process research and development charges, restructuring and special charges, interest income and other, net, interest expense, and the provision for (benefit from) income taxes, as the aforementioned items are not allocated for purposes of the CODM’s reportable segment review. Assets and liabilities are not discretely reviewed by the CODM.

Note 11: Contingencies

In November 2001, the Company, various of its officers and certain underwriters of the Company’s initial public offering of securities were named in a purported class action lawsuit filed in the United States District Court for the Southern District of New York. The suit, In re Sirenza Microdevices, Inc. Initial Public Offering Securities Litigation, Case No. 01-CV-10596, alleges improper and undisclosed activities related to the allocation of shares in the Company’s initial public offering, including obtaining commitments from investors to purchase shares in the aftermarket at pre-arranged prices. Similar lawsuits concerning more than 300 other companies’ initial public offerings were filed during 2001, and this lawsuit is being coordinated with those actions (the “coordinated litigation”). Plaintiffs filed an amended complaint on or about April 19, 2002, bringing claims for violation of several provisions of the federal securities laws and seeking an unspecified amount of damages. On or about July 1, 2002, an omnibus motion to dismiss was filed in the coordinated litigation on behalf of the issuer defendants, of which the Company and its named officers and directors are a part, on common pleadings issues. On October 8, 2002, pursuant to stipulation by the parties, the court dismissed the officer and director defendants from the action without prejudice. On February 19, 2003, the court granted in part and denied in part a motion to dismiss filed on behalf of defendants, including the Company. The court’s order dismissed all claims against the Company except for a claim brought under Section 11 of the Securities Act of 1933.

A proposal has been made for the settlement and release of claims against the issuer defendants, including the Company, in exchange for a guaranteed recovery to be paid by the issuer defendants’ insurance carriers and an assignment of certain claims. The settlement is subject to a number of conditions, including approval of the proposed settling parties and the court. If the settlement does not occur, and litigation against the Company continues, the Company believes it has meritorious defenses and intends to defend the case vigorously. In addition, the Company does not believe the ultimate outcome will have a material adverse impact on the Company’s results of operations or financial condition.

On April 16, 2003, Scientific Components Corporation d/b/a Mini-Circuits Laboratory (“Mini-Circuits”) filed a complaint against the Company in the United States District Court for the Eastern District of New York alleging, among other things, breach of warranty by the Company for alleged defects in certain goods sold to Mini-Circuits. Mini-Circuits seeks compensatory damages plus interest, costs and attorneys’ fees. On July 30, 2003, the Company filed an answer to the complaint and asserted counterclaims against Mini-Circuits. Even though the Company believes Mini-circuits’ claims to be without merit and intends to defend the case and assert its claims vigorously, if the Company ultimately loses or settles the case, it may be liable for monetary damages and other costs of litigation. An estimate as to the possible loss or range of loss in the event of an unfavorable outcome cannot be made as of September 30, 2004. Even if the Company is entirely successful in the lawsuit, the Company may incur significant legal expenses and the Company’s management may expend significant time in the defense.

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On August 11, 2003, OneSource Financial Corp. filed a complaint against the Company and John and Susan Ocampo in the District Court for Travis County, Texas. The Company was served with the complaint on September 15, 2003 and filed its answer on October 16, 2003. The complaint alleges breach of contract by the Company and breach of guaranty by John and Susan Ocampo with respect to an equipment lease entered into in 1999. OneSource alleges that the terms of the lease provided for an automatic renewal of the lease upon expiration of the original term in April 2003 and seeks an additional twelve months of monthly rental payments on the equipment in addition to a fair market value buyout of the equipment, accrued interest, liquidated damages and attorneys’ fees. The Company believes OneSource’s claims for breach of contract to be without merit and intends to defend the case vigorously. However, if the Company ultimately loses or settles the case, it may be liable for the amounts claimed by OneSource and other costs of litigation. The Company has estimated the range of loss in the event of an unfavorable outcome of the matter of up to $400,000. Even if the Company is entirely successful in the lawsuit, the Company may incur significant legal expenses and the Company’s management may expend significant time in the defense.

Note 12: Recent Accounting Pronouncement

In March 2004, the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Issue’s objective is to provide guidance for identifying other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until after further deliberations by the FASB. The disclosure requirements of EITF 03-1 are effective beginning with the Company’s fiscal 2004 annual report. Once the FASB reaches a final decision on the measurement and recognition provisions, the company will evaluate the impact of the adoption of EITF 03-1.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), and in particular under the heading “Business Outlook” below, and elsewhere in this report are forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “potential,” or “continue,” the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those described under “Risk Factors” below. Forward-looking statements made in this MD&A, including under “Business Outlook” below, supersede forward-looking statements made prior to the date of this report, and the “Business Outlook” section below supersedes in its entirety “Business Outlook” sections in prior reports.

We begin MD&A with a discussion of Sirenza’s overall strategy to give the reader an overview of the goals of our business and the direction in which our business and products are moving. We then follow this with an overview of the critical factors that affect our net revenues, cost of revenues and operating expenses. This is followed by a discussion of the critical accounting estimates that we believe are important to understand the assumptions and judgments incorporated in our reported financial results. In the next section we discuss the results of our operations for the three-month and nine-month periods ended September 30, 2004 compared to the three-month and nine-month periods ended September 30, 2003. We then provide an analysis of the changes in our balance sheet and cash flows, and discuss our financial commitments in the sections entitled “Liquidity and Capital Resources” and “Contractual Obligations”.

Company Overview

We are a designer and supplier of high performance radio frequency (RF) components for the commercial communications and aerospace and defense (A&D) equipment markets. Our products are designed to optimize the reception and transmission of voice and data signals in mobile wireless communications networks and in other wireless and wireline applications. Our commercial communications applications include components for wireless base station applications, wireless LANs, fixed wireless networks, broadband wireline applications such as coaxial cable and fiber optic networks, cable television set-top boxes, remote meter readers, Radio Frequency Identification (RFID) readers and wireless video transmitters. Our A&D end markets include components for government, military, avionics, space and homeland security systems.

We believe a fundamental value we provide to our commercial and A&D customers is derived from our focus on the needs of infrastructure applications, our wide array of highly engineered products in multiple technologies, and our commitment to support our customers worldwide with sales and application engineering support.

We offer a broad line of products that range in complexity from discrete components to integrated circuits (IC) and multi-component modules (MCM). Our discrete, IC and MCM products employ a broad array of semiconductor process technologies, which we believe allows us to optimize our products for our customer applications.

A significant downturn affected our end markets beginning in 2001. Although our net revenues were significantly impacted by this downturn in 2001, our net revenues have increased in each of the last two years, driven by new product introductions, increased market share and the addition of complementary products through our strategic acquisitions of other companies and assets.

We have acquired two companies in the last two years. On September 11, 2002, we acquired Xemod Incorporated, which allowed us to broaden our amplifier product line to include LDMOS-based amplifier modules for wireless infrastructure applications. We have had limited sales of these products to date. On May 5, 2003, we acquired substantially all of the assets and assumed specified liabilities of Vari-L Company, Inc., (Vari-L) which enabled us to significantly broaden our product portfolio of MCM products. The acquisition of Vari-L added a significant level of net revenues to Sirenza subsequent to the date of the transaction.

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After the acquisition of Vari-L, we relocated our corporate headquarters and consolidated our manufacturing facilities in Broomfield, Colorado, which allowed us to achieve significant operational cost synergies, primarily in operations, general and administrative and, to a more limited degree, in sales and marketing. The achievement of these operational cost synergies in combination with a significant increase in our net revenues subsequent to the Vari-L transaction was the primary factor that caused a decrease in the ratio of our operating expenses (i.e. research and development, sales and marketing and general and administrative) to our net revenues from 63% in the second quarter of 2003 to under 40% in the third quarter of 2004. If we had not achieved these cost synergies, our cost of revenues, general and administrative and sales and marketing expenses would have been higher, both in terms of dollars and as a percentage of net revenues in the third quarter of 2004.

Historically we have utilized a divisional organization structure. The divisions focused on either specific end markets and/or product types. (See Note 10: “Segments of an Enterprise and Related Information” in our Notes to Condensed Consolidated Financials Statements for further information). Currently we are organized into two, product focused divisions: our Amplifier Division and our Signal Source Division. The two divisions are generally focused on the same end markets and customers and are managed separately in order to better manage the research and development and marketing efforts for particular products. Our Amplifier Division’s main product lines are primarily IC-based and included discrete, amplifier, low noise amplifier and power amplifier IC products and an emerging MCM product line including power amplifier modules. Our Signal Source Division’s main product lines are MCMs that include voltage controlled oscillators (VCOs) and phase-locked loop (PLL) products, passive and active mixers and an emerging signal coupler product line. We also have a market-focused business unit focused on the A&D market that sells products from both the Amplifier and Signal Source divisions.

Revenue Overview

We present our revenue results as “net revenues.” Net revenues are defined as our revenues less sales discounts, rebates, returns and other pricing adjustments. Historically, these revenue related adjustments have not represented a significant percentage of our revenues.

We sell our products worldwide through a direct sales channel and a distribution sales channel. Our distribution channel consists of all sales made by our four distribution channel partners (Avnet, Acal, Nu Horizons and RFMW). We defer the recognition of revenue and the related costs of revenue until our distribution partners sell our products to their end customers. Our distribution partners are based in the United States and Europe. Our direct channel consists of all sales made by us in which we recognize revenue when the product has shipped, title has transferred and no further obligations remain.

Although we have typically not experienced a delay in customer acceptance of our products, should a customer delay acceptance in the future our policy is to delay revenue recognition until a customer accepts the products.

Historically, a significant percentage of our net revenues have been derived from a limited number of customers, including our distributors. From 2001 to 2003, our customer base shifted significantly. Significant sales and marketing efforts by us have contributed to a majority of our 2003 and 2004 net revenues being derived from a specific set of large wireless infrastructure original equipment manufacturer customers (OEMs) including Andrew, Ericsson, Lucent and their contract manufacturers. This trend was strengthened in 2003 by the acquisition of Vari-L whose customers were also large infrastructure OEMs, including Nokia, Siemens and Motorola. We believe that these OEMs and other global OEM suppliers will continue to account for a majority of our net revenues for the foreseeable future.

We have grown our net revenues through the introduction of new products, increasing our market share and by adding complementary products through strategic acquisitions. Our strategy is to continue to grow our net revenues by the same means.

In addition to these strategies, we continue to focus on growing sales to customers in the other wireless, wireline and A&D end-markets, through both our direct and distribution channels.

Our sales have also shifted in their geographic location. From 2001 through 2003 we broadened our geographic reach so that as we exited 2003, our net revenues were evenly split between Asia, North America and Europe. Sales into Asia increased during 2004 as a result of OEMs outsourcing their manufacturing to contract manufactures, primarily in China. As a result of the increase in shipments to OEM contract manufacturers, we anticipate that a higher percentage of our sales will be in the Asia region.

Since 2001, we have had essentially the same group of competitors. For our amplifier products, we most often compete with Agilent, WJ Communications, M/A-COM and NEC. The main competitors in our signal source products are Alps, M/A-COM and Mini-circuits. We also compete with communications equipment manufacturers, some of who are our customers, who design RF components internally such as Ericsson, Lucent, Motorola and Nortel Networks.

Another continuing trend is that our OEM customers started to outsource the manufacturing of their equipment to large contract manufacturers (CMs), including Celestica, Flextronics and Solectron. As a result, our sales are now to both these CM and OEM customers. However, our OEM customers dictate the design and the pricing of the products sold to their CMs. When we report customer net revenues in our public announcements, we attribute all net revenues to the ultimate OEM customer and not the respective CMs.

Cost of Revenues Overview

Cost of revenues consists primarily of costs associated with:

1. Wafers from third-party wafer fabs for our IC products,

2. Raw material components from third-party vendors, for both our IC and MCM products,

3. Packaging for our IC products performed by third-party vendors,

4. Assembling and testing of our MCM products in our facility,

5. Testing of our IC products in our facility, and

6. Costs associated with procurement, production control, quality assurance, reliability and manufacturing engineering.

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For our IC products, we outsource our wafer manufacturing and packaging and then perform final testing and tape and reel assembly at our Colorado manufacturing facility. For the majority of our MCMs, we manufacture, assemble and test most of our products at our manufacturing facility in Colorado.

Historically, we have depended upon a limited number of foundries for semiconductor wafers for our IC products. Most, but not all, of these vendors are on multi-year contracts on which pricing is set based on volume. For the packaging of our IC products, we have depended on a small number of packaging vendors for a significant majority of our products. We anticipate that we will continue to depend on a limited number of vendors for our wafer and packaging requirements.

We have a wider selection of component vendors to choose from in the manufacture of our MCMs. These suppliers are competitive and we expect that to the extent our volumes increase, we may be able to reduce costs by obtaining better volume pricing and delivery terms.

We continue to explore the outsourcing of a larger portion of our manufacturing operations. We intend to increase the level of outsourcing of our manufacturing operations if unit volumes increase to a level that makes outsourcing economically attractive.

Gross Profit and Margin Overview

Our gross profit and gross margin percent can be influenced by a number of factors, including, but not limited to:

1. Product features

Historically, customers are willing to pay a premium for new or different features or functionality. Therefore, increased net revenues of such products in a given period will have a positive effect on our gross margin percent.

2. Product type

In the markets in which we operate, IC products have historically yielded a higher gross margin percent than MCMs. Generally, this means in periods in which net revenues of IC products represent a higher percentage of our total net revenues, our gross margin percentages are likely to be higher. Therefore, increased net revenues of IC products in a given period will have a positive effect on our gross margin percent.

3. Market

Our products are sold into a wide variety of markets and each of these markets has a pricing structure that is dictated by the economics of that particular market. Therefore, the gross margin percent on our products can vary by the markets into which they are sold. Therefore, increased sales into higher margin markets in a given period will have a positive effect on our gross margin percent.

4. Sales Channel

Historically, the gross margin percent on sales to our large OEM customers has been lower than the gross margin percent on sales through our distribution channel or sales to some of our smaller direct customers. This is primarily due to the bargaining power of the large OEM customers and their higher product volumes. Therefore, increased sales to our large OEM customers in a given period will likely have a negative effect on our gross margin percent.

5. Level of integration of the product

Our customers generally are seeking more integrated products with enhanced functionality, which enables them to procure fewer products from fewer suppliers. These integrated products typically command a higher average selling price than our stand-alone components. However, the manufacturing costs of these integrated products are higher, which generally results in a lower gross margin percent on initial sales of our integrated products in comparison to our stand-alone components. Therefore, increased sales of our more integrated products in a given period will generally have a positive impact on our average selling prices and a negative effect on our gross margin percent.

6. The efficiency and effectiveness of our manufacturing operations

Our gross margin percent is generally lower in periods with less volume and higher in periods with increased volume. In periods in which volumes are low, our fixed manufacturing overhead costs are allocated to fewer units, thereby decreasing our gross margin percent when those products are sold. Likewise, in periods in which volumes are high, our fixed manufacturing overhead costs are allocated to more units, thereby increasing gross margin percent when those products are sold.

7. Provision for excess inventories

As discussed in more detail in “Critical Accounting Policies and Estimates,” our cost of revenues and gross margin percent may be negatively influenced by provisions for excess inventories and positively influenced by the sale of previously written-down inventory. These actions can have material impacts on cost of revenues, gross profit and gross margin percent.

We believe that each of the above factors will continue to affect our cost of revenues, gross profit and gross margin percentage for the foreseeable future. In addition, the interaction of the factors listed above could have a significant period-to-period effect on our cost of revenues, gross profit and gross margin percent.

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Operating Expense Overview

Research and development expenses consist primarily of salaries and salary-related expenses for personnel engaged in R&D activities, material costs for prototype and test units and other expenses related to the design, development and testing of our products and, to a lesser extent, fees paid to consultants and outside service providers. We expense all of our R&D costs as they are incurred. Our R&D costs can vary significantly from quarter to quarter depending on the timing and quantities of materials bought for prototype and test units. We believe one of our key competitive advantages is our ability to offer a broad range of highly engineered products designed to meet the needs of our customers. Our strategy is to continue to invest in R&D at sufficient levels in order to maintain our competitive advantage.

We historically have done our R&D in multiple, geographically dispersed sites in North America rather than concentrating it in one location. We believe that locating product development at multiple sites allows us to attract key personnel we might not otherwise be able to hire. In addition, we believe that having stand-alone R&D centers allows the personnel there to better concentrate on their development tasks. We plan to continue our strategy of conducting our R&D activities in multiple locations.

Sales and marketing expenses consist primarily of salaries, commissions and salary-related expenses for personnel engaged in marketing, sales and application engineering functions, as well as costs associated with trade shows, promotional activities, advertising and public relations. We record as an expense, commissions to our external, independent sales representatives when revenues from the associated sale are recognized. We record as an expense, quarterly commissions to internal sales employees based on the achievement of targeted net revenue goals.

The nature of our sales and marketing expenditures has changed significantly over time. In 2001 we invested in increasing the number of direct sales personnel and application engineering support for our customers. In particular, to support our customers, we placed both sales personnel and application engineers in various time zones around the world. We believe that our sales force and application engineers provide us with a key competitive advantage in our markets. We intend to maintain our investment in the sales and marketing functions in order to sustain our advantage in this area.

General and administrative expenses consist primarily of salaries and salary-related expenses for executive, finance, accounting, information technology, and human resources personnel, as well as insurance and professional fees. We intend to increase our general and administrative expenses as the need arises.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that are believed 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. We evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies require the most significant judgments and estimates to be made in the preparation of our consolidated financial statements. We also have other policies that we consider key accounting policies, such as our policies for revenue recognition, in particular the deferral of revenue on sales to distributors, the valuation of our net deferred tax assets, and amortization of acquisition-related intangible assets. However, these policies currently do not meet the definition of critical accounting estimates, because they do not generally require us to make estimates or judgments that are difficult or subjective.

Non-Marketable Equity Securities: In 2002, we acquired 12.5 million shares of Global Communication Semiconductors, Inc. (GCS), a privately held semiconductor foundry. The acquired shares represented 14% of the shares outstanding at the time. The investment strengthened our supply chain for InGaP and InP semiconductor technologies. In connection with the investment, our President and CEO joined GCS’s seven member board.

On a quarterly basis we evaluate our investment in GCS to determine if an other than temporary decline in value has occurred. Factors that may cause an other than temporary decline in the value of our investment in GCS would include, but not be limited to, a degradation of the general business environment in which GCS operates, the failure of GCS to achieve certain performance milestones, a series of operating losses in excess of GCS’ current annual business plan, the inability of GCS to continue as a going concern or a reduced valuation as determined by a new financing event. Evaluating each of these factors involves a significant amount of judgment on management’s part. If we determine that an other than temporary decline in value has occurred, we will write-down our investment in GCS to fair value. Such a write-down could have a material adverse impact on our consolidated results of operations in the period in which it occurs. For example, in the fourth quarter of 2002, we wrote down the value of our investment in GCS by $2.9 million after determining that GCS’ value had experienced an other than temporary decline. Our ultimate ability to realize our investment in GCS in the future may be dependent on the market conditions surrounding the wireless communications industry and the related semiconductor foundry industry, as well as public markets receptivity to liquidity events such as initial public offerings or mergers and acquisition activities.

Valuation of Goodwill: Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the fair value of the net identifiable tangible and intangible assets acquired. We perform an annual review in the third quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. Our impairment review process compares the fair value of the reporting unit to its carrying value, including the goodwill related to that reporting unit.

Our fair value approach uses two methods, a discounted future cash flow approach and market value approach. The discounted future cash flow model uses estimates of revenue for the business unit, based on estimates of market segment growth rates, estimated costs, and an estimated appropriate discount rate. These estimates are based on historical data, various internal estimates, various external market sources of information, and management’s expectations of future trends.

Our market value approach considers our market capitalization and market multiples of revenue for comparable companies in our industry, as determined by management. This information is derived from publicly available sources.

All of these estimates, and to a lesser degree, the selection of comparable publicly traded companies, involve a significant amount of judgment. If the

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fair value of the reporting unit exceeds the carrying value of the assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the assets assigned to the reporting unit exceeds the fair value of the reporting unit, then a second step must be performed, and the implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded.

Our expectations are that the most important factors in the accuracy of our estimation will be the overall strength of the market for telecommunication components in our segments of the market, and the demand for the particular products acquired in the Vari-L transaction.

We conducted our annual goodwill impairment analysis in the third quarter of 2004. The estimates that we used assumed that the reporting units would participate in a gradually improving market for radio frequency components in the wireless and wireline infrastructure markets, that our share of those markets would increase, and the profitability of the reporting units would increase over time. We concluded that we did not have any impairment of goodwill based on our then forecasted discounted cash flows, our market capitalization and market multiples of revenue of comparable companies in our industry.

Excess and Obsolete Inventories: Our provision for excess inventories is based on levels of inventory exceeding the forecasted demand of such products within specific time horizons. We forecast demand for specific products based on the number of products we expect to sell, with such assumptions dependent on our assessment of market conditions and current and expected orders from our customers, considering that orders are subject to cancellation with limited advance notice prior to shipment. The estimation of future demand used in the valuation of inventory is the basis for our announced revenue outlook and our factory loading factors. If forecasted demand decreases or if inventory levels increase disproportionately to forecasted demand, inventory write-downs may be required. Likewise, if we ultimately sell inventories that were previously written-down, we would reduce the previously recorded excess inventory provisions which would have a positive impact on our cost of revenues, gross margin percent and operating results.

In 2001, we recorded a provision for excess inventories of $7.8 million. We subsequently began selling certain products that were previously written-down. For example, we sold approximately $620,000 of previously written-down inventory products in the first nine months of 2004. Sales of previously written-down inventories had less than a one percent positive impact on our gross margin in the third quarter of 2004.

The following table illustrates the impact on cost of revenues of additions to written-down inventories and sales of previously written-down inventory products for historical Sirenza amplifier products and also provides a schedule of the activity of Sirenza’s written-down inventories (in thousands):

The demand for our products was extremely volatile from late 2001 to late 2002. As our customers were very unsure of their end demand, they could not provide us with a reliable forecast of their demand for our products. Since late 2002, the forecasts from our customers have become more reliable.

The single largest factor affecting the accuracy of our provisions for excess inventories will be the accuracy of our end customers’ forecasts. Affecting these forecasts will be the strength of the recovery in the demand for communications components in our market segments. Also impacting it will be the speed at which our products are designed in or out of our customers’ products.

We will ultimately dispose of written-down inventories by either selling such products or scrapping them. We currently expect sales of written-down inventory products in 2004 to be lower than in 2003. Similarly, we anticipate that we will scrap additional written-down inventories in the near term.

Results of Operations

The following table shows selected consolidated statement of operations data expressed as a percentage of net revenues for the periods indicated:

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Comparison of the Three and Nine Months Ended September 30, 2004 and September 30, 2003

Net Revenues

The following table sets forth information pertaining to our sales channel and geographic net revenue composition expressed as a percentage of net revenues for the periods indicated. Our sales channel structure is explained above in the “Revenue Overview” section. Our geographic sales composition is based upon the location to which we ship our products.