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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended March 31, 2005

OR

Commission File No. 0-14225

EXAR CORPORATION

(Exact Name of Registrant as specified in its charter)

48720 Kato Road, Fremont, CA 94538

(Address of principal executive offices, Zip Code)

Registrant’s telephone number, including area code: (510) 668-7000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK

(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2004 was $595,159,824 based on the last sales price reported for such date as reported on The Nasdaq Stock Market, Inc.

The number of shares outstanding of the Registrant’s Common Stock was 42,819,980 as of May 31, 2005, net of treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s 2005 Definitive Proxy Statement to be filed not later than 120 days after the close of the 2005 fiscal year are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Report.

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EXAR CORPORATION AND SUBSIDIARIES

INDEX TO

ANNUAL REPORT ON FORM 10-K

FOR FISCAL YEAR ENDED MARCH 31, 2005

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PART I

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Annual Report”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are generally written in the future tense and/or may generally be identified by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements contained in this Annual Report include, among others, statements made in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations- “ Outlook for Fiscal Year 2006” and elsewhere regarding (1) the Company’s market share and position, (2) the Company’s design wins, (3) the Company’s product enhancements, (4) the Company’s revenue growth and decline, (5) the Company’s growth and net sales, (6) the Company’s gross profits, (7) the Company’s research and development efforts and related expenses, (8) the effect of interest rates on the Company’s interest income, (9) the Company’s anticipation that it will continue to finance operations with cash flows from operations, existing cash and investment balances, and some combination of long-term and/or lease financing and additional sales of equity securities, (10) the Company’s belief that its cash and cash equivalents, short-term marketable securities and cash flows from operations will be sufficient to satisfy working capital requirements and capital equipment needs for at lest the next 12 months, (11) the Company’s competitive position, (12) the Company’s belief that its success will continue to depend on its distributors and sales representatives, (13) the Company’s expectations that revenue from sale of its communications products will grow over the long-term, (14) the Company’s selling, general and administrative expenses, and (15) the possibility of future acquisitions and investments. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that could cause actual results to differ materially from those included herein include, but are not limited to, the information contained under the captions “Part I, Item 1. Business,” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and, in particular, “Risk Factors.” The Company disclaims any obligation to update information in any forward-looking statement.

ITEM 1.    BUSINESS

Overview

Exar Corporation (“Exar” or the “Company”) designs, develops and markets high-performance, high-bandwidth physical interface and access control solutions that facilitate the aggregation and transport of signals in access, metro and wide area networks over the worldwide communications infrastructure. The Company’s industry-proven analog and digital design expertise, system-level knowledge and standard complementary metal oxide semiconductors (“CMOS”) process technologies provides original equipment manufacturers (“OEMs”) with innovative, highly integrated circuits (“ICs”) addressing standards such as T/E carrier, ATM and SONET/SDH. In addition, the Company has a portfolio of clock and timing products that expanded last year with the introduction of a family of clock generation solutions that complement Exar’s clock distribution devices announced in fiscal year 2003. The clock and timing product lines leverage Exar’s phase lock loop (“PLL”) technology which is used extensively in its existing network and transmission products. The clock and timing products are targeted at wireless base stations, network switches and routers. The Company also provides one of the industry’s most comprehensive families of serial communications solutions comprised of low voltage, multi-channel universal asynchronous receiver transmitters (“UARTs”). Last year, Exar extended its product offering by releasing what the Company believes are the industry’s first 66MHz PCI 3.0 compliant UARTs targeting applications where continuous redundancy and Quality of Service at higher bus clock speeds are critical. UARTs are well suited to increase data transfer efficiency for various industrial, telecommunications and computer server applications. In addition, the Company designs and markets IC products that address select applications for the video and imaging markets.

Exar was incorporated in California in 1971 and reincorporated in Delaware in 1991. Exar’s Common Stock trades on the NASDAQ Stock Market, Inc. (“NASDAQ”) under the symbol “EXAR”. See the information

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in “Part II Item 8, Financial Statements and Supplementary Data” for information on the Company’s financial position as of March 31, 2005 and 2004 and results of operations and cash flows for the periods ended March 31, 2005, 2004 and 2003.

Exar believes its broad product offerings provide its customers the following benefits:

Key elements of the Company’s solution include:

Commitment to Connectivity.    Exar remains steadfast to the Company’s commitment to connectivity—a strategic principle that drives Exar’s product strategies and serves as a foundation for customer and vendor engagements. Connectivity describes our distinctive approach in creating and providing value to our shareholders, employees, customers and suppliers.

Leading Analog and Mixed-Signal Design Expertise.    Exar has over 30 years of proven technical competency in developing analog and mixed-signal ICs. As a result, the Company has developed deep expertise in these areas and a comprehensive library of design elements. For example, the Company believes that it has particularly strong expertise in the design of high-speed, low-jitter phase-locked loops, which are key elements in its mixed-signal transceiver, jitter attenuator, data aggregation mapper products and clock devices. As a result, Exar can provide its customers with solutions that typically exceed standard specifications and allow them flexibility in designing other system elements.

Comprehensive Solutions to Enhance System Integration.    The combination of Exar’s design and system-level expertise allows it to provide a comprehensive solution that encompasses hardware, software and applications support. Exar believes that, by using its solutions, OEMs can efficiently integrate the Company’s devices into their systems, better leverage their development resources and reduce their time-to-market.

Compelling Performance Solutions.    The Company uses its systems expertise and its analog, digital and mixed-signal design techniques to architect high-performance products based on standard CMOS process technologies. Exar believes that these CMOS processes are proven, stable, predictable and able to meet its customers’ speed, power and performance requirements at a competitive price point.

The Company’s OEM customers include, among others, Adtran Inc. (“Adtran”), Alcatel, Cisco Systems Inc. (“Cisco”), Digi International, Inc. (“Digi International”), Hewlett-Packard Company (“Hewlett-Packard”), Huawei Technologies Company, LTD. (“Huawei”), Logitech International S.A. (“Logitech”), Lucent Technologies, Inc. (“Lucent”), Marconi Corporation Plc (“Marconi”), Mitsubishi Electronic Corporation of Japan (“Mitsubishi Electronics”), NEC Corporation (“NEC”), Nokia Corporation (“Nokia”), Plantronics, Inc. (“Plantronics”), Siemens A.G. (“Siemens”), and Tellabs, Inc. (“Tellabs”). For the fiscal year ended March 31, 2005, no one OEM customer represented 10% or more of net sales.

Industry Background

Communications technology has evolved from simple analog voice signals transmitted over networks of copper telephone lines to complex analog and digital voice, video and data signals transmitted over hybrid

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networks of media, such as copper, coaxial and fiber optic cables. This evolution has been driven by large increases in the number of users and the complexity and variety of the data transmitted over networks resulting from:

The majority of installed communications systems were designed to transmit only voice communication, and, therefore, are inadequate for the high-bandwidth transmission of both voice and data. Access to the public communications network is typically based on asynchronous technologies, such as T/E carrier over copper wire. The demand for greater bandwidth is driving a migration from lower-speed T1/E1 to higher-speed T3/E3 transmission rates. The T1/E1 standard permits the transmission of data at 1.5 Mbps/2.0 Mbps, and the T3/E3 standard permits the transmission of data at 45 Mbps/34 Mbps. The backbone of the public network is built on an optical fiber transmission medium that employs synchronous technologies such as SONET/SDH. Similar to the utilization of faster transmission rates over copper wire, SONET/SDH protocols such as OC-3 (155 Mbps) are being upgraded to OC-12 (622 Mbps), OC-48 (2.5 Gbps) and OC-192 (10 Gbps) to increase the bandwidth over a single optical fiber.

The market dynamics of the communications industry changed significantly between 2000 and 2002. The industry experienced a severe downturn and it became evident the telecommunications infrastructure had been built out in excess of actual end-user demand. Many carriers that spent billions of dollars expanding their networks rapidly decreased capital expenditures on networking equipment in an effort to stabilize their financial conditions. This dynamic severely impacted Exar’s customers during this period and many OEMs, in addition to eliminating excess inventory, underwent extensive restructuring and significantly downsized their organizations to reduce expenses. Beginning in calendar year 2003, the Company noted increased development activity within the telecommunications industry as OEMs sought to support increased bandwidth requirements from end-users over the existing telecommunications infrastructure. At the beginning of calendar year 2004, the Company experienced an increase in customer orders in anticipation of growth in end demand. As end demand growth proved to be lower than anticipated by the Company’s customers, they reduced their inventory stocks, thereby reducing orders placed with the Company during the remainder of calendar year 2004. At the same time, the Company’s OEM customers were and continue to be under tremendous pressure to develop new products for access and MAN markets that will enable carriers to leverage their current network infrastructure.

To address these evolving requirements of the communications industry, OEMs must develop and introduce increasingly sophisticated systems with fewer engineering resources. To achieve the performance and functionality required of these systems, communications OEMs are using increasingly complex communications ICs, which now account for a significant portion of the value-added proprietary content of these systems. As a result of new equipment introductions, coupled with the reduction in their technical staff, the proliferation of transmission standards and the difficulty of designing and producing communications ICs internally, equipment suppliers are increasingly outsourcing the design and production of the ICs incorporated into their systems.

The key ICs contained in a typical communications system include physical interface, access control, clocks, network processor, traffic manager and switch fabric devices. Because physical interface and access control ICs interface with the transmission media and are critical to increasing bandwidth, these ICs must offer high-speed and robust performance. Therefore, communications equipment OEMs seek IC suppliers that possess extensive analog and digital expertise to provide high-speed, mixed-signal solutions to bridge the analog physical world and the digital computing environment. This must be coupled with system-level expertise so that a supplier can quickly bring to market high-performance, highly reliable ICs with optimal feature sets.

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Strategy

Exar strives to be a leading provider of physical layer high-performance, high-bandwidth IC solutions for use in the worldwide communications infrastructure. The Company also designs, develops and markets IC products that address the needs of the serial communications market. To achieve its business objectives, Exar employs the following strategies:

Focus on Growing Market Share within the Communications Markets.    Exar targets communications markets, including T/E carrier, ATM and SONET/SDH. The Company has built substantial expertise in the areas of analog and digital design, systems architecture and applications support. Exar believes that the integration of these capabilities enables the Company to develop solutions addressing the high-bandwidth physical layer requirements of communications systems OEMs. The Company’s broad product offerings support differentiated features that the Company believes will enable it to increase its market share.

Leverage Analog and Mixed-Signal Design Expertise to Provide Integrated System-Level Solutions.    Utilizing its strong analog and mixed-signal design expertise, the Company integrates mixed-signal physical interface devices with digital access control devices. The Company offers products that integrate transceivers with jitter attenuators and framers/ATM UNIs on a single IC. The Company’s data aggregation devices leverage its T/E carrier and SONET/SDH expertise, mapping multiple T3 data streams into a SONET/SDH stream. These configurations enable OEMs to use less board space and reduce their overall system cost. In the last two years, the Company has utilized its PLL knowledge to introduce new clock products for communications and server applications.

Expand the Company’s Revenue Content Per System.    Exar’s analog and mixed-signal design expertise have enabled the Company to build what it believes to be a technological lead and a strong market position in T3/E3 transceivers, T1/E1 transceivers and framer and SONET aggregation. The Company intends to leverage this lead and its established customer relationships to capture design wins for its physical layer products, thereby increasing the Company’s overall revenue content per system.

Strengthen and Expand Strategic OEM Relationships.    Exar’s OEM customers include Alcatel, Cisco, Digi International, Hewlett-Packard, Huawei, Lucent, NEC, Nokia and Tellabs. To promote the early adoption of its solutions, the Company actively seeks collaborative relationships with strategic OEMs during product development. The Company believes that OEMs recognize the value of Exar’s early involvement because designing their system products in parallel with the Company’s development can accelerate time to market for their end products. In addition, Exar believes that collaborative relationships help the Company to obtain early design wins and to reduce the market acceptance risk of its new products.

Leverage Broad Product Portfolio to Accelerate Communications Product Development.    Exar believes it has developed a strong presence in the serial communications market, where the Company has leading industry customers and proven technological capabilities. The Company’s design expertise has enabled it to offer a diverse portfolio of both industry standard and proprietary serial communications products. In addition, the Company has further expanded its communications portfolio by offering a family of clock distribution devices, which leverage technology common with its existing network and transmission products.

Use Standard CMOS Process Technologies to Provide Compelling Price/Performance Solutions.    Exar designs its products to be manufactured using standard CMOS processes. The Company believes that these processes are proven, stable and predictable and benefit from the extensive semiconductor-manufacturing infrastructure devoted to CMOS processes. Therefore, the Company believes that it can achieve a higher level of performance at a lower cost than competitors’ products based on alternative manufacturing technologies. However, in certain cases the Company may use other process technologies to take advantage of their performance advantages.

Leverage Fabless Semiconductor Model.     Exar has long-standing relationships with third-party assembly, test and wafer foundries to manufacture the Company’s ICs. The Company’s fabless approach allows it to avoid

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substantial capital spending, obtain competitive pricing, minimize the negative effects of industry cycles, reduce time to market, reduce technology and product risks, and facilitate the migration of the Company’s products to new CMOS process technologies, which reduce costs and power consumption plus optimizes performance. By leveraging the fabless model, Exar can focus on its core competencies of sales, marketing and product design and development.

Products

Communications

Exar’s products for T/E carrier, ATM and SONET/SDH applications include high-speed analog, digital and mixed-signal physical interface and access control ICs. The physical interface IC consists of a transmitter and receiver that, when integrated, is called a transceiver. Transceivers interface with the physical transmission media. Most of these high-speed, mixed-signal ICs convert parallel digital inputs into a single analog bit stream that is many times faster than the original signal. Access control circuits are digital circuits that format, or frame, the data, perform error checking, and in some applications, aggregate signals by mapping multiple lower-speed data streams to a single higher-speed stream. The figure below illustrates where the Company’s products are employed within networking equipment.

Exar’s communications products include analog front ends (“AFEs”), transmitters, receivers, transceivers (also known as line interface units or “LIUs”), PHYs, jitter attenuators, framers, clocks, ATM UNIs and data aggregation mappers. These products are used in networking equipment such as SONET/SDH Add/Drop Multiplexers (“ADMs”), PBX, central office switches, digital cross connects, multi-service provisioning platforms, routers and DSLAMs.

T1/E1

Exar offers the broadest range of products in the T1/E1 segment encompassing AFEs, short-haul and long-haul LIU’s and LIU/framer combinations that incorporate its industry first reconfigurable, relayless, redundancy with integrated termination resistors and jitter attenuators. Used individually, or in chip sets, Exar’s T1/E1/J1 devices offer customers key advantages including design flexibility, enhanced system reliability and standards compliance which are critical components of high-density, low-power system boards and line-cards. In addition, Exar’s T1/E1/J1 LIU combination products simplify the design process. Exar’s T1/E1 portfolio includes products with up to 21 channels of AFE, up to 14 channels LIU/JA and up to 8 channel LIU/framer combinations.

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T3/E3

The Company continues to enhance its T3/E3 physical interface solutions with integrated transceivers, covering one, two, three, four, six and twelve-channels, with or without integrated jitter attenuation, that achieve high performance levels, while requiring less board space and lower overall power in multi-port applications. Extending its jitter attenuation capabilities, Exar incorporates desynchronization in its transceivers and data aggregation mappers to solve complex timing issues associated with mapping/demapping from SONET/SDH (synchronous) to T3/E3 (asynchronous) environments. Last year, the Company introduced three new multi-channel DS3/E3 LIU/Framer/JA combination devices which offer customers additional design flexibility.

SONET/SDH

Exar’s data aggregation mapper solutions leverage the Company’s expertise in T/E carrier with SONET/SDH enabling the Company to provide unique solutions to the SONET/SDH market place. In addition to integrating SONET PHY capability into its data aggregation mappers, the Company also offers an OC-48 PHY and plans to complement these devices with additional OC-48 data aggregation solutions. Exar’s access control products include framers and ATM UNIs, in addition to its data aggregation mappers. Complementing Exar’s OC-3 to OC-48 SONET/SDH devices was the addition of a highly integrated and innovative OC-3/STM-1 to OC-192/STM-64 multi-rate framer. This product extends Exar’s SONET/SDH capabilities to cover all data rates starting from OC-3/STM-1 to OC-192/STM-64. In addition, the device enables significant flexibility in line card design coupled with substantial cost and power savings.

Clock and Timing

Whether regulating data transmissions or executing system instructions, clocks perform the critical role of producing precisely timed and repeated impulses that synchronize the overall system or other embedded applications. In fiscal 2004, Exar introduced a family of five new programmable skew clock components—clock distribution devices—targeted at high-performance system boards, offering flexibility to board designers by providing them with precision, low jitter, programmable skew, zero delay and fan out buffers. These were followed in fiscal 2005 by a series of Intelligent Dynamic Clock Switch (IDCS), or clock generation, devices. These devices offer features including dynamic switch, manual override, on-board redundancy and fail-safe operations plus other features that enable customers to develop easily applications that increase over-all system reliability. Exar offers both clock generation and distribution capabilities to customers targeting the wireless base station, network switch and router markets.

In addition, the Company also supplies a family of V.35 transceiver products used for data transmission, primarily in networking equipment such as routers and bridges.

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The following table describes some of the Company’s key communications products:

The Company introduced a number of new communications ICs in the fiscal year ended March 31, 2005 that provide an expanded line of T/E carrier products, SONET/SDH products, as well as clock distribution devices. With respect to T/E carrier, the Company introduced additional multi-channel, multi-function ICs to the portfolio, that integrate transceivers, jitter attenuators, framers and ATM UNIs. For SONET/SDH, Exar introduced additional devices focused on data aggregation,—combining OC-3 (155 Mbps) capability with OC-12 (622 Mbps) and OC-48 (2.5 Gbps) capabilities. In the clock and timing markets, Exar introduced a new family of clock ICs called Intelligent Dynamic Clock Switch (IDCS), which when added to the Company’s Programmable Skew Clocks (PSB) announced in fiscal 2004, make Exar one of the few companies offering both clock solutions.

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Serial Communications

There is a move from parallel to serial interfaces for chip-to-chip or system-to-system interconnects. By converting parallel links into serial, UARTs play a vital role in reducing the large number of wires and traces that are in the existing legacy designs. In addition to this conversion, an off-chip UART that is not part of a central processing unit (CPU) offers additional benefits by off loading functions such as interrupt processing and data flow control that enables increased CPU bandwidth.

Exar has one of the broadest ranges of highly-integrated UART products that are compatible with 16C550 industry standard devices. The product portfolio consists of single, dual, quad and octal channel devices with enhanced feature sets, and a broad range of packaging options. These products provide an easy migration path from one product generation to the next. All are highly-integrated UARTs with First-In, First-Out (“FIFO”) circuitry, which the Company believes are the de-facto industry standard for multi-channel FIFO UARTs used in multi-port applications. In addition to these solutions, the Company has one of the industry’s smallest (5x5x0.9mm) full-featured single-channel UARTs. This small package solution is ideal for a variety of portable and handheld applications in which board space is minimal and extended battery life is critical. In fiscal year 2005, Exar introduced a multi-channel 66MHz PCI 3.0 UART that provides an ideal solution for system management and administration of applications where continuous redundancy and quality of service at higher bus clock speeds are critical. It also enables an easy migration path from Exar’s 33MHz PCI interface devices for higher-speed applications.

Exar sells its UART products to the remote access, data collection, industrial automation, point-of-sale and handheld/mobile markets.

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The following table describes some of the Company’s key serial communications products:

Video and Imaging

Exar supplies high-performance analog-to-digital converters (“ADCs”), and integrated analog front ends (“AFEs”), for products such as digital copiers and scanners, digital still cameras (“DSCs”), and multifunctional peripherals (“MFPs”). These ICs incorporate scanning, faxing, copying and printing functions in a single integrated system. The Company uses advanced design techniques and process technologies to integrate low-power converter architectures with surrounding analog functions, thereby reducing system costs.

The following table describes some of the Company’s key products for the video and imaging markets:

Net sales for 2005, 2004 and 2003 fiscal years for the Company’s product lines are disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Sales and Customers

The Company markets its products in North and South America through 23 independent sales representatives and two independent, non-exclusive primary distributors, as well as the Company’s own direct sales organization. The Company currently has domestic support offices in or near Atlanta, Boston, Chicago, Dallas, Los Angeles and Fremont, California, Additionally, the Company is represented in Europe and the Asia/Pacific region by its wholly-owned foreign subsidiaries and international support offices in Kawasaki, Japan;

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Shanghai, China; and Valauris, France. In addition to these Exar offices, 22 independent sales representatives and other independent, non-exclusive distributors represent the Company in Europe and the Asia/Pacific region. The Company’s international sales represented 50.9%, 53.5% and 58.6% of net sales for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. Net sales by region for the 2005, 2004 and 2003 fiscal years are disclosed in “Part II, Item 8. Financial Statements and Supplementary Data, Note 12, Industry and Segment Information.”

For the 2005, 2004 and 2003 fiscal years, the Company’s long-lived assets were primarily located in the United States.

The Company’s OEM customers include, among others, the following:

Hewlett-Packard accounted for 26.4% of the Company’s net sales for the fiscal year ended March 31, 2003. For the fiscal years ended March 31, 2005, 2004 and 2003, no other OEM customer accounted for 10% or more of the Company’s net sales. The sharp decline in video, imaging and other products sales reflected a decision by the Company’s primary customer in imaging sales, Hewlett-Packard, to transition some of its production to a competing supplier. The Company sells its products to distributors and OEMs throughout the world. For the year ended March 31, 2005, worldwide sales through the Company’s two primary distributors for subsequent resale to OEMs or their subcontract manufacturers accounted for 36.8% of net sales. Future Electronics (“Future”) was and continues to be the Company’s largest primary distributor. Future, on a worldwide basis, represented 20.4%, 20.3% and 17.2% of net sales in fiscal years 2005, 2004 and 2003, respectively. The Company’s second largest primary distributor, Nu Horizons Electronics Corp. (“Nu Horizons”), accounted for 16.4%, 13.4% and 6.5% of net sales in fiscal years 2005, 2004 and 2003, respectively.

Manufacturing

Exar outsources all of its fabrication and assembly, as well as the majority of its testing operations. This fabless manufacturing model allows the Company to focus on its core competencies of sales, marketing and product design and development.

The majority of the Company’s current products are implemented in standard CMOS. The Company uses CMOS manufacturing processes to take advantage of that technology’s lower power consumption, cost-effectiveness, foundry availability and ever-increasing speed. Chartered Semiconductor Manufacturing (“Chartered”) manufactures substantially all of the CMOS semiconductor wafers from which the Company’s products are manufactured. The Company does not have long term supply agreements with Chartered. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.”

Most semiconductor wafers are shipped to the Company’s subcontractors in Asia for wafer test and assembly, where they are cut into individual die and packaged. Independent contractors in Hong Kong and

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Indonesia perform most of the Company’s assembly work. Following assembly, final test and quality assurance are performed either at the Company’s Fremont, California facility or at its subcontractors’ facilities in Asia. The combination of various functions makes the test process for analog and mixed-signal devices particularly difficult. Test operations require the programming, maintenance and use of sophisticated computer-based test systems and complex automatic handling systems.

Research and Development

Exar believes that the continued introduction of new products in its targeted and adjacent markets is essential to its growth. Exar’s research and development is focused on developing high-performance analog, digital and mixed-signal solutions addressing the high-bandwidth requirements of communications systems OEMs. Exar continues to make significant investments in advanced design tools and high-performance standard cell libraries. By utilizing these tools, the Company pursues the development of design methodologies that are optimized for reducing design-cycle time and increasing chances of first-time success. In order to support high pin-count devices, the Company continues to develop high-performance packages for its new products in collaboration with packaging suppliers. Exar spent $22.0 million, $21.8 million and $22.3 million on research and development in fiscal years 2005, 2004 and 2003, respectively.

Competition

The semiconductor industry is intensely competitive and is characterized by rapid technological change and a history of price reductions as production efficiencies are achieved in successive generations of products. Although the market for analog and mixed-signal integrated circuits is generally characterized by longer product life cycles and less dramatic price reductions than the market for digital integrated circuits, the Company faces substantial competition in each market in which it participates. Competition in the Company’s markets is based principally on technical innovation, product features, timely introduction of new products, quality and reliability, performance, price, technical support and service. The Company believes that it competes favorably in all of these areas.

Because the IC markets are highly fragmented, the Company generally encounters different competitors in its various target markets. Competitors with respect to the Company’s communications products include Agere Systems, Applied Micro Circuits Corporation, Integrated Device Technology, Inc., Intel Corporation, Mindspeed Technologies, Inc., PMC Sierra, Inc., TranSwitch Corporation and Vitesse Semiconductor Corporation. Competitors in the clock products area include Cypress Semiconductor, Integrated Circuit Systems, Inc. and FreeScale Semiconductor, Inc. Competitors in the Company’s serial communications and video and imaging markets include Royal Philips Electronics, Texas Instruments Incorporated and Wolfson Microelectronics LTD.

Backlog

Exar defines backlog to include OEM orders and distributor orders for which a delivery schedule has been specified for product shipment occurring during the succeeding six months. As of March 31, 2005, Exar’s backlog was $9.6 million, compared to $10.3 million as of March 31, 2004.

The Company’s business and, to a large extent, that of the entire communication semiconductor industry, is currently characterized by shortened order-to-shipment schedules. Sales are made pursuant to either purchase orders for current delivery of standard items or agreements covering purchases over a period of time, which are frequently subject to revision and cancellation. Lead times for the release of purchase orders depend on the scheduling practices of the individual customer, and the Company’s rate of bookings varies from month-to-month. In addition, Exar’s domestic distributor agreements generally permit the return of up to 10% of purchases of the preceding quarter for purposes of stock rotation and also provide for credits to distributors in the event that Exar reduces the price of any inventoried product. Since orders constituting the Company’s backlog are subject

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to changes in delivery schedules or to cancellation at the option of the customer without significant penalty, backlog is not necessarily an indication of future sales. The Company believes that its backlog as of any particular date may not be representative of actual sales for any succeeding six-month period.

Intellectual Property Rights

The Company has 111 patents issued and 21 patent applications pending in the U.S. The Company has 14 patents issued and 25 patent applications pending in various foreign countries. The Company’s existing patents will expire between 2005 and 2022, or sooner if it chooses not to pay renewal fees. The Company believes that its intellectual property is critical to its current and future success. However, the Company does not believe that it is materially dependent upon any one patent. To protect its intellectual property, the Company also relies on a combination of mask work registrations, trademarks, copyrights, trade secrets, employee and third party nondisclosure agreements and licensing arrangements. The Company may enter into license agreements or other agreements to gain access to externally developed products or technologies.

The Company may fail to adequately protect its intellectual property. Others may gain access to the Company’s trade secrets or disclose such trade secrets to third parties. Some or all of the Company’s pending and future patent applications may not result in issued patents that provide it with a competitive advantage. Even if issued, such patents, as well as its existing patents, may be challenged and later determined to be invalid or unenforceable. In addition, others may develop similar or superior products without access to or without infringing upon its intellectual property, including intellectual property that is protected by trade secret and patent rights.

The Company cannot be sure that its products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications or that the Company’s products do not infringe any patents or proprietary rights of third parties. Occasionally, the Company is informed by third parties of alleged patent infringement. In the event that any relevant claims of third-party patents are found to be valid and enforceable, the Company may be required to:

If the Company were required to take any of the actions described above or defend against any claims from third parties, its business, financial condition and results of operations could be harmed. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.”

Employees

As of March 31, 2005, the Company employed 268 full-time employees, with 120 in research and development, 55 in operations, 51 in marketing and sales and 42 in administration. Of the 120 research and development employees, 65 hold advanced degrees. The Company’s ability to attract, motivate and retain qualified personnel is essential to its continued success. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.” None of the Company’s employees is represented by a collective bargaining agreement, nor has the Company ever experienced a work stoppage due to labor issues. The Company believes its employee relations are good.

Available Information

The Company files electronically with the SEC its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current Reports on Form 8-K, and amendments to those Reports pursuant to Section 13 or 15(d) of

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the Securities Exchange Act of 1934. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding the Company. The Company makes available on its website at: www.exar.com, free of charge, copies of these documents as soon as reasonably practicable after filing or furnishing such documents to the SEC. Copies of such documents may be requested by contacting the Company’s Investor Relations Department at (510) 668-7201 or by sending an e-mail through the Investor Relations page on the Company’s website: www.exar.com.

GLOSSARY:    Exar uses a number of terms in this Annual Report which are familiar to industry participants but which some investors may not recognize. The Company has provided a glossary of some of these terms below.

Access:

Refers to the part of the network between a home or business and the public network.

Access Control Circuits:

An IC that formats or frames the data, performs error checking and in some applications aggregates signals by mapping multiple lower rate data streams to a single higher speed data stream.

Analog-to-Digital Converters (“ADCs”):

Convert an analog signal to a digital signal.

Add/Drop Multiplexer (“ADM”):

A device at an intermediate point on a transmission line that enables new signals to come in and existing signals to go out.

Analog Front Ends (“AFEs”):

An IC that conditions the analog signal received from a sensor and performs an analog-to-digital conversion.

Analog Integrated Circuits:

These semiconductor devices are used to electronically shape continuous real-world phenomena, such as sound waves, motion, heat, light and pressure. The electronic signals from analog ICs are typically translated into digital form and later converted back into analog forms that provide visual, auditory and tactile sensory stimuli.

Application-Specific Standard Product (“ASSP”):

A device tailored for a specific application that is sold on the open market to multiple customers with similar requirements. Customers will often differentiate their end product with unique software and hardware features.

Asynchronous Transfer Mode (“ATM”):

A fast packet switching protocol by which short packets or cells containing data, voice or video signals are moved over networks at high-speed. This high-speed switching technology is used as a backbone technology in carrier networks and large enterprises. ATM is designed to take advantage of high-speed transmission media such as T3/E3 and SONET.

ATM User Network Interfaces (“ATM UNIs”):

A device that provides the ATM Physical Layer (Physical Medium Dependent and Transmission Convergence sub-layers) interface for the public and private networks.

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Asynchronous Transmission:

Describes digital signals that are transmitted without precise clocking.

Backbone:

Backplane or bus which makes up the skeleton of a network.

Bandwidth:

Commonly defined as the volume of data that a transmission line can carry, measured in bits per second (“bps”). Traditional copper lines have the lowest bandwidth potential, while fiber optic lines have the highest.

A range of signal frequencies, measured in cycles per seconds or Hertz (“Hz”). Also refers to the speed at which data is transmitted, measured in bits per second (“bps”).

Broadband Communications:

Data transmission at speeds of equal to or greater than 1.5 Mbps.

Central Office (“CO”):

The main switching facility for a telephone company where larger telephone trunks are provisioned out in smaller lines to customers. Where fiber is connected to copper and vice versa.

Central Processing Unit (“CPU”):

The computational and control unit of a computer; the device that interprets and executes instructions. By definition, the CPU is the chip that functions as the “brain” of the computer.

Complementary Metal Oxide Semiconductor (“CMOS”):

Process technology used to manufacture silicon integrated circuits.

Carrier:

An organization that provides communications services.

Copper:

Usually small gauge where two wires are twisted together, “twisted pair.” Limited in the amount of information it can carry. Typically associated with “last mile” transport.

Design Win:

Exar defines as a minimum order of 100 units which signifies acceptance of a device by an OEM for use in their end product.

Digital Cross Connect:

An electronic switching system that routes digital signals among multiple paths without demultiplexing them.

Digital ICs:

Within these devices, transistors are used to switch discrete digital signals that are represented in two states: on or off, or “1” or “0”. With today’s process technologies, millions of transistors can be integrated on a single chip, resulting in enormous computing power.

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DSLAM: