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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005.

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  x    No  ¨

As of March 31, 2005 there were 35,582,115 shares of registrant’s Common Stock outstanding.

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SIRENZA MICRODEVICES, INC.

INDEX

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Part I. Financial Information

SIRENZA MICRODEVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

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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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 month period ended March 31, 2005 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, 2004 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 fiscal year ended December 31, 2004, which are included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on March 3, 2005.

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

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” (SFAS 123). Under APB Opinion No. 25, as amended by FIN 44, when the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation, as amended by Statement of Financial Accounting Standards No. 148 “Accounting for Stock Based Compensation, Transition and Disclosures” (SFAS 148). For purposes of this pro-forma disclosure, the value of the options is amortized ratably to expense over the options’ vesting periods.

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On December 16, 2004, the Company acquired ISG Broadband, Inc. (ISG), a designer of RF gateway module and IC products for the cable TV, satellite radio and HDTV markets, for approximately $6.9 million in cash and estimated direct transaction costs of approximately $789,000 for a total preliminary purchase price of $7.7 million. Additional cash consideration of up to $7.15 million may become due and payable by the Company upon the achievement of margin contribution objectives attributable to sales of selected products for periods through December 31, 2007. To the extent sales of the selected products achieve a minimum gross margin percentage, the Company will be required to make additional payments to the former shareholders of ISG for a portion or all of the gross profit earned on such sales, up to a pre-defined maximum, as outlined below. The future cash payout of additional consideration, if any, will be payable in the quarter following the end of the applicable annual earn-out period, as outlined below, and will be recorded as additional goodwill. The range of possible payment is as follows (in thousands):

The allocation of the purchase price is preliminary until finalization of all direct transaction costs and pre-acquisition contingencies. The Company has identified a pre-acquisition contingency related to certain inventory products that are to be used for a specific application for which ISG was not qualified by the customer to manufacture such products as of the consummation date of the acquisition. Prior to the closing of the acquisition, ISG had recorded an inventory valuation reserve of approximately $358,000 for the excess of cost over estimated net realizable value for this inventory. To the extent the Company determines it is unable to sell this inventory because of a lack of qualification, an additional write-down of up to $350,000 would be required. Likewise, to the extent Sirenza is able to sell this inventory for this specific application, a reduction to the reserve of up to $358,000 would be required. Adjustments to the aforementioned inventory reserve related to this specific contingency prior to December 16, 2005, the estimated end of the allocation period, will be included in the allocation of the purchase price, resulting in an increase or decrease to goodwill. There have been no adjustments to the aforementioned inventory reserves from the date of the acquisition to March 31, 2005.

Any adjustment to the aforementioned inventory reserve subsequent to December 16, 2005 or related to events occurring subsequent to December 16, 2004 will be included in the determination of net income in the period in which the adjustment is determined.

The Company does not anticipate direct transaction costs to be materially different than the current estimate of $789,000.

The goodwill resulting from this acquisition has been assigned to the Amplifier division for segment reporting purposes and is expected to be deductible for income tax purposes.

The Company’s results of operations include the effect of ISG subsequent to December 16, 2004.

Amortization of acquisition-related intangible assets totaled $465,000 and $431,000 for the three-month periods ended March 31, 2005 and 2004, respectively. The amortization of acquisition-related intangible assets in the three-month period ended March 31, 2005 included amortization associated with the Company’s acquisitions of Vari-L, Xemod and ISG. The amortization of acquisition-related intangible assets in the three-month period ended March 31, 2004 included amortization associated with the Company’s acquisitions of Vari-L and Xemod.

The Company’s acquisition-related intangible assets were as follows (in thousands):

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As of March 31, 2005, the Company’s estimated amortization expense of acquisition-related intangible assets over the next five years and thereafter is as follows (in thousands):

There were no changes in the carrying amount of goodwill during the three-month period ended March 31, 2005.

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 wafers and raw material components and build inventories well 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 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.

The Company sold previously written-down inventory products with an original cost basis of approximately $65,000 and $273,000 in the first quarters of 2005 and 2004, 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. Sales of previously written-down inventories increased the Company’s gross margin for the three months ended March 31, 2005 by less than one percentage point. 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.

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

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The Company accounts for its investment in GCS under the cost method of accounting and has classified the investment as a non-current asset on its consolidated balance sheet.

The Company regularly 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 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 require management to make significant judgments about the fair value of the GCS securities.

In the fourth quarters of 2004 and 2002, the Company determined that an other than temporary decline in value of its investment had occurred. Accordingly, the Company recorded a charge of approximately $1.5 million in 2004 and $2.9 million in 2002 to reduce the carrying value of its investment to its estimated fair value. The fair value has been estimated by management and may not be reflective of the value in a third party financing event.

The ultimate realization of the Company’s investment in GCS will be dependent on the occurrence of a liquidity event for GCS, and/or our ability to sell our GCS shares, for which there is currently no public market. The likelihood of any of these events occurring will depend on, among other things, the market conditions surrounding the wireless communications industry and the related semiconductor foundry industry, as well as the 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.

Acquisition-Related Restructuring Costs Capitalized in 2004 as a Cost of Acquisition

During the fourth quarter of 2004, in connection with the acquisition of ISG, the Company’s management approved and initiated plans to restructure the operations of the ISG organization. The Company recorded $310,000 to eliminate duplicative ISG facilities and for ISG employee termination costs. These costs were recognized as a liability assumed in the business combination and included in the allocation of the cost to acquire ISG and, accordingly, have been included as an increase to goodwill.

Of the restructuring cost, $61,000 related to severance and fringe benefits associated with the termination of four employees. Of the four terminations, two were engaged in manufacturing activities, one was engaged in sales and marketing activities and one was engaged in general and administrative activities. All of the terminated employees were from the United States. The terminations were concluded in the fourth quarter of 2004. Approximately $55,000 of the severance and fringe benefits was paid in the fourth quarter of 2004 and an additional $4,000 was paid in the first quarter of 2005. The remaining cash expenditures related to the severance and fringe benefits are expected to be paid in the second quarter of 2005.

An additional $37,000 of the restructuring cost relates to severance and fringe benefits or relocation costs for two employees. These employees will either be terminated or relocated to the Company’s Broomfield, Colorado facility. One of these employees is engaged in manufacturing activities and the other employee is engaged in general and administrative activities. Both of these employees reside in the United States. The severance and fringe benefits or relocation costs are expected to be paid in the second quarter of 2005. In the event these employees are terminated, they are not required to render service until their respective termination dates in order to receive any termination benefits.

Of the restructuring cost, $212,000 related to costs of exiting duplicative facilities primarily 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 short duration of the remaining contractual lease term that expires in May of 2005, the Company assumed that the exited facility would not be subleased.

At each balance sheet date, the Company evaluates its restructuring accrual for appropriateness.

The following table summarizes the activities related to the Company’s accrued restructuring balance during the first quarter of 2005 (in thousands):

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The following table summarizes the Company’s restructuring costs and activities for the restructuring activities identified below from inception through March 31, 2005 (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.

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 net income (loss) per common share were 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 and employee stock awards.

The effect of options to purchase 5,329,236 shares of common stock at an average exercise price of $2.68 for the first quarter ended March 31, 2005 have not been included in the computation of diluted net loss per share as the effect would have been antidilutive. In addition, 50,000 shares of non-vested common stock at a purchase price of $0.001 have not been included in the computation of diluted net loss per share as the effect would have been antidilutive.

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The components of comprehensive income (loss), net of tax, were as follows (in thousands):

The components of accumulated other comprehensive income (loss), net of tax, were as follows (in thousands):

At the beginning of 2005, the Company reorganized into two, product focused business segments, the Amplifier division and the Signal Source division and one market oriented segment, the Aerospace and Defense (A&D) division. The Amplifier division’s main product lines are primarily IC-based and include discrete, amplifier, low noise amplifier, power amplifier and transceiver IC products, a multi-component module (MCM) product line including power amplifier modules and a broadband product line. The Signal Source division’s main product lines are primarily MCMs used in mobile wireless infrastructure applications to generate and control RF signals, including VCOs, PLLs, coaxial resonator oscillators (CROs), and passive and active mixers. In addition, the Signal Source division has an IC-based modulator and demodulator product line and a line of signal couplers. The A&D division’s main product lines are government and military specified versions of certain of our signal processing components and various passive components. 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 Annual Report on Form 10-K filed with the SEC on March 3, 2005. 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, GCS impairment 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.

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The segment information above has been restated to reflect the change in the number the Company’s segments from two to three in the first quarter of 2005. Prior to this reorganization, the revenues and operating income (loss) attributable to our A&D products were primarily included in the revenues and operating income (loss) attributable to our Signal Source division.

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.

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the court for approval. The terms of the settlement, if approved, would dismiss and release all claims against the participating defendants (including the Company). In exchange for this dismissal, D&O insurance carriers would agree to guarantee a recovery by the plaintiffs from the underwriter defendants of at least $1 billion, and the issuer defendants would agree to an assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. The settlement is subject to a number of conditions, including court approval. 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 March 31, 2005. 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.

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 additional 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, the Company 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.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first period of the next fiscal year beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the first quarter of 2006, beginning January 1, 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a material adverse impact on the Company’s consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R.

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 below under “Risk Factors.”

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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, followed by 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 policies and estimates that we believe require the most significant judgments to be made in the preparation of our consolidated financial statements. In the next section we discuss the results of our operations for the first quarter of 2005 compared to the first quarter of 2004. We then provide an analysis of our cash flows, including the impact on cash of important balance sheet changes, and discuss our financial commitments in the sections entitled “Liquidity and Capital Resources” and “Contractual Obligations.”

Company Overview

We are a leading designer and an ISO 9001:2000 and ISO 14001:2004 certified supplier of high performance RF components for the commercial communications and 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 mobile wireless infrastructure applications, wireless LANs, fixed wireless networks, broadband wireline applications such as coaxial cable and fiber optic networks, cable television set-top boxes, RFID readers, wireless video transmitters, antennae and receivers for satellite radio, as well as tuner ICs and transceivers for HDTV set-top boxes. Sales of components for the A&D end markets include components for government, military, avionics, space and homeland security systems.

We believe a fundamental value we provide to our customers is derived from our focus on the needs of customer specific 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 ICs and MCMs. Our discrete, IC and MCM products employ numerous semiconductor process technologies, which we believe allows us to optimize our products for our customers’ applications.

Our net revenues have increased in each of 2002, 2003 and 2004, 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 made three acquisitions since 2002. On December 16, 2004, we acquired ISG, a designer of RF gateway module and IC products for the cable TV, satellite radio and HDTV markets. This acquisition enables us to address new end markets, including HDTV and satellite radio, and broadens our product offering in the set-top box market by adding ISG’s silicon-based receiver/tuner products to our existing product lines targeting this market. 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., a designer and manufacturer of VCOs, PLLs and other MCM products for the mobile wireless infrastructure market, as well as certain components for the A&D market. This acquisition strengthened our product portfolio by adding RF signal source components while strengthening our presence in the A&D markets. The acquisition of Vari-L added a significant amount of net revenues to Sirenza subsequent to the date of the transaction. 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.

On September 11, 2002, we acquired Xemod Incorporated, a designer and fabless manufacturer of RF power amplifier modules and components based on patented LDMOS technology. The acquisition strengthened our product portfolio of RF components by adding high power amplifier module products. We have not had significant sales of these products to date.

Historically we have utilized a divisional organization structure focused on either specific end markets and/or product types. Beginning in January of 2005, we reorganized to operate in two, product focused divisions and one market oriented division: our Amplifier division, our Signal Source division and our A&D division. The Amplifier and Signal Source divisions are generally focused on similar end markets and customers and are managed separately in order to better manage the research and development and marketing efforts for particular products. The A&D division is focused on the government, military, avionics, space and homeland security systems end markets. The Amplifier division’s main product lines are primarily IC-based and include discrete, amplifier, low noise amplifier, power amplifier and transceiver IC products, an MCM product line including power amplifier modules and our broadband product line. The Signal Source division’s main product lines are MCMs used in mobile wireless infrastructure applications to generate and control RF signals, including VCOs, PLLs, coaxial resonator oscillators (CROs), passive and active mixers, an IC-based modulator and demodulator product line and a line of signal couplers. The A&D division’s main product lines are government and military specified versions of certain of our signal processing components and various passive components.

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. We recognize revenues on sales to our distributors under agreements providing for rights of return and pricing discount programs at the time our products are sold by the distributors to third party customers. Our distribution channel, which accounted for 11% of total net revenues for the first quarter of 2005, consists of those sales made by our four distribution channel partners (Avnet, Acal, Nu Horizons, and RFMW) under agreements that provide for rights of return and pricing discounts.

Sales to Avnet and Acal as resellers, and to other resellers of our products, are made on contractual terms that do not include rights of return and pricing discounts. We recognize revenue from sales to these resellers of our products, and from sales to all other non-distribution customers, at the time product has shipped, title has transferred and no obligations remain. Our direct sales channel, which accounted for 89% of total net revenues for the first quarter of 2005, consists of those sales made to all non-distributor customers and resellers of our products, including sales to Avnet and Acal as resellers.

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 2002 to the first quarter of 2005, our customer base shifted significantly as a result of our focus on strengthening our direct sales channel. Our sales and marketing efforts contributed to a majority of our 2003 and 2004 net revenues being derived from a specific set of large wireless infrastructure original equipment manufacturers including (OEMs) Andrew, Ericsson, Lucent and their contract manufacturers (CMs). 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 and other global OEMs and their CMs will continue to account for a majority of our net revenues for the foreseeable future.

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We have grown our net revenues through the introduction of new products, increasing our market share and 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 other wireless, wireline and A&D end-markets, through both our direct and distribution channels.

As we exited 2003, our net revenues were evenly split between Asia, North America and Europe. Sales into Asia increased during 2004 and in the first quarter of 2005 as a result of OEMs increasingly outsourcing their manufacturing to contract manufacturers, primarily in China. As a result of the increase in shipments to our OEMs’ contract manufacturers, we anticipate that a higher percentage of our sales will be in the Asia region.

With respect to products sold in our Amplifier division, we compete primarily with other suppliers of high-performance RF components used in communications infrastructure equipment, such as Agilent, M/A-COM, NEC and WJ Communications. For our broadband products, we expect our most significant competitors will include Maxim Integrated Products, Microtune, Motorola and Philips. With respect to our Signal Source division products, our primary competitors are Alps, M/A-COM and Minicircuits. With respect to our A&D division products, our primary competitors are Hittite, Synergy, Remec and Cougar Components. We also compete with communications equipment manufacturers, some of whom are our customers that design RF components internally, such as Ericsson, Lucent, Motorola, Nokia and Nortel Networks.

Since 2002, our OEM customers have been increasingly outsourcing the manufacturing of their equipment to CMs, including Celestica, Flextronics, Sanmina and Solectron. As a result, we sell directly to both OEMs and CMs. Currently, our OEM customers make the sourcing decisions for our sales to 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:

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

Historically, we have relied upon a limited number of foundries to manufacture most of our semiconductor wafers for our IC products. We have contractual agreements with most, but not all, of these suppliers in which pricing is established based on volume, and in which price, volume and other terms are reset on a periodic basis through negotiations between the parties based on current market conditions. We source our IC packaging assembly from a limited number of established, international commercial vendors. We anticipate that we will continue to depend on a limited number of vendors for our wafer and packaging requirements.

Generally, raw materials utilized by us for our MCM products are readily available from numerous sources. These vendors 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 currently outsource a portion of our manufacturing and testing function, and may increasingly do so where economically viable for both the vendor and us.

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 have been willing to pay a premium for new or different features or functionality. Therefore, increased sales of such products in a given period are likely to have a positive effect on our gross margin percent.

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2. Product type

In the markets in which we operate, IC products have historically yielded a higher gross margin percent than MCMs. Therefore, increased sales 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 attendant to large OEM customers based on their higher product volumes. Therefore, increased sales to our large OEM customers in a given period may have a negative effect on our gross margin percent.

5. Level of integration of the product

Our customers generally seek 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 negatively impacting 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 positively impacting 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.

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 levels appropriate for our overall operating plan in order to maintain our competitive advantage.

We historically have performed our R&D activities in multiple, geographically dispersed locations in North America. We believe maintaining multiple R&D design centers 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 and sales-related goals.

We continue to invest in increasing the number of direct sales personnel and application engineers supporting 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 direct sales force and application engineers provide us with a key competitive advantage in our markets. We intend to maintain our investment in 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 invest in general and administrative expenses at levels appropriate for our overall operating plan.

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.

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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, and of the valuation of long-lived assets including acquisition-related intangible assets. However, we do not believe these policies currently 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: We regularly 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, financial performance below that anticipated in 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 quarters of 2004 and 2002, we wrote down the value of our investment in GCS by $1.5 million and $2.9 million, respectively, after determining that GCS’ value had experienced an other-than-temporary decline.

The ultimate realization of our investment in GCS will be dependent on the occurrence of a liquidity event for GCS, and/or our ability to sell our GCS shares, for which there is no public market. The likelihood of any of these events occurring will depend on, among other things, the market conditions surrounding the wireless communications industry and the related semiconductor foundry industry, as well as the 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 methodology consists of a forecasted discounted cash flow model and a market value model. The forecasted discounted 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 model 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, including the selection of comparable publicly traded companies, involve a significant amount of judgment. If the 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, 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 factor in our estimation will be our ability to accurately forecast the demand for our products.

We conducted our annual goodwill impairment analysis in the third quarter of 2004. We concluded that we did not have any impairment of goodwill based on our 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.

We recorded a provision for excess inventories of $7.8 million in 2001. We subsequently began selling some of these written-down inventory products. In the first quarter of 2005, we sold previously written-down inventory products with an original cost basis of approximately $65,000. 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. Sales of previously written-down inventories had a positive impact on our gross margin in the first quarter of 2005 of less than one percentage point.

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 division products and also provides a schedule of the activity of Sirenza’s written-down inventories (in thousands):

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 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 2005 to be lower than in 2004. Similarly, we anticipate that we will scrap additional written-down inventories in the near term.

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Deferred Tax Assets: We perform quarterly and annual assessments of the realization of our deferred tax assets considering all available evidence, both positive and negative. Assessments of the realization of deferred tax assets require that management make significant judgments about many factors, including the amount and likelihood of future taxable income. As a result of these assessments, we previously concluded that it was more likely than not that our deferred tax assets would not be realized and established a full valuation allowance against our deferred tax assets in 2001. The valuation allowance established in 2001 was recorded as a result of our analysis of the facts and circumstances at that time, which led us to conclude that we could no longer forecast future U.S. taxable income under the more likely than not standard required by SFAS No. 109 “Accounting for Income Taxes.”

Although we did not have taxable income in the first quarter of 2005, in 2004, we had taxable income in every quarter. We continue to evaluate the need for a valuation allowance. To the extent we are able to generate taxable income for the remainder of 2005 and if our projections indicate that we are likely to generate sufficient future taxable income, we may determine that some, or all, of our deferred tax assets will more likely than not be realized, in which case we will reduce our valuation allowance in the quarter in which such determination is made. In the quarter in which the valuation allowance is reduced, we may recognize a benefit from income taxes on our income statement, which may have a positive impact on our consolidated results of operations.

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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Comparisons of the Three Months Ended March 31, 2005 and March 31, 2004

Net Revenues

The following table sets forth information pertaining to our channel and geographic net revenue composition expressed as a percentage of net revenues for the periods indicated:

Net revenues decreased to $12.2 million in the first quarter of 2005 from $13.8 million in the first quarter of 2004. This decrease was primarily the result three factors, all related to our wireless infrastructure OEM customers. First, our OEMs rescheduled certain Amplifier and Signal Source division shipments from the first quarter of 2005 into the second quarter of 2005. Second, sales to our OEMs in the first quarter of 2005 were at lower average selling prices compared to the first quarter of 2004 as a result of our OEMs negotiating lower prices for 2005. This also impacted our Amplifier and Signal Source divisions. Lastly, some of our Amplifier division OEMs transitioned to more advanced semiconductor process technology products, which have lower average selling prices than some of our older products.

Sales into Asia increased to 43% of total net revenues primarily as a result of our OEMs increasingly outsourcing their manufacturing to contract manufacturers, primarily in China. Also contributing to the percentage increase in sales to Asia was an increase in sales to Chinese OEM customers as a result of our continued focus in the Asia region. Sales to Europe decreased to 23% of total net revenues, both as a result of the continued outsourcing of our OEM customers to their contract manufacturers and as a result of the order deferrals and shipment delays by European customers in the first quarter of 2005.

The decrease in distribution net revenues in the first quarter of 2005 compared to 2004 was primarily attributable to our increased focus on large OEM customers, many of whom prefer to have direct relationships with their suppliers, including us. In addition, in 2004, we began promoting the sales of our products to Asia through one of our resellers instead of through our distribution partners.

Cost of Revenues, Gross Margin and Gross Profit

Cost of revenues decreased to $6.8 million in the first quarter of 2005 from $7.4 million in the first quarter of 2004 primarily as a result of lower sales in the first quarter of 2005 compared to 2004. The reduction in sales was also the primary contributor to the decrease in our gross profit to $5.3 million in the first quarter of 2005 from $6.4 million in the first quarter of 2004. Gross margin decreased to 44% in the first quarter of 2005 from 46% in the first quarter of 2004. The decrease in gross margin was primarily attributable to the lower sales volume in our Amplifier and Signal Source divisions, as in periods in which volumes are low, our fixed manufacturing overhead costs are allocated to fewer units, thereby negatively impacting our gross margin when those products are sold. Also contributing to the decrease in gross margin was a less favorable mix of products shipped in the first quarter of 2005 compared to the first quarter of 2004 primarily in our Amplifier division. Additionally, in the first quarter of 2005, we experienced lower sales of previously written-down inventories compared to the first quarter of 2004. Sales of previously written-down inventories had a positive impact on our gross margin in the first quarter of 2005 of less than one percentage point compared to a positive impact on our gross margin in the first quarter of 2004 of approximately two percentage points. Operations personnel increased to 151 at March 31, 2005 from 149 at March 31, 2004.

Operating Expenses

Research and Development. Research and development expenses increased to $2.8 million in the first quarter of 2005 from $2.1 million in the first quarter of 2004. This increase was primarily attributable to costs of additional personnel engaged in research and development activities subsequent to the acquisition of ISG. Salaries and salary related expenses increased by approximately $366,000 in the first quarter of 2005 compared to the first quarter of 2004 primarily due to the acquisition of ISG.

Other contributory factors included additional costs associated with engineering material purchases, which added costs of approximately $171,000, software maintenance, which added costs of approximately $105,000 and higher facility costs, which added costs of approximately $53,000. Research and development personnel increased to 65 at March 31, 2005 from 52 at March 31, 2004 due to the addition of 13 R&D employees in December of 2004 as a result of the acquisition of ISG.

Sales and Marketing. Sales and marketing expenses decreased to $1.8 million in the first quarter of 2005 from $1.9 million in the first quarter of 2004. This decrease was primarily attributable to lower costs associated with inside and outside sales representative commissions due to lower sales in the first quarter of 2005. Inside and outside sales representative commissions decreased by approximately $139,000 in the first quarter of 2005 compared to the first quarter of 2004. Partially offsetting this decrease was an increase in salaries and salary related expenses, as a result of an increase in headcount and an increase in compensation for our sales and marketing employees. Sales and marketing and applications engineering personnel increased to 37 at March 31, 2005 from 36 at March 31, 2004. The acquisition of ISG resulted in the addition of one sales and marketing person in December 2004.

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General and Administrative. General and administrative expenses increased to $2.2 million in the first quarter of 2005 from $1.8 million in the first quarter of 2004. This increase was primarily attributable to a write-off of $215,000 of previously deferred costs associated with an equity financing and an increase in salaries and salary related expenses of approximately $183,000. The increase in salaries and salary related expenses was due to an increase in headcount and an increase in compensation for our general and administrative employees. Other contributory factors included higher costs associated with professional fees (i.e. legal, accounting and public company related expenses) and employee relocation costs that were offset by reduced costs associated with Directors and Officers insurance premiums. General and administrative personnel increased to 34 at March 31, 2005 from 32 at March 31, 2004. The acquisition of ISG resulted in the addition of one general and administrative person in December 2004.

Amortization of Deferred Stock Compensation. During the three months ended March 31, 2004, we recorded $3,000 of amortization of deferred stock compensation. The deferred stock compensation was fully amortized in the first quarter of 2004.

Amortization of Acquisition-Related Intangible Assets

We recorded amortization of $465,000 in the first quarter of 2005 and $431,000 in the first quarter of 2004 related to our acquired intangible assets.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, includes income from our cash and available-for-sale securities, interest expense from capital lease financing obligations and other miscellaneous items. We had net interest and other income of $61,000 in the first quarter of 2005 and $27,000 in the first quarter of 2004. The increase in net interest and other income in the first quarter of 2005 compared to the first quarter of 2004 was primarily attributable to an increase in interest rates.

Provision for (Benefit from) Income Taxes

We recorded a $77,000 benefit from income taxes in the first quarter of 2005. The benefit from income taxes represents our current estimated tax rate for the full year of 2005 and consists of federal and state minimum taxes and income taxes on the earnings of certain foreign subsidiaries. The difference between the benefit from income taxes that would be derived by applying the statutory rate to our loss before income taxes and the benefit actually recorded is due primarily to the impact of state and foreign taxes including other miscellaneous non-deductible items offset by federal net operating losses not utilized.

Liquidity and Capital Resources

We have financed our operations primarily through the private sale in 1999 of mandatorily redeemable convertible preferred stock (which was subsequently converted to common stock) and from the net proceeds received upon completion of our initial public offering in May 2000. In addition, we generated cash flows from operations of $4.9 million in 2004 and $831,000 in the first quarter of 2005. As of March 31, 2005, we had cash and cash equivalents of $3.0 million and short-term investments of $7.9 million. At March 31, 2005, our working capital approximated $21.4 million. In addition, we had $1.0 million of restricted cash as of March 31, 2005. At March 31, 2005, short-term debt totaled $38,000 and represented less than one percent of stockholders’ equity. We did not have any long-term debt at March 31, 2005.

Net cash used in, provided by operating activities

Operating activities provided cash of $831,000 in the first quarter of 2005. In first quarter of 2005, the primary source of cash was a reduction in accounts receivable as well as an increase in accounts payable. Uses of cash in the first quarter of 2005 were increases in other assets and decreases in accrued acquisition costs and accrued restructuring.

Our accounts receivable were $2.0 million lower at the end of the first quarter of 2005 compared to the end of 2004. The decrease is primarily attributable to a $2.9 million decrease in net revenues in the first quarter of 2005 compared to the fourth quarter of 2004. Also, in the first quarter of 2005 we collected a significant amount of the accounts receivable on our balance sheet at December 31, 2004 related to the acquisition of ISG at the end of 2004.

Our days sales outstanding remained at 66 days in the first quarter of 2005 consistent with the fourth quarter of 2004. Our DSO’s were positively impacted by collecting a significant amount of the accounts receivable on our balance sheet at December 31, 2004 related to the acquisition of ISG at the end of 2004. This positive effect was offset by an increase in shipments, as a percentage of net revenues, to our OEM customers, who typically pay us more slowly than our non-OEM customers.

Inventories increased to $8.7 million at March 31, 2005 from $8.5 million at December 31, 2004. The increase was primarily attributable to us carrying a higher level of work-in-process and finished goods inventory as a result of our OEMs rescheduling certain Amplifier and Signal Source division shipments from the first quarter of 2005. In addition, we increased safety stock levels for certain finished goods products, as we deemed appropriate.

Our inventory turns decreased to 3.2 at March 31, 2005 from 3.6 as we exited 2004. The decrease in inventory turns was primarily attributable to the build in work-in-process and finished goods inventory as described above.

Accounts payable increased to $3.7 million at March 31, 2005 from $3.1 million at December 31, 2004. The increase in accounts payable in the first quarter of 2005 was primarily attributable to an increase in purchasing activity.

Accrued restructuring decreased to $289,000 at March 31, 2005 from $518,000 at December 31, 2004. Accrued restructuring decreased by $229,000 due to severance payments made to terminated employees and lease commitment payments.

Accrued acquisition costs decreased to $30,000 at March 31, 2005 from $779,000 at December 31, 2004 primarily as a result of payments made in the first quarter of 2005 related to our acquisition of ISG.

Other assets (current and non-current) increased to $2.5 million at March 31, 2005 from $2.1 million at December 31, 2004 primarily as a result of purchases of software licenses.

Net cash used in investing activities totaled $496,000 in the first quarter of 2005. The primary use of cash in investing activities in the first quarter of 2005 was for purchases of capital equipment.

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As a result of our acquisition of ISG at the end of 2004, additional cash consideration of up to $7,150,000 may become due and payable for the achievement of margin contribution objectives attributable to sales of selected products for periods through December 31, 2007. The first installment of any such payments would be due in 2006 if earned, and would be a maximum amount of $1.15 million. Additional payments of up to $3.0 million each may be paid in 2007 and 2008.

Cash provided by financing activities totaled $259,000 in the first quarter of 2005. The major financing inflow of cash in each quarter related to proceeds from employee stock plans. The major financing use of cash in each quarter was for principal payments on capital lease obligations. We expect that our capital lease payments will decrease in the near future as our capital lease agreements expire. Our capital lease obligations totaled $38,000 as of March 31, 2005.

Under the current economic and telecommunications market conditions and the current company structure, and outlook for 2005, we expect that we will be able to fund our working capital and capital expenditure needs from the cash generated from operations for the foreseeable future. Other sources of liquidity that may be available to us are the leasing of capital equipment, a line of credit at a commercial bank, or the sale of Company securities. The issuance of any additional shares would result in dilution to our existing stockholders. If we draw on the other sources of liquidity and capital resources noted above to grow our business, execute our operating plans, or acquire complementary technologies or businesses, it could result in increased expense and lower profitability.

Contractual Obligations

As of March 31, 2005, our contractual obligations, including payments due by period, were as follows (in thousands):

Purchase commitments are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders. We include in purchase commitments contractual obligations we have with our vendors who supply us with our wafer requirements for IC-based products. Because the wafers we purchase are unique to these suppliers and involve significant expense, our agreements with these suppliers prohibit cancellation subsequent to the production release of the products in our suppliers’ manufacturing facilities, regardless of whether our end customers cancel orders with us or our requirements are reduced. Purchase orders or contracts for the purchase of raw materials, other than wafer requirements for IC-based products, and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current manufacturing needs and are generally fulfilled by our vendors within short time horizons. Except for wafers for our IC-based products, we do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months.

We also include in purchase commitments contractual obligations we have with a vendor for outsourced manufacturing services. Because certain of the components purchased by this vendor are unique and cannot be used by its other customers, our agreement to fulfill the contract prohibits cancellation of certain components subsequent to the vendor placing purchase orders with its suppliers. We also enter into contracts with other vendors for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.

We expect to fund these commitments with cash flows from operations. The expected timing of payments of the obligations discussed above is based upon current information. Timing and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Off-Balance-Sheet Arrangements

As of March 31, 2005 we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”) and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first period of the next fiscal year beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the first quarter of 2006, beginning January 1, 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either

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as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a material adverse impact on the Company’s consolidated results of operations and earnings per share. The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R.

Business Outlook

This business outlook represents the view of management as of the date of this Quarterly Report on Form 10-Q and under the current economic and telecommunications market conditions, and the current company structure. It contains many forward-looking statements. 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.

In 2004 as compared to 2003, we saw an increase in the demand for our products across a broad spectrum of customers and applications and for a wide variety of our products. We experienced a slight weakening in our sales in the fourth quarter of 2004 and a more pronounced decline the first quarter of 2005, due in large part to deferrals and shipment delays resulting from revised OEM forecasts. Given our sales results in the fourth quarter of 2004 and the first quarter of 2005, it is uncertain whether the overall increase in sales in 2004 over 2003 represents a significant long-term upturn in demand from our end customers, or a short-term upturn, which is a critical uncertainty in assessing our financial outlook.

We believe that the primary factors affecting our revenue outlook for the remainder of 2005 will be the extent of growth in the overall communications and A&D markets, as well as the demand from our customers for any new products we may introduce. We continue to focus on our goal of growing revenues by increasing the market share of our existing products, and by diversifying our end markets through the development of new products and the addition of complementary products.

We believe the most significant influences on our outlook for gross margin for the remainder of 2005 will be the factors mentioned under “Gross Profit and Margin Overview” above, including product features, product type, market, sales channel, level of integration of the product, and the efficiency and effectiveness of our manufacturing operations. Increasing our gross profit and our gross margin are key goals for the remainder of 2005.

With respect to operating expenses, we believe that the single largest factor affecting our overall operating expenses will be the extent of growth in our customers’ end markets and the resulting impact on our net revenues. In response to the decline in sales we experienced in the first quarter of 2005, we have begun to implement cost cutting measures intended to bring our operating expenses more in line with our revised sales expectations. If the lowered sales activity we experienced in the first quarter of 2005 continues in future quarters, we anticipate taking further actions to adjust our operating expenses accordingly.

As mentioned earlier in this MD&A, we believe our continued success is dependent on technological advancement, including developing new technologies and differentiated products for our various market segments, driven by our research and development spending for 2005. Our research and development expenses could vary significantly from quarter to quarter depending largely on the timing of wafer and mask set purchases.

Regarding general and administrative expense, we believe the most significant factor that might impact our estimates will be the amount and timing of the cost for complying with corporate governance and accounting rule pronouncements.

Our expenses will also vary depending upon the level and type of any acquisition or offering activity we may engage in during a given period. These activities may result in transaction-related, one-time charges and amortization of acquisition-related intangible assets.

We believe the most significant factors influencing our cash flow from operations for the remainder of 2005 will be our ability to generate net income, the length of time it takes to collect our accounts receivable and the amount of inventory we will have to buy to support our customer orders. We believe the most significant factors influencing our non-operating cash flow for the remainder of 2005 will be our capital expenditures and the amount of cash received from employee stock plans. We expect that we will be able to fund our working capital and capital expenditure needs for the foreseeable future from the cash generated from operations.

We believe the most important items affecting our accounts receivable management will be the linearity of our shipments to, and the percentage of total net revenue from, our large OEM customers, and their CMs. Also impacting our accounts receivable management will be the geographic location of our shipments, particularly in Asia. Our large OEMs, and in particular their CMs, as well as our customers in Asia, generally pay more slowly than our other customers thereby slowing our cash collection of our accounts receivable. We expect the current trend toward large wireless OEMs outsourcing their manufacturing to continue. We also expect the trend of increasing sales into Asia to continue. With the visibility we have now into this mix, we expect our DSO’s to increase in 2005 compared to 2004.

We believe that the two largest factors affecting our cash usage in inventory will be the order pattern of our customers and the amount of inventory required to support our forecasted demand. As a result of our expectations regarding our future sales, we may have to increase our inventory. With the visibility we now have into these factors, our goal is to keep our inventory turns reasonably consistent with our experience in 2004.

We believe the largest factors influencing cash usage for capital expenditures will be the order patterns of our customers. We will continue to purchase a limited amount of capital equipment in response to these orders.

Factors that may influence the level of proceeds we receive from employee stock plans include our stock price level and employee cash needs for personal reasons.

RISK FACTORS

Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q.

We have a history of significant operating losses. If we are unable to increase our gross profit sufficiently to offset our operating expenses, our history of operating losses will continue.

Although our income from operations approximated $186,000 for 2004, we incurred significant losses from operations in the first quarter of 2005 and the years ended December 31, 2003 and 2002. Losses from operations approximated $2.0 million in the first quarter of 2005, $6.7 million in the year ended December 31, 2003 and $11.4 million in the year ended December 31, 2002. As of March 31, 2005, our accumulated deficit was approximately $91.0 million. It is possible that we will not generate a sufficient level of gross profit to return to or increase our profitability.

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Our gross profit depends on a number of factors, some of which are not within our control, including:

As a result of these factors, we may be unable to maintain or increase our gross profit in future periods. If we are unable to increase our gross profit sufficiently to offset our operating expenses, we will not return to profitability, and our history of operating losses will continue.

Even if we do achieve significant gross profit from our product sales, our operating expenses may increase over the next several quarters, as we may, among other things:

As a result, we may need to significantly increase our gross profit to the extent we experience an increase in operating expenses. We may be unable to do so, and therefore, we cannot be certain that we will be able to return to or increase profitability on a quarterly or annual basis, if at all.

Our operating results will fluctuate and we may not meet quarterly financial expectations, which could cause our stock price to decline.

Our quarterly operating results have varied significantly in the past and are likely to vary significantly in the future based upon a number of factors, many of which we have little or no control over. Factors that could cause our operating results to fluctuate include:

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The occurrence of these and other factors could cause us to fail to meet quarterly financial expectations, which could cause our stock price to decline. For example, in the first quarter of 2005 and the fourth quarter of 2004, our financial results were below investment community expectations, in part due to rescheduling of customer orders, and our stock price subsequently declined.

Our results may suffer if we are not able to accurately forecast demand for our products.

Our business is characterized by short-term orders and shipment schedules. Customer orders can typically be cancelled or rescheduled without significant penalty to the customer. Because we do not have substantial non-cancelable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which can be highly unpredictable and can fluctuate substantially.

During periods of industry downturn, such as we have experienced in the past, customers do not generally order products as far in advance of the scheduled shipment date as they do during periods when our industry is not in a downturn. We therefore experienced lower levels of backlog during the last downturn, making it more difficult for us to forecast production levels, capacity and net revenues. We are currently in a period where it is difficult to predict future growth in the markets we serve, making it more difficult to estimate requirements for production capacity. If we are unable to plan inventory and production levels effectively, our business, financial condition and results of operations could be materially adversely affected.

From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers and foundries, we may order materials in advance of customer demand. This advance ordering has in the past and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors make our products less saleable. Accordingly, our business, financial condition and results of operations could be materially, adversely affected.

We expect to make future acquisitions, which involve numerous risks.

We have in the past and will continue to evaluate potential acquisitions of, and investments in, complementary businesses, technologies, services or products, and expect to pursue such acquisitions and investments if appropriate opportunities arise. However, we may not be able to identify suitable acquisition or investment candidates in the future, or if we do identify suitable candidates, may not be able to make such acquisitions or investments on commercially acceptable terms, or at all. In the event we pursue acquisitions, we will face numerous risks including:

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Even if an acquisition or alliance is successfully integrated, we may not receive the expected benefits or synergies of the transaction. Past transactions have resulted, and future transactions may result, in significant costs and expenses and charges to earnings. The accounting treatment for any acquisition may result in significant goodwill, which, if impaired, will negatively affect our consolidated results of operations. The accounting treatment for any acquisition may also result in significant in-process research and development charges, which will negatively affect our consolidated results of operations in the period in which an acquisition is consummated. In addition, any completed, pending or future transactions may result in unanticipated expenses or liabilities associated with the acquired assets or businesses. Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions. The incurrence of indebtedness could be detrimental to our results of operations, and the issuance of equity securities could be dilutive to our existing stockholders. Any or all of the above factors may differ from the investment community’s expectations in a given quarter, which could negatively affect our stock price.

Our gross margin will fluctuate from period to period.

Numerous factors will cause our gross margin to fluctuate from period to period. For example, the gross margin on sales to our large OEM customers has historically been lower than on sales through our distribution channel or sales to some of our smaller direct customers, primarily due to the bargaining power attendant with large OEM customers and their higher product volumes. If, as we expect, these larger equipment OEMs and other global OEMs continue to account for a majority of our net revenues for the foreseeable future, the continuance of this trend will likely have a negative impact on our gross margins in future periods. In addition, sales of our IC products have historically yielded a higher gross margin than our MCM products. Therefore, increased sales of MCM products in a given period will likely have a negative effect on our gross margin. In addition, we anticipate that sales of certain of our recently acquired broadband products, in particular satellite radio antennas, will have lower gross margins than sales of our wireless infrastructure products. Therefore, increased sales of satellite radio antenna products in a given period will likely have a negative effect on our gross margin. Other factors that could cause our gross margin to fluctuate include the features of the products we sell, the markets into which we sell our products, the level of integration of our products, the efficiency and effectiveness of our manufacturing operations, provisions for excess inventories and sales of previously written-down inventories. As a result of these or other factors, we may be unable to maintain or increase our gross margin in future periods.

Our growth depends on the growth of the wireless and wireline communications infrastructure market. If this market does not grow, or if it grows at a slow rate, demand for our products may fail to grow or diminish.

Our growth will depend on the growth of the telecommunications industry in general and, in particular, the market for wireless and wireline infrastructure components. We cannot assure you that the market for these products will grow at all. If the market does not grow or experiences a downturn, we may be unable to expand our business. In the past, there have been reductions throughout the worldwide telecommunications industry in component inventory levels and equipment production volumes, and delays in the build-out of new wireless and wireline infrastructure. These events have had an adverse effect on our operations and caused us, in the past, to lower our previously announced expectations for our financial results, which caused the market price of our common stock to decrease. The occurrence of the events described above could result in lower or erratic sales for our products and could have a material adverse effect on our business, financial condition and results of operations. A substantial portion of our net revenues are currently derived from sales of components for wireless infrastructure applications. As a result, downturns in the wireless communications market, such as the significant downturn that began in 2001, could have a material adverse effect on our business, financial condition and results of operations.

We depend on a relatively small number of customers, many of which are concentrated in the wireless communications market, for a significant portion of our net revenues. The loss of sales to any of these customers, or a downturn in that market, could adversely affect our net revenues.

A relatively small number of customers account for a significant portion of our net revenues in any particular period. For example, in the first quarter of 2005, sales to Motorola, represented 16% of net revenues; sales through Avnet, one of our distributors and resellers, represented 14% of net revenues; and sales through Acal, another of our distributors and resellers, represented 12% of net revenues. In addition, wireless infrastructure OEMs, such as Ericsson, account for a significant amount of our net revenues, either directly or through sales to their contract manufacturers such as Celestica. For example, in the first quarter of 2005, Ericsson and Motorola each accounted for, directly or indirectly, more than 10% of our net revenues. While we do enter into long-term supply agreements with customers from time to time, these contracts typically do not require the customer to buy any minimum amount of our products, and orders are typically handled on a purchase order by purchase order basis. The loss of any one of these customers could limit our ability to sustain and grow our net revenues.

Sales to our large OEM customers have been affected by a pattern of product price decline, which can harm our business.

The market for our wireless communications products is characterized by rapid technological change, evolving industry standards, product obsolescence, and significant price competition, and, as a result, is subject to decreases in selling

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prices. We are unable to predict future prices for our products, but we expect that prices for products that we sell to our large wireless infrastructure OEM customers, who we expect to continue to account for a majority of our net revenues for the foreseeable future, will continue to be subject to significant downward pressure. Wireless infrastructure OEMs continue to require components from their suppliers, including us, to deliver improved performance at lower prices. Accordingly, our ability to maintain or increase net revenues will be dependent on our ability to increase unit sales volumes of existing products and to successfully develop, introduce and sell new products with higher prices into both the wireless infrastructure and other markets. We are also making a significant effort to develop new sales channels and customer bases in which we hope price competition will not be as significant as it is in selling to large wireless infrastructure OEMs. There can be no assurance that we will be able to develop significant new customers outside the wireless infrastructure market, increase unit sales volumes of existing products, or develop, introduce and/or sell new products.

The declining selling prices we have experienced in the past and the pricing pressure we continue to face in the wireless infrastructure market have also negatively affected and may in the future negatively affect our gross margins. To maintain or increase our gross margins, we must continue to meet our customers’ design and performance needs while reducing our costs through efficient raw material procurement and process and product improvements. Even if we are able to increase unit sales volumes and reduce our costs per unit, there can be no assurance that we would be able to maintain or increase net revenues or profits.

If we fail to introduce new products in a timely and cost-effective manner, our ability to sustain and increase our net revenues could suffer.

The markets for our products are characterized by new product introductions, evolving industry standards and changes in manufacturing technologies. Because of this, our future success will in large part depend on our ability to:

We estimate that the development cycles of some of our products from concept to production could last more than 12 months. We have in the past experienced delays in the release of new products. We may not be able to introduce new products in a timely and cost-effective manner, which would impair our ability to sustain and increase our net revenues.

Product quality, performance and reliability problems could disrupt our business and harm our financial condition and results of operations.

Our customers demand that our products meet stringent quality, reliability and performance standards. RF components such as those we produce may contain undetected defects or flaws when first introduced or after commencement of commercial shipments. In addition, some of our products are manufactured using process technologies that are relatively new and for which long-term field performance data are not available. As a result, defects or failures have in the past, and may in the future occur relating to our product quality, performance and reliability, despite testing by us, our suppliers or our customers. If these failures or defects occur or become significant, we could experience:

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