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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K/A



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to
.



Commission File Number 000-27843



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Somera Communications, Inc.

(Exact
name of registrant as specified in its charter)



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 77-0521878                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)





301 S. Northpoint Drive, Coppell, TX 75019

(Address of principal executive
offices and zip code)



Registrants telephone
number, including area code: (972) 304-5660



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Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, $0.001 par value per share

(Title of Class)



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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, 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. Yes ̈No x



Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 under the Securities Exchange Act of 1934). Yes x    No ̈



The aggregate market value of the voting stock held by non-affiliates of the Registrant (based on the closing sale price of the Common Stock
as reported on the NASDAQ National Market as of June 25, 2004) was approximately $74,136,626. The number of outstanding shares of the Registrants Common Stock as of the close of business on March 14, 2005 was 49,975,461.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K to the extent stated herein.



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EXPLANATORY NOTE



Somera Communications, Inc. (the Registrant) is filing this Amendment to the Form 10-K (originally filed by the
Registrant on March 31, 2005) for the purpose of including Item 8 (Financial Statements) in its entirety, as amended to reflect the changes made in the Amendment to the Form 10-K filed by the Registrant on April 13, 2005. This Amendment to Form 10-K
does not otherwise change or update the disclosures set forth in the Form 10-K as originally filed and amended, and does not otherwise reflect events occurring after the filing of the Form 10-K.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of Somera
Communications, Inc.:



We have completed an integrated audit of Somera
Communications, Inc.s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.



Consolidated financial statements and financial statement schedule



In our opinion, the consolidated financial statements listed in the accompanying index, present fairly, in all material respects, the financial position of Somera
Communications, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



Internal control over financial reporting



Also, in our opinion, managements assessment, included in Managements Report on
Internal Control over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established inInternal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we
consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.



PRICEWATERHOUSECOOPERS LLP



Los Angeles, California

March 25, 2005



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SOMERA COMMUNICATIONS, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------ | -
|                                                                                                                                                                  |  | December 31, 2004 |         |   | December 31, 2003 |  
|ASSETS                                                                                                                                                            |  |                   |         |   |                   |   |        |  
|Current assets:                                                                                                                                                   |  |                   |         |   |                   |   |        |  
|Cash and cash equivalents                                                                                                                                         |  | $                 | 7,654   |   |                   | $ | 30,642 |  
|Short-term investments                                                                                                                                            |  |                   | 32,757  |   |                   |   | 16,200 |  
|Accounts receivable, net of allowance for doubtful accounts of $574 and $943 at December 31, 2004 and December 31, 2003,
respectively                             |  |                   | 16,217  |   |                   |   | 19,906 |  
|Inventories, net                                                                                                                                                  |  |                   | 10,027  |   |                   |   | 13,804 |  
|Income tax receivable                                                                                                                                             |  |                   |        |   |                   |   | 6,818  |  
|Other current assets                                                                                                                                              |  |                   | 1,876   |   |                   |   | 3,669  |  
|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  
|Total current assets                                                                                                                                              |  |                   | 68,531  |   |                   |   | 91,039 |  
|Property and equipment, net                                                                                                                                       |  |                   | 4,600   |   |                   |   | 5,809  |  
|Other assets                                                                                                                                                      |  |                   | 148     |   |                   |   | 117    |  
|Goodwill                                                                                                                                                          |  |                   | 1,760   |   |                   |   | 1,760  |  
|Intangible assets, net                                                                                                                                            |  |                   | 50      |   |                   |   | 117    |  
|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  
|Total assets                                                                                                                                                      |  | $                 | 75,089  |   |                   | $ | 98,842 |  
|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                              |  |                   |         |   |                   |   |        |  
|Current liabilities:                                                                                                                                              |  |                   |         |   |                   |   |        |  
|Accounts payable                                                                                                                                                  |  | $                 | 12,396  |   |                   | $ | 14,520 |  
|Accrued compensation                                                                                                                                              |  |                   | 2,503   |   |                   |   | 3,478  |  
|Other accrued liabilities                                                                                                                                         |  |                   | 11,139  |   |                   |   | 9,338  |  
|Deferred revenue                                                                                                                                                  |  |                   | 723     |   |                   |   | 1,369  |  
|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  
|Total current liabilities                                                                                                                                         |  |                   | 26,761  |   |                   |   | 28,705 |  
|Commitments (Note 6)                                                                                                                                              |  |                   |         |   |                   |   |        |  
|Stockholders equity:                                                                                                                                             |  |                   |         |   |                   |   |        |  
|Preferred stock ($0.001 par value per share; authorized 20,000 shares, no shares issued)                                                                          |  |                   |         |   |                   |   |        |  
|Common stock ($0.001 par value per share; authorized 200,000 shares, shares issued and outstanding: 49,872 and 49,262 at December 31, 2004 and
2003 respectively) |  |                   | 49      |   |                   |   | 49     |  
|Additional paid-in capital                                                                                                                                        |  |                   | 74,652  |   |                   |   | 73,663 |  
|Unearned stock-based compensation                                                                                                                                 |  |                   | (72     | ) |                   |   | (98    | )
|Accumulated other comprehensive gain (loss)                                                                                                                       |  |                   | (191    | ) |                   |   | 5      |  
|Accumulated deficit                                                                                                                                               |  |                   | (26,110 | ) |                   |   | (3,482 | )
|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  
|Total stockholders equity                                                                                                                                        |  |                   | 48,328  |   |                   |   | 70,137 |  
|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  
|Total liabilities and stockholders equity                                                                                                                        |  | $                 | 75,089  |   |                   | $ | 98,842 |  
|                                                                                                                                                                  |  |                   |         |   |                   |   |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



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SOMERA COMMUNICATIONS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|----------------------------------------- |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- |  | - | ------- | -
|                                          |  | Year Ended December 31, 2004 |         |   | Year Ended December 31, 2003 |   |         | Year Ended December 31, 2002 | 
|Revenues:                                 |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Equipment revenue                         |  | $                            | 87,120  |   |                              | $ | 119,729 |                              |  | $ | 181,616 |  
|Service revenue                           |  |                              | 12,914  |   |                              |   | 16,838  |                              |  |   | 17,584  |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Total revenues                            |  |                              | 100,034 |   |                              |   | 136,567 |                              |  |   | 199,200 |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Cost of revenues:                         |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Equipment cost of revenue                 |  |                              | 67,008  |   |                              |   | 88,458  |                              |  |   | 134,726 |  
|Service cost of revenue                   |  |                              | 9,479   |   |                              |   | 13,298  |                              |  |   | 10,864  |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Total cost of revenues                    |  |                              | 76,487  |   |                              |   | 101,756 |                              |  |   | 145,590 |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Gross Profit                              |  |                              | 23,547  |   |                              |   | 34,811  |                              |  |   | 53,610  |  
|                                          |  |                              |        
|Operating expenses:                       |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Sales and marketing                       |  |                              | 23,676  |   |                              |   | 28,164  |                              |  |   | 31,289  |  
|General and administrative                |  |                              | 23,017  |   |                              |   | 26,997  |                              |  |   | 26,979  |  
|Goodwill impairment                       |  |                              |        |   |                              |   | 24,825  |                              |  |   |        |  
|Asset impairment                          |  |                              |        |   |                              |   | 522     |                              |  |   | 1,593   |  
|Amortization of intangible assets         |  |                              | 67      |   |                              |   | 751     |                              |  |   | 689     |  
|Restructuring charges, net                |  |                              |        |   |                              |   |        |                              |  |   | 2,759   |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Total operating expenses                  |  |                              | 46,760  |   |                              |   | 81,259  |                              |  |   | 63,309  |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Loss from operations                      |  |                              | (23,213 | ) |                              |   | (46,448 | )                            |  |   | (9,699  | )
|Other income, net                         |  |                              | 643     |   |                              |   | 604     |                              |  |   | 1,037   |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Loss before income taxes                  |  |                              | (22,570 | ) |                              |   | (45,844 | )                            |  |   | (8,662  | )
|Income tax provision (benefit)            |  |                              | 58      |   |                              |   | 12,666  |                              |  |   | (3,508  | )
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Net loss                                  |  | $                            | (22,628 | ) |                              | $ | (58,510 | )                            |  | $ | (5,154  | )
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Net loss per sharebasic and diluted      |  | $                            | (0.45   | ) |                              | $ | (1.19   | )                            |  | $ | (0.11   | )
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  
|Weighted average sharesbasic and diluted |  |                              | 49,739  |   |                              |   | 49,126  |                              |  |   | 48,645  |  
|                                          |  |                              |         |   |                              |   |         |                              |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



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SOMERA COMMUNICATIONS, INC.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



|                                                                         |  |                              |         |   |                              |   |         |                              |  |   |        |  
|------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---------------------------- | - | ------- | ---------------------------- |  | - | ------ | -
|                                                                         |  | Year Ended December 31, 2004 |         |   | Year Ended December 31, 2003 |   |         | Year Ended December 31, 2002 | 
|Net loss                                                                 |  | $                            | (22,628 | ) |                              | $ | (58,510 | )                            |  | $ | (5,154 | )
|Other comprehensive income (loss):                                       |  |                              |         |   |                              |   |         |                              |  |   |        |  
|Foreign currency translation losses (gains)                              |  |                              | (117    | ) |                              |   | 120     |                              |  |   | (44    | )
|Unrealized loss on investments                                           |  |                              | (79     | ) |                              |   |        |                              |  |   | 3      |  
|Reclassification adjustments for (gains) losses included in net earnings |  |                              |        |   |                              |   | (1      | )                            |  |   |       |  
|                                                                         |  |                              |         |   |                              |   |         |                              |  |   |        |  
|Other comprehensive income (loss)                                        |  |                              | (196    | ) |                              |   | 119     |                              |  |   | (41    | )
|                                                                         |  |                              |         |   |                              |   |         |                              |  |   |        |  
|Comprehensive loss                                                       |  | $                            | (22,824 | ) |                              | $ | (58,391 | )                            |  | $ | (5,195 | )
|                                                                         |  |                              |         |   |                              |   |         |                              |  |   |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



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SOMERA COMMUNICATIONS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                               |  |              |  |                            |    |                                   |   |        |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------ |  | -------------------------- | -- | --------------------------------- | - | ------ | --------------------------------------------- | - | ---- | --------------------------------------- |  | - | ----- | - |  | - | ------- | - |  | - | ------- | -
|                                                                               |  | Common Stock |  | Additional Paid-in Capital |    | Unearned Stock-Based Compensation |   |        | Accumulated Other Comprehensive Income (loss) |   |      | Retained Earnings (Accumulated Deficit) |  |   | Total |  
|                                                                               |  | Number       |  | Value                      |    |                                   |   |        |                                              
|Balance, December 31, 2001                                                     |  | 48,535       |  | $                          | 49 |                                   | $ | 71,929 |                                               | $ | (71  | )                                       |  | $ | (73   | ) |  | $ | 60,182  |   |  | $ | 132,016 |  
|Issuance of common stock through employee stock purchase plan                  |  | 168          |  |                            |   |                                   |   | 586    |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 586     |  
|Issuance of contingent common stock on acquisition of MSI Communications, Inc. |  | 179          |  |                            |   |                                   |   | 505    |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 505     |  
|Issuance of common stock through stock option exercises                        |  | 22           |  |                            |   |                                   |   | 125    |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 125     |  
|Amortization of unearned stock-based compensation                              |  |             |  |                            |   |                                   |   |       |                                               |   | 63   |                                         |  |   |      |   |  |   |        |   |  |   | 63      |  
|Unrealized gain/(loss) on investments                                          |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   | 3     |   |  |   |        |   |  |   | 3       |  
|Foreign currency translation adjustment                                        |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   | (44   | ) |  |   |        |   |  |   | (44     | )
|Net loss                                                                       |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   |      |   |  |   | (5,154  | ) |  |   | (5,154  | )
|                                                                               |  |              |  |                            |    |                                   |   |        |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2002                                                     |  | 48,904       |  | $                          | 49 |                                   | $ | 73,145 |                                               | $ | (8   | )                                       |  | $ | (114  | ) |  | $ | 55,028  |   |  | $ | 128,100 |  
|                                                                               |  |              |  |                            |    |                                   |   |        |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   |         |  
|Issuance of common stock through employee stock purchase plan                  |  | 298          |  |                            |   |                                   |   | 320    |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 320     |  
|Warrants issued in exchange for services                                       |  |              |  |                            |    |                                   |   | 51     |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   | 51      |  
|Issuance of common stock in exchange for services                              |  | 60           |  |                            |   |                                   |   | 104    |                                               |   | (104 | )                                       |  |   |      |   |  |   |        |   |  |   |        |  
|Compensation expense related to acceleration of stock options                  |  |             |  |                            |   |                                   |   | 43     |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 43      |  
|Amortization of unearned stock-based compensation                              |  |             |  |                            |   |                                   |   |       |                                               |   | 14   |                                         |  |   |      |   |  |   |        |   |  |   | 14      |  
|Unrealized gain/(loss) on investments                                          |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   | (1    | ) |  |   |        |   |  |   | (1      | )
|Foreign currency translation adjustment                                        |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   | 120   |   |  |   |        |   |  |   | 120     |  
|Net loss                                                                       |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   |      |   |  |   | (58,510 | ) |  |   | (58,510 | )
|                                                                               |  |              |  |                            |    |                                   |   |        |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2003                                                     |  | 49,262       |  | $                          | 49 |                                   | $ | 73,663 |                                               | $ | (98  | )                                       |  | $ | 5     |   |  | $ | (3,482  | ) |  | $ | 70,137  |  
|                                                                               |  |              |  |                            |    |                                   |   |        |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   |         |  
|Issuance of common stock through employee stock purchase plan                  |  | 189          |  |                            |   |                                   |   | 232    |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 232     |  
|Warrants issued in exchange for services                                       |  |             |  |                            |   |                                   |   | 13     |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 13      |  
|Issuance of common stock through stock option exercises                        |  | 421          |  |                            |   |                                   |   | 744    |                                               |   |     |                                         |  |   |      |   |  |   |        |   |  |   | 744     |  
|Amortization of unearned stock-based compensation                              |  |             |  |                            |   |                                   |   |       |                                               |   | 26   |                                         |  |   |      |   |  |   |        |   |  |   | 26      |  
|Unrealized gain/(loss) on investments                                          |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   | (79   | ) |  |   |        |   |  |   | (79     | )
|Foreign currency translation adjustment                                        |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   | (117  | ) |  |   |        |   |  |   | (117    | )
|Net loss                                                                       |  |             |  |                            |   |                                   |   |       |                                               |   |     |                                         |  |   |      |   |  |   | (22,628 | ) |  |   | (22,628 | )
|                                                                               |  |              |  |                            |    |                                   |   |        |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   |         |  
|Balance, December 31, 2004                                                     |  | 49,872       |  | $                          | 49 |                                   | $ | 74,652 |                                               | $ | (72  | )                                       |  | $ | (191  | ) |  | $ | (26,110 | ) |  | $ | 48,328  |  
|                                                                               |  |              |  |                            |    |                                   |   |        |                                               |   |      |                                         |  |   |       |   |  |   |         |   |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



---

SOMERA COMMUNICATIONS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                          |  | Year ended December 31, |        
|                                                                                          |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Cash flows from operating activities:                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                  |  | $                       | (22,628 | ) |      | $ | (58,510 | )    |  | $ | (5,154  | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                             |  |                         | 3,511   |   |      |   | 4,471   |      |  |   | 5,363   |  
|Provision for doubtful accounts                                                           |  |                         | 84      |   |      |   | 1,221   |      |  |   | 1,876   |  
|Provision for excess and obsolete inventories                                             |  |                         | 7,264   |   |      |   | 8,583   |      |  |   | 13,667  |  
|Deferred tax provision (benefit)                                                          |  |                         |        |   |      |   | 24,813  |      |  |   | (2,721  | )
|Warrants issued in exchange for services                                                  |  |                         | 13      |   |      |   | 51      |      |  |   |        |  
|Accelerated vesting of stock options                                                      |  |                         |        |   |      |   | 43      |      |  |   |        |  
|Non-cash restructuring charge                                                             |  |                         |        |   |      |   |        |      |  |   | 1,593   |  
|Non-cash goodwill and intangible asset write-down                                         |  |                         |        |   |      |   | 25,329  |      |  |   |        |  
|Amortization of stock-based compensation                                                  |  |                         | 26      |   |      |   | 14      |      |  |   | 63      |  
|Forgiveness of loans to officers                                                          |  |                         |        |   |      |   | 267     |      |  |   | 203     |  
|(Gain) loss on disposal of assets                                                         |  |                         | 318     |   |      |   |        |      |  |   | (93     | )
|Changes in operating assets and liabilities:                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                       |  |                         | 3,605   |   |      |   | 3,938   |      |  |   | 19,477  |  
|Inventories                                                                               |  |                         | (3,489  | ) |      |   | 3,433   |      |  |   | (9,138  | )
|Income tax receivable                                                                     |  |                         | 6,818   |   |      |   | (4,138  | )    |  |   |        |  
|Other current assets                                                                      |  |                         | 1,793   |   |      |   | (298    | )    |  |   | (2,181  | )
|Other assets                                                                              |  |                         | (31     | ) |      |   | 221     |      |  |   | (129    | )
|Accounts payable                                                                          |  |                         | (2,124  | ) |      |   | (5,390  | )    |  |   | (10,582 | )
|Accrued compensation                                                                      |  |                         | (975    | ) |      |   | 373     |      |  |   | 335     |  
|Deferred revenue                                                                          |  |                         | (646    | ) |      |   | (4,314  | )    |  |   | 1,133   |  
|Other accrued liabilities                                                                 |  |                         | 1,801   |   |      |   | 446     |      |  |   | 1,203   |  
|Income taxes payable                                                                      |  |                         |        |   |      |   |        |      |  |   | (4,486  | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by operating activities                                       |  |                         | (4,660  | ) |      |   | 553     |      |  |   | 10,429  |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Acquisition of property and equipment                                                     |  |                         | (2,423  | ) |      |   | (2,811  | )    |  |   | (4,333  | )
|Disposal of property and equipment                                                        |  |                         | 4       |   |      |   |        |      |  |   |        |  
|Acquisition of business, net of cash acquired                                             |  |                         |        |   |      |   |        |      |  |   | (9,529  | )
|Purchase of short-term investments                                                        |  |                         | (51,433 | ) |      |   | (11,600 | )    |  |   | (22,789 | )
|Sale of short-term investments                                                            |  |                         | 34,797  |   |      |   | 7,600   |      |  |   | 10,589  |  
|Loans to officers                                                                         |  |                         |        |   |      |   |        |      |  |   | (2,000  | )
|Repayment of loan to officer                                                              |  |                         |        |   |      |   | 1,129   |      |  |   | 675     |  
|Earn-out payment related to Compass Telecom acquisition                                   |  |                         |        |   |      |   | (2,900  | )    |  |   |        |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                     |  |                         | (19,055 | ) |      |   | (8,582  | )    |  |   | (27,387 | )
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Proceeds from employee stock purchase plan                                                |  |                         | 232     |   |      |   | 320     |      |  |   | 586     |  
|Proceeds from stock option exercises                                                      |  |                         | 744     |   |      |   |        |      |  |   | 125     |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                 |  |                         | 976     |   |      |   | 320     |      |  |   | 711     |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Net decrease in cash and cash equivalents                                                 |  |                         | (22,739 | ) |      |   | (7,709  | )    |  |   | (16,247 | )
|Effect of exchange rate changes on cash and cash equivalents                              |  |                         | (249    | ) |      |   | 120     |      |  |   | (44     | )
|Cash and cash equivalents, beginning of year                                              |  |                         | 30,642  |   |      |   | 38,231  |      |  |   | 54,522  |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                                    |  | $                       | 7,654   |   |      | $ | 30,642  |      |  | $ | 38,231  |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                        |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash paid during the period for interest                                                  |  | $                       | 18      |   |      | $ | 25      |      |  | $ | 67      |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Income taxes paid                                                                         |  | $                       | 69      |   |      | $ | 95      |      |  | $ | 5,111   |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  
|Issuance of common stock in acquisition of business                                       |  | $                       |        |   |      | $ |        |      |  | $ | 505     |  
|                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1Formation and Business of the Company:



Somera Communications, Inc. (the Company) was formed in August 1999 and is incorporated under the laws of the State of Delaware.
The predecessor company was Somera Communications, LLC, which was formed in California in July 1995. In November 1999, the Company raised approximately $107 million in net proceeds from its initial public offering. Since that time, the
Companys common stock has traded on the Nasdaq National market under the symbol SMRA.



Note 2Summary of Significant Accounting Policies:



Basis of Presentation



The Companys fiscal years reported are the 52- or 53-week periods ending on the Sunday nearest to December 31. Fiscal years 2004, 2003, and 2002 comprised the 53 or
52 week periods ended on January 2, 2005, December 28, 2003, and December 29, 2002, respectively. For presentation purposes, the financial statements and notes have been presented as ending on the last day of the nearest calendar month.



Principles of Consolidation



The Company acquired MSI Communications, Inc. in October 2000 and created Somera
Communications Sales Inc., a New Jersey based corporation. In November 2000, Somera Communications B.V. was formed and incorporated in The Netherlands. Somera Communications Pte Ltd., incorporated in Singapore, was formed in August 2001. Somera
Communications Ltda, incorporated in Brazil, was formed in April 2002. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Specifically, estimates are used for, but not limited to the accounting for doubtful accounts receivable, slow-moving and obsolete inventory, sales returns reserves, warranty reserves, valuation of
goodwill and purchased intangibles, restructuring accruals and deferred tax assets. Actual results could differ from those estimates.



Revenue Recognition



The Companys revenues are derived from the sale of new and re-used telecommunications equipment and equipment related services. With the exception of equipment
exchange transactions, whereby equipment for one operators network is taken in exchange for other equipment, equipment revenue is recognized upon delivery by the Company provided that, at the time of delivery, there is evidence of a
contractual arrangement with the customer, the fee is fixed or determinable, collection of the resulting receivable is reasonably assured and there are no significant remaining obligations. Delivery occurs when title and risk of loss transfer to the
customer, generally at the time the product is shipped to the customer.



The
Company also generates service revenue, either in connection with equipment sales or through service only transactions. Revenue related to time and materials contracts is recognized as services are rendered at contract labor rates plus material and
other direct costs incurred. Revenue on fixed price contracts is recognized using the percentage-of-completion method based on the ratio of total costs incurred to date compared to



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



estimated total costs to complete the contract. Estimates of costs to complete include
material, direct labor, overhead, and allowable general and administrative expenses. These estimates are reviewed on a contract-by-contract basis, and are revised periodically throughout the life of the contract such that adjustments to profit
resulting from revisions are made cumulative to the date of the revision. The full amount of an estimated loss is charged to operations in the period it is determined that a loss will be realized from the contract. Revenue earned but not yet billed
is included in other current assets in the accompanying consolidated balance sheet. Unbilled receivables were $173,000, $100,000 and $255,000 at December 31, 2004, 2003 and 2002, respectively. Revenue from services represented approximately 12.9%,
12.3%, and 8.8% of total revenue for the fiscal years ended December 31, 2004, 2003, and 2002, respectively.



Revenue for transactions that include multiple elements such as equipment and services bundled together is allocated to each element based on its relative fair value based on negotiated terms (or in the absence of
fair value, the residual method) and recognized when the revenue recognition criteria have been met for each element. The Company recognizes revenue for delivered elements only when the following criteria are satisfied: (1) undelivered elements are
not essential to the functionality of delivered elements, (2) uncertainties regarding customer acceptance are resolved, and (3) the fair value for all undelivered elements is known. Revenue is deferred when customer acceptance is uncertain, when
significant obligations remain, or when undelivered elements are essential to the functionality of the delivered products.



The Company manages contracts whereby the Company pays for services rendered by third parties as an agent for its customers. The Company passes these expenses through to
customers, who reimburse the Company for the expenses plus a management fee. Revenues related to these types of contracts include only management fees received from customers.



A reserve for sales returns and warranty obligations is recorded at the time of shipment and is based on the Companys historical
experience.



The Company supplies equipment to customers in exchange for
re-used equipment or to customers from which re-used equipment was purchased under separate arrangements executed within a short period of time (reciprocal arrangements). For reciprocal arrangements, the Company considers Accounting
Principles Board (APB) No. 29, Accounting for Nonmonetary Transactions, and Emerging Issues Task Force (EITF) Issue No. 86-29, Nonmonetary Transactions: Magnitude of Boot and Exceptions to the Use of Fair
Value, Interpretation of APB No. 29, Accounting for Nonmonetary Transactions. Revenue is recognized when the equipment received in accordance with the reciprocal arrangement is sold through to a third party. Revenues recognized under
reciprocal arrangements were $540,000, $1.1 million, and $1.3 million for the fiscal years ended December 31, 2004, 2003, and 2002, respectively.



Income Taxes



The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the liability method in
accounting for income taxes. Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.



Under United States Generally Accepted Accounting Principles, the Company must establish valuation allowances against its deferred tax assets if it is determined that it
is more likely than not that these assets will not be recovered. In assessing the need for a valuation allowance, both positive and negative evidence must be considered. It was determined that the Companys cumulative losses reported in recent
years represented significant negative evidence which required a full valuation allowance to be recorded. Accordingly, the Company took a non-cash charge of $24.8 million in the fourth quarter of 2003 to establish a full valuation allowance against
its net deferred tax assets. In 2004, we increased the valuation allowance by $8.6 million, primarily as a result of additional net operating loss carryforwards to continue to provide for a full valuation allowance against the net deferred tax
assets. The Company will continue to assess the need to record valuation allowances against any future deferred tax assets resulting from tax benefits for future losses.



Concentration of Credit Risk and Other Risks and Uncertainties



Financial instruments, which potentially expose the Company to a concentration of credit
risk, consist principally of cash and cash equivalents, short term investments and accounts receivable. The Company places its temporary cash with three high credit quality financial institutions in the United States. The Company performs ongoing
credit evaluations of its customers financial condition and generally requires no collateral.



For the year ended December 31, 2004, no single customer accounted for more that 10% of net revenue and one customer accounted for 11.7% of accounts receivable. For the year ended December 31, 2003, no single customer
accounted for more than 10% of net revenue and one customer accounted for 22% of accounts receivable at December 31, 2003. For the year ended December 31, 2002, one customer accounted for 13.4% of net revenue and one customer accounted for 23.7% of
accounts receivable at December 31, 2002.



One supplier accounted for 14.8% of
equipment purchases in the year ended December 31, 2004 and for 11.5% of equipment purchases in the year ended December 31, 2003. A different supplier accounted for 14.7% of equipment purchases in the year ended December 31, 2002.



Foreign Currency Translation



The Company considers the local currency to be the functional currency for its international
subsidiaries. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the year. Translation
adjustments resulting from this process are charged or credited to accumulated other comprehensive income (loss). Foreign currency transaction gains and losses, which to date have not been material, are included in the statement of operations.



Fair Value of Financial Instruments



The carrying amounts of certain of the Companys financial instruments, including cash
and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term maturities.



Cash and Cash Equivalents



The Company considers all highly liquid instruments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash
equivalents.



Short Term Investments



The Company had short-term investments of $32.8 million and $16.2 million at December 31,
2004 and 2003, respectively. The short-term investments consisted primarily of US government and auction rate securities representing cash available for current operations. Auction rate securities are variable rate bonds and preferred



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



stock tied to short-term interest rates with maturities on the face of the securities in
excess of 90 days. Auction rate securities have interest rate resets through a modified Dutch auction, at pre-determined short-term intervals. They trade at par and are callable at par on any interest payment date at the option of the issuer.
Despite the long-term nature of the stated contractual maturities on our investments in auction rate securities, the Company has the ability to quickly liquidate these securities. The amount of the investments in auction rate securities as of
December 31, 2004 and 2003 was $1.9 million and $11.2 million, respectively.



In accordance with SFAS 115,Accounting for Certain Investments in Debt and Equity Securities, the Company has classified its short-term investments as available for sale. These items are carried at fair market value,
based on quoted market prices, and unrealized gains and losses are reported as a separate component of accumulated other comprehensive loss in stockholders equity. All short-term investments are maintained in taxable securities. To date,
unrealized gains or losses have not been material.



Certain auction rate
securities amounting to $11.2 million at December 31, 2003 have been reclassified from cash and cash equivalents to short-term investments. The company had historically classified these instruments as cash equivalents if the period between interest
rate resets was ninety days or less, which was based on our ability to either liquidate our holdings or roll our investment over to the next reset period. The reclassification was made because the certificates had stated maturities beyond three
months. We have also made corresponding adjustments to our Consolidated Statements of Cash Flows for fiscal 2003 and 2002, to reflect the gross purchases and sales of these variable rate securities as investing activities rather than as a component
of cash and cash equivalents. For the years ended December 31, 2003 and 2002, adjustments to the statement of cash flows were made to reflect gross purchases of auction rates securities of $6.6 million and $17.8 million and gross sales of auction
rate securities of $7.6 million and $5.6 million, respectively. These changes had no impact on total assets, current assets, net income or cash flows from operations of the Company.



Inventories



Inventories, which are comprised of finished goods held for resale, including re-used equipment, are stated at the lower of cost (determined on an average cost basis) or
net realizable value. Costs may include refurbishment costs associated with repairing and reconfiguring re-used equipment held for resale. Inventories are stated net of reserves for obsolete and slow moving items.



Property and Equipment



Property and equipment are recorded at cost and are stated net of accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, ranging from three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or remaining
lease term on a straight-line basis. Purchased software utilized in designing, installing and operating business information and communications systems is capitalized and amortized on a straight-line basis, generally over three years. Expenditures
for maintenance and repairs are charged to expense as incurred. Additions, major renewals, and replacements that increase the propertys useful life are capitalized. Gains and losses on dispositions of property and equipment are included in
general and administrative expenses.



The estimated useful lives of depreciable
new assets are as follows:



|                           |  |                             
|-------------------------- |  | ----------------------------
|Furniture & Fixtures       |  | 5 years                     
|Computer & Phone Equipment |  | 3 years                     
|Software                   |  | 3 years                     
|Warehouse Equipment        |  | 5 years                     
|Leasehold improvements     |  | 7 years or life of the lease



Goodwill and
Intangible Assets



The cost of acquired companies is allocated to the
assets acquired and liabilities assumed based on estimated fair values at the date of acquisition. Costs allocated to identifiable intangible assets are generally amortized on a straight-line basis over the remaining estimated useful lives of the
assets, as determined by underlying contract terms or appraisals. Such lives range from fifteen months to three years.



The excess of the cost of acquired companies over the net amounts assigned to assets acquired and liabilities assumed is recorded as goodwill. Goodwill is not amortized
but instead tested for impairment at least annually. The Company currently operates as three reporting units comprised of New Equipment, Re-used Equipment, and Services. The excess of the fair value of the reporting units over the amounts allocated
to the identifiable assets and liabilities of the reporting unit is the implied fair value of the goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company conducts annual impairment tests every June
and whenever events or circumstances may occur that might require the need for more frequent tests. These circumstances include, but are not limited to: the loss of a number of significant clients, the identification of other impaired assets within
the Company, the disposition of a significant portion of the Company, or a significant adverse change in business climate or regulations. Upon completion of the 2003 impairment review, the Company recorded a total impairment charge for goodwill and
intangible assets of $24.8 million. No impairment was required in 2004 based on the annual impairment review. See Note 5.



Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. Effective January 1, 2002,
intangible assets with indefinite useful lives are not amortized but instead tested for impairment at least annually. During 2003, the Company also reviewed its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Based on this review, the Company determined that certain intangible assets could not be recovered from their identifiable cash flows. Accordingly, the Company recorded a pre-tax impairment charge of
approximately $522,000 to write-down these assets to their estimated fair values. See Note 5.



Warranty Reserve



The Company generally
accrues for estimated future warranty expenses for equipment sales upon sale and any additional amounts are recorded when such costs are probable and can be reasonably estimated. The Company offers a standard warranty of one year from date of
shipment for all equipment sold. Longer warranty periods are provided on a very limited basis in instances where the original equipment manufacture (OEM) warranty is longer or it is a requirement to sell to a specific customer or market.
Accordingly, the Companys estimated warranty expenses are determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor per claim, and in certain
instances, estimated property damage. The warranty reserve is expensed to cost of goods sold and is included in other accrued liabilities. Actual claims incurred in the future may differ from original estimates, which may result in material
revisions to the warranty reserve.



Sales Returns Reserve



As part of the Companys revenue recognition policy, the Company
estimates future product returns and establish reserves against revenue at the time of sale based on historical return rate. The returns reserve is recorded against revenue and is included as a reduction to accounts receivable. Actual results could
differ from those estimates, which could affect operating results.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock-based Compensation



The Company uses the intrinsic value method of Accounting Principles Board Opinion No. 25
(APB 25), Accounting for Stock Issued to Employees, and its interpretations in accounting for its employee stock options. The Company amortizes stock based compensation arising from certain employee and non-employee stock
option grants over the vesting periods of the related options, generally four years, using the method set out in Financial Accounting Standards Board Interpretation No. 28 (FIN 28). Under the FIN 28 method, each vested tranche of options
is accounted for as a separate option grant awarded for past services. Accordingly, the compensation expense is recognized over the period during which the services have been provided. This method results in higher compensation expense in the
earlier vesting periods of the related options.



Pro forma information
regarding net loss and net loss per share as if the Company recorded compensation expense based on the fair value of stock-based awards have been presented in accordance with Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure and are as follows for the years ended December 31, 2004, 2003, and 2002 (in thousands, except per share data):



|                                                                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                     |  | Year Ended December 31, |        
|                                                                                                                                     |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Net lossas reported                                                                                                                 |  | $                       | (22,628 | ) |      | $ | (58,510 | )    |  | $ | (5,154  | )
|Add: Stock-based employee compensation expensed in the financial statements, net of related tax effects                              |  |                         | 26      |   |      |   | 57      |      |  |   | 63      |  
|Deduct: Stock-based employee compensation expense determined under fair value based method for all award, net of related tax
effects |  |                         | (1,485  | ) |      |   | (3,598  | )    |  |   | (12,504 | )
|                                                                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Net lossas adjusted                                                                                                                 |  | $                       | (24,087 | ) |      | $ | (62,051 | )    |  | $ | (17,595 | )
|                                                                                                                                     |  |                         |         |   |      |   |         |      |  |   |         |  
|Net loss per sharebasic and diluted as reported                                                                                     |  | $                       | (0.45   | ) |      | $ | (1.19   | )    |  | $ | (0.11   | )
|Net loss per sharebasic and diluted as adjusted                                                                                     |  | $                       | (0.48   | ) |      | $ | (1.26   | )    |  | $ | (0.36   | )



The Company calculated the fair value
of each option grant on the date of grant using the Black-Scholes option pricing model as prescribed by SFAS No. 123 Accounting for Stock-based Compensation using the following assumptions:



|                         |  |                            |   |  |                              |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------ |  | -------------------------- | - |  | ---------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                         |  | Employee Stock Option Plan |   |  | Employee Stock Purchase Plan |  
|                         |  | 2004                       |   |  | 2003                         |   |  | 2002 |   |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Risk-free interest rate  |  | 3.37                       | % |  | 3.36                         | % |  | 2.62 | % |  | 1.87 | % |  | 1.05 | % |  | 2.30 | %
|Expected life (in years) |  | 5                          |   |  | 5                            |   |  | 5    |   |  | 0.50 |   |  | 0.50 |   |  | 0.50 |  
|Dividend yield           |  | 0                          | % |  | 0                            | % |  | 0    | % |  | 0    | % |  | 0    | % |  | 0    | %
|Expected volatility      |  | 84                         | % |  | 81                           | % |  | 95   | % |  | 69   | % |  | 59   | % |  | 79   | %



Net Loss Per Share



Basic net loss per share is computed by dividing the loss for the period
by the weighted average number of shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares and equivalent shares outstanding during the period.
Equivalent shares, composed of shares issuable upon the exercise of options and warrants, are included in the diluted net loss per share computation to the extent such shares are dilutive. For the years ended 2004, 2003 and 2002, there was no
dilutive impact due to the recorded net loss in all periods. As a result, weighted average shares outstanding for basic and diluted shares are the same for all periods presented:



|                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|----------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                          |  | Year Ended December 31, |        
|                                          |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Numerator                                 |  |                         |         |   |      |   |         |      |  |   |        |  
|Net loss                                  |  | $                       | (22,628 | ) |      | $ | (58,510 | )    |  | $ | (5,154 | )
|                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Denominator                               |  |                         |         |   |      |   |         |      |  |   |        |  
|Weighted average sharesbasic and diluted |  |                         | 49,739  |   |      |   | 49,126  |      |  |   | 48,645 |  
|                                          |  |                         |         |   |      |   |         |      |  |   |        |  
|Net loss per sharebasic and diluted      |  | $                       | (0.45   | ) |      | $ | (1.19   | )    |  | $ | (0.11  | )
|                                          |  |                         |         |   |      |   |         |      |  |   |        |  



For the years ended December 31, 2004,
2003, and 2002, options to purchase 3,165,204, 7,530,228, and 4,302,196 shares of common stock were excluded from the fully diluted calculation as their effect would be anti-dilutive.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recent Accounting Pronouncements



In March 2004, the Emerging Issues Task Force (EITF) amended and ratified
previous consensus reached on EITF 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Issues. This amendment, which was originally effective for financial periods beginning after June 15, 2004,
introduced qualitative and quantitative guidance for determining whether securities are other-than-temporarily impaired. In September 2004, the Financial Accounting Standards Boards (FASB) staff issued a number of positions
(FSP) that focused primarily upon the application of EITF 03-01 to debt securities that are impaired solely due to interest rates and/or sector spreads. Subsequently, FASB suspended the effective date of the application of the majority
of EITF 03-01 for an unspecified period, pending additional review. In the interim, the Company continues to apply earlier authoritative accounting guidance to the measurement and recognition of other-than-temporary impairments of its debt and
equity securities.



In October 2004, the Emerging Issues Task Force (EITF)
ratified its consensus on Issue No. 04-10, Applying Paragraph 19 of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, in Determining Whether to Aggregate Operating Segments That Do Not
Meet the Quantitative Thresholds. EITF No. 04-10 addresses how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in
accordance with SFAS No. 131. The provisions of EITF Issue No. 04-10 will be effective for fiscal periods beginning after March 15, 2005. The Company is currently in the process of determining the impact of EITF 04-10 on its financial results.



The American Jobs Creation Act of 2004 (the AJCA) was signed into
law by the U.S. President on October 22, 2004. The Act contains numerous changes to U.S. tax law, both temporary and permanent in nature, including a potential tax deduction with respect to certain qualified domestic manufacturing activities,
changes in the carryback and carryforward utilization periods for foreign tax credits and a dividend received deduction with respect to accumulated income earned abroad. The new law could potentially have an impact on the Companys effective
tax rate, future taxable income and cash and tax planning strategies, amongst other affects. In December 2004, the FASB issued Staff Position No. 109-1 (FSP 109-1),Application of FASB Statement No. 109, Accounting for Income Taxes,
to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 and Staff Position No. 109-2 (FSP 109-2),Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004. FSP 109-1 clarifies that the manufacturers tax deduction provided for under the AJCA should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax
rate reduction. FSP 109-2 provides accounting and disclosure guidance for the repatriation of certain foreign earnings to a U.S. taxpayer as provided for in the AJCA. The Company is currently in the process of evaluating the impact that the Act will
have on its financial position and results of operations.



In November 2004,
the FASB issued SFAS No. 151, Inventory Costs (SFAS 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS 151 will be effective for inventory costs incurred
beginning January 1, 2006. The Company does not believe the adoption of SFAS 151 will have a material impact on its consolidated financial statements.



In December 2004, the FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets,an amendment of APB No. 29, Accounting for
Nonmonetary Transactions. SFAS 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of
this standard to have a material effect on its consolidated financial statements.



In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R (revised 2004),Share-Based Payment, which replaced SFAS No. 123 and superceded APB Opinion No. 25. SFAS No. 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 in the first interim or annual period beginning after June 15, 2005. The pro forma disclosures
previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. The Company is required to adopt SFAS No. 123R in the third quarter of fiscal year 2005, beginning July 1, 2005. Under SFAS No. 123R, The
Company must determine the appropriate fair value method to be used for valuing share-based payments, the amortization method of compensation cost and the transition method to be used at the date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation cost be
recorded for all unvested stock options and nonvested stock at the beginning of the first quarter of adoption of SFAS No. 123R, whereas the retroactive method requires recording compensation cost for all unvested stock options and nonvested stock
beginning with the first period restated. The Company is evaluating the requirements of SFAS No. 123R and expects that the adoption of SFAS No. 123R will have a material impact on its results of operations and earnings per share. The Company has not
yet determined the method of adoption of SFAS No. 123R, or whether the amounts recorded in the consolidated statements of income in future periods will be similar to the current pro forma disclosures under SFAS No. 123.



Note 3Acquisitions:



Compass Telecom, LLC.



On October 9, 2002, the Company acquired Compass Telecom Services (Compass Telecom) for $9.5 million in cash including
acquisition costs. Compass Telecom provides outsourced services to support telecom operators need to more efficiently optimize their networks and equipment assets. Through this acquisition, the Company developed or strengthened services
offerings in the areas of equipment deployment services for installation, de-installation and microwave deployment, as well as site development, network development, and e911 services. The acquisition was accounted for in accordance with SFAS No.
141 Business Combinations. The results of operations of Compass Telecom have been included in the consolidated financial statements since the date of acquisition.



The purchase agreement also provided for earn outs in years 2002 through 2004 for certain officers of Compass Telecom. The earn outs were
contingent upon the financial performance of Compass Telecom during the fourth quarter of 2002, and fiscal years 2003 and 2004. The fourth quarter 2002 earn out was achieved, resulting in a $2.9 million increase in the purchase price and associated
goodwill. The earn out was accrued in other accrued liabilities as of December 31, 2002 and subsequently paid in 2003. For the following two years, additional amounts were to be earned based on certain financial performance and employee retention
milestones. Under the original purchase agreement, for the years ending December 31, 2003 and 2004, the maximum earn outs were $3.85 million and $3.25 million, respectively.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The purchase price was allocated to the net tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair values at the date of acquisition as determined by the Companys management. The excess of the purchase price over the fair value of the net identifiable assets was allocated to
goodwill. Compass Telecom provides outsourced services to support telecom operators need to more efficiently optimize their networks and equipment assets. The purchase price, including the earn-out of $2.9 million, was allocated as follows (in
thousands):



|                       |  |   |        |  
|---------------------- |  | - | ------ | -
|Current assets         |  | $ | 2,708  |  
|Property and equipment |  |   | 315    |  
|Other long-term assets |  |   | 32     |  
|Assumed liabilities    |  |   | (1,486 | )
|Customer contract      |  |   | 654    |  
|Non-compete agreements |  |   | 665    |  
|Goodwill               |  |   | 9,509  |  
|                       |  |   |        |  
|Total purchase price   |  | $ | 12,397 |  
|                       |  |   |        |  



The customer contract intangible asset
was amortized over the fifteen-month term of the contract on a straight-line basis and was fully amortized as of December 31, 2003. The non-compete covenants are being amortized over the thirty-six month term of the covenants on a straight-line
basis. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, no amortization has been recorded on the Compass Telecom goodwill. Amortization expense related to the non-compete agreements was $67,000, $751,000 and
$689,000 in 2004, 2003 and 2002, respectively.



In June 2003 the Company
completed its annual goodwill impairment analysis. Under the requirements of SFAS No. 142, the Company has three reporting unitsNew equipment, Re-used Equipment, and Services. Given the acquisition of Compass Telecom was to expand its services
business, 100% of the goodwill related to Compass Telecom was allocated to services. The annual impairment test concluded the services reporting unit was impaired. Accordingly, the goodwill relating to the Compass Telecom acquisition was written
off. See note 5.



On November 21, 2003, the Company entered into an asset
purchase agreement with two of the former owners of Compass Telecom, where the Company agreed to sell back to the former owners those services which do not support or complement its equipment business, including site development, network development
and e911 services. In consideration of the sale of assets, the Company was due to receive $745,000 on or before February 19, 2004 and is due to receive 2% of Compass Telecom gross revenues through 2006. The payment related to 2004 gross revenues is
scheduled to be settled in 2005. Under the terms of the agreement, the former owners of Compass Telecom have relinquished their rights to receive all further earn-out payments in 2003 and 2004 under their prior agreement with Somera. The non-compete
covenant will remain in effect between the two parties and therefore, the non-compete intangible asset will remain on the books and continue to amortize through 2005.



The Company also reviewed its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Based on this review in 2003, the Company determined both the customer contract intangible asset and the non-compete covenants were impaired. Accordingly, the Company recorded a pre-tax impairment charge of approximately
$522,000 to write down these assets to their estimated fair values. The customer contract intangible asset was fully amortized as of December 31, 2003. The non-compete covenants will have expected amortization of $50,000 for the year ended December
31, 2005 and none thereafter.



The following unaudited pro forma information
presents a summary of consolidated results of operations of the Company and Compass Telecom as if the acquisition had occurred January 1, 2002.



|                                    |  |                              |         |  
|----------------------------------- |  | ---------------------------- | ------- | -
|                                    |  | Year Ended December 31, 2002 |        
|Net revenue                         |  | $                            | 208,552 |  
|Net income (loss)                   |  | $                            | (3,332  | )
|Net income (loss) per sharebasic   |  | $                            | (0.07   | )
|Net income (loss) per sharediluted |  | $                            | (0.07   | )



These unaudited pro forma results have
been prepared for comparative purposes only and include certain adjustments, such as the reversal of a one-time acquisition related compensation charge and amortization expense as a result other intangible assets. They do not purport to be
indicative of the results of operations which actually would have occurred had the combination been in effect on January 1, 2002 or of future results of operations of the consolidated entities.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 4Balance Sheet Accounts (in thousands):



|                                 |  |                   |        |   |                   |   |         |  
|-------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------- | -
|Asset Class                      |  | December 31, 2004 |        |   | December 31, 2003 |  
|Property and Equipment, Net:     |  |                   |        |   |                   |   |         |  
|Computer and telephone equipment |  | $                 | 3,039  |   |                   | $ | 7,184   |  
|Software                         |  |                   | 3,205  |   |                   |   | 3,147   |  
|Office equipment and furniture   |  |                   | 731    |   |                   |   | 1,229   |  
|Warehouse equipment              |  |                   | 1,623  |   |                   |   | 1,738   |  
|Leasehold improvements           |  |                   | 1,533  |   |                   |   | 3,114   |  
|                                 |  |                   |        |   |                   |   |         |  
|                                 |  |                   | 10,131 |   |                   |   | 16,412  |  
|Less accumulated depreciation    |  |                   | (5,531 | ) |                   |   | (10,603 | )
|                                 |  |                   |        |   |                   |   |         |  
|                                 |  | $                 | 4,600  |   |                   | $ | 5,809   |  
|                                 |  |                   |        |   |                   |   |         |  



Depreciation expense for the years
ended December 31, 2004, 2003, and 2002, amounted to $3.4 million, $3.7 million, and $4.7 million, respectively.



|                                                |  |                   |        |   |                   |   |        |  
|----------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------ | -
|                                                |  | December 31, 2004 |        |   | December 31, 2003 |  
|Inventories held for sale                       |  | $                 | 15,620 |   |                   | $ | 17,508 |  
|Less: Reserve for excess and obsolete inventory |  |                   | (5,593 | ) |                   |   | (3,704 | )
|                                                |  |                   |        |   |                   |   |        |  
|Inventories, net                                |  | $                 | 10,027 |   |                   | $ | 13,804 |  
|                                                |  |                   |        |   |                   |   |        |  



The Company incurred charges for
excess and obsolete inventory totaling $7.3 million, $8.6 million, and $13.7 million in the years ended December 31, 2004, 2003, and 2002, respectively. We increased our inventory reserve in 2004 to $5.6 million from $3.7 million in 2003 to reduce
the carrying value of our inventory to current market prices. As of December 31, 2004, net inventory was down 27.4% lower than as of December 31, 2003 due to reduced purchasing activity and cost controls as a response to telecommunications industry
consolidations that affected equipment products.



During the first two quarters
of 2003, the Company consolidated all domestic inventory held in distribution centers located in the states of New Jersey, Georgia and California to a single, centrally located facility in Texas. This consolidation of distribution centers resulted
in a $1.5 million provision in inventory reserve in 2003 due to lost, stolen, and damaged inventory.



|                                    |  |                   |        |                   |   |      
|----------------------------------- |  | ----------------- | ------ | ----------------- | - | -----
|                                    |  | December 31, 2004 |        | December 31, 2003
|Other Accrued Liabilities:          |  |                   |        |                   |   |      
|Restructuring accrual (see note 11) |  | $                 | 288    |                   | $ | 551  
|Warranty reserve (see note 8)       |  |                   | 1,128  |                   |   | 915  
|Income and other taxes payable      |  |                   | 4,843  |                   |   | 4,411
|Other                               |  |                   | 4,880  |                   |   | 3,461
|                                    |  |                   |        |                   |   |      
|                                    |  | $                 | 11,139 |                   | $ | 9,338
|                                    |  |                   |        |                   |   |      



Note 5Goodwill and Intangible
Assets:



In July 2001, the FASB issued SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives to their estimated residual values. The Company adopted the provisions of SFAS No. 142 effective January 1, 2002.



Intangible assets consist of customer contracts, non-compete agreements and goodwill related
to the Companys acquisitions of Compass Telecom LLC in 2002, Asurent Technologies, Inc in 2001 and MSI Technologies, Inc in 2000. The customer contracts are being amortized on a straight-line basis over the terms of the contracts, 15 to 18
months. The non-compete agreement is being amortized on a straight-line basis over the 36-month life of the agreement, ending in September 2005.



In the second quarter of 2003, the Company completed its annual impairment analysis of goodwill as required under SFAS No. 142. The Company also conducted an impairment
test on the purchased intangible assets as required under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This resulted in a total impairment charge of $25.3 million. The annual impairment analysis of
goodwill considered the estimated fair value of the Companys three reporting units (New Equipment, Re-used Equipment and Services) based on market capitalization, as implied by the value of Someras common stock, and estimated future
discounted cash flows. The Company determined that the carrying values of two reporting units (Services and Re-used Equipment) exceeded their respective fair values. Accordingly, the Company compared the implied fair value of each reporting
units goodwill with their carrying values and recorded a pre-tax impairment charge of approximately $24.8 million. The remaining goodwill relates to the New Equipment reporting unit.



In the second quarter of 2004, the Company completed its annual impairment analysis of
goodwill as required under SFAS No. 142. Consistent with the annual impairment analysis conducted in 2003, the Company utilized a discounted cash flow model to perform its annual impairment analysis of goodwill. The Company



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



reviewed the estimated fair value of the New Equipment reporting unit based on the related
discounted cash flows and compared the implied fair value to the carrying value of the reporting unit. As the carrying value did not exceed the fair value of the reporting unit, the Company determined that the current goodwill of approximately $1.8
million related to new equipment was not impaired.



The following is a summary
of changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2003 (in thousands):



|                                      |  |          |         |  
|------------------------------------- |  | -------- | ------- | -
|                                      |  | Goodwill |        
|Balance at December 31, 2002          |  | $        | 26,585  |  
|AdjustmentImpairment                 |  |          | (24,825 | )
|                                      |  |          |         |  
|Balance at December 31, 2003 and 2004 |  | $        | 1,760   |  
|                                      |  |          |         |  



Intangible assets with definite useful
lives are amortized over their respective estimated useful lives to their estimated residual values. In the second quarter of 2003, the Company also reviewed its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. Based on this review, the Company determined that certain intangible assets could not be recovered from their identifiable cash flows. Accordingly, in 2003, the Company recorded a pre-tax impairment charge of
approximately $522,000 to write-down these assets to their estimated fair values.



The following is a summary of the remaining acquired intangible assets with finite useful lives at December 31, 2004, 2003 and 2002 (in thousands):



|                                   |  |                    |       |   |                       |   |      |       |  |   |       |  
|---------------------------------- |  | ------------------ | ----- | - | --------------------- | - | ---- | ----- |  | - | ----- | -
|                                   |  | Customer contracts |       |   | Non-compete agreement |   |      | Total | 
|Original Cost at December 31, 2001 |  | $                  | 1,499 |   |                       |   | 665  |       |  | $ | 2,164 |  
|Amortization                       |  |                    | (643  | ) |                       |   | (131 | )     |  |   | (774  | )
|                                   |  |                    |       |   |                       |   |      |       |  |   |       |  
|Balance at December 31, 2002       |  | $                  | 856   |   |                       | $ | 534  |       |  | $ | 1390  |  
|                                   |  |                    |       |   |                       |   |      |       |  |   |       |  
|Impairment                         |  |                    | (236  | ) |                       |   | (286 | )     |  |   | (522  | )
|Amortization                       |  |                    | (620  | ) |                       |   | (131 | )     |  |   | (751  | )
|                                   |  |                    |       |   |                       |   |      |       |  |   |       |  
|Balance at December 31, 2003       |  |                    |      |   |                       | $ | 117  |       |  | $ | 117   |  
|                                   |  |                    |       |   |                       |   |      |       |  |   |       |  
|Amortization                       |  |                    |      |   |                       |   | (67  | )     |  |   | (67   | )
|                                   |  |                    |       |   |                       |   |      |       |  |   |       |  
|Balance at December 31, 2004       |  | $                  |      |   |                       | $ | 50   |       |  | $ | 50    |  
|                                   |  |                    |       |   |                       |   |      |       |  |   |       |  



Amortization expense related to
intangible assets was $67,000, $751,000, and $689,000 for the years ended December 31, 2004, 2003, and 2002, respectively. Estimated amortization expense related to intangible assets subject to amortization at December 31, 2004 for the year ending
December 31, 2005 is expected to be $50,000 and none thereafter.



Note
6Commitments and Contingencies:



The Company maintains a credit
facility of $4.0 million with Wells Fargo HSBC Trade Bank, which provides for issuances of letters of credit, primarily for procurement of inventory. The credit facility terminates May 1, 2005. The credit agreement requires facility fees, which are
not significant. At December 31, 2004, the Company was in compliance with all covenants. As of December 31, 2004 and 2003, the Company had no letters of credit outstanding. The Company had no long-term debt as of December 31, 2004 and 2003.



From time to time, the Company may be involved in legal proceedings with third
parties arising in the ordinary course of business. Such actions may subject the Company to significant liability and could be time consuming and expensive to resolve. The Company is not currently a party to, nor is aware of any such litigation or
other legal proceedings at this time that could materially harm the business.



The Company is obligated under various operating leases for both office and warehouse space. The remaining lease terms range in length from one to seven years. Rent expense, net of sublease income, for the years ended December 31 2004,
2003, and 2002, was $2.7 million, $3.4 million, and $2.6 million, respectively.



Future minimum lease payments under non-cancelable operating leases, net of sublease income of $100,000, at December 31, 2004 are as follows (in thousands):



|                                                 |  |      |       |      |   |       |  |      |       |      |   |            |  |   |       |  |   |    
|------------------------------------------------ |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | - | ----- |  | - | ---
|                                                 |  | 2005 |       | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Thereafter
|Gross restructuring related leases (see note 11) |  | $    | 266   |      | $ | 22    |  | $    |      |      | $ |           |  | $ |      |  | $ |   
|Operating Leases                                 |  |      | 1,950 |      |   | 1,465 |  |      | 1,344 |      |   | 1,408      |  |   | 1,300 |  |   | 683
|                                                 |  |      |       |      |   |       |  |      |       |      |   |            |  |   |       |  |   |    
|Total commitments                                |  | $    | 2,216 |      | $ | 1,487 |  | $    | 1,344 |      | $ | 1,408      |  | $ | 1,300 |  | $ | 683
|                                                 |  |      |       |      |   |       |  |      |       |      |   |            |  |   |       |  |   |    



Under the terms of the lease
agreements, the Company is also responsible for internal maintenance, utilities and a proportionate share (based on square footage occupied) of property taxes.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 7Stockholders Equity:



Warrants



In September 2001, the Company issued warrants to purchase 170,250 shares of common stock in
exchange for recruitment services. The warrants were immediately vested and have an exercise price of $4.50 per share. The fair value of the warrants of approximately $236,000 has been recorded as an expense in 2001. The fair value of these warrants
was estimated using the Black-Scholes option pricing model and the following assumptions: dividend yield of 0%; volatility of 40%; risk free interest rate of 3.30% and a term of three years. The warrants expired in September 2004.



In November 2003, the Company issued warrants to purchase 55,500 shares of common stock in
exchange for recruiting services. The warrants were immediately vested and have an exercise price of $1.52 per share. The fair value of the warrants of approximately $50,999 has been recorded as an expense in 2003. The fair value of these warrants
was estimated using the Black-Scholes option pricing model and the following assumptions: dividend yield of 0%; volatility of 95%; risk free interest rate of 2.50% and a term of three years. The warrants are outstanding at December 31, 2004, and
will expire in November 2006.



In October 2004, the Company issued warrants to
purchase 15,000 shares of common stock in exchange for consulting services. The warrants were immediately vested and have an exercise price of $1.38 per share. The fair value of the warrants of approximately $13,745 has been recorded as an expense
in 2004. The fair value of these warrants was estimated using the Black-Scholes option pricing model and the following assumptions: dividend yield of 0%; volatility of 81%; risk free interest rate of 3.6% and a term of five years. The warrants are
outstanding at December 31, 2004, and will expire in October 2009.



1999 Stock Option Plan



In September 1999, the Company adopted
the 1999 Stock Option Plan (the Plan) under which 6,750,000 common shares were reserved for the issuance of stock options to employees, directors and consultants. The primary purpose of the Plan is to attract and retain the best
available personnel and to provide additional incentive to the grantees. Upon the completion of the initial public offering in November 1999, options granted under the Unit Plan were converted to options to purchase an equivalent number of common
shares. Under the terms of the Plan, incentive options may be granted to employees, and nonstatutory options may be granted to employees, directors and consultants, at prices no less than 100% and 85%, respectively, of the fair market value of the
common shares at the date of grant. Options granted under the Plan vest at a rate of 25% after one year with the remaining vesting evenly over the next three years. The options expire ten years from the date of grant.



In July 1999, the Company issued stock options to two officers and one outside director
resulting in unearned stock-based compensation of $830,000, which was amortized over the vesting period of the underlying options of four years. Amortization expense associated with this unearned stock-based compensation totaled $7,000 and $63,000
for the years ended December 31, 2003 and 2002, respectively. There was no related amortization on these options in 2004.



In July 2002, the Company issued stock options to purchase 900,000 shares of stock to an executive of the Company. The options were granted with an exercise price equal
to the stocks fair market value on the date of grant. The options vest at a rate of 25% after one year with the remaining vesting evenly over the following three years thereafter. The options expire ten years from the date of grant. In January
2003, the executive left the Company and all of the options were canceled.



In
July 2002, the Company issued stock options to purchase 350,000 shares of stock to an executive of the Company. The options were granted with an exercise price equal to the stocks fair market value on the date of grant. The options vest as
performance milestones are achieved and expire ten years from the date of grant. In January 2003, the executive left the Company and all of the options were canceled.



During 2003, the Company issued options to purchase 890,000 shares of stock to seven executives of the Company. The options were granted
with an exercise price equal to the stocks fair market value on the date of grant. The options vest at a rate of 25% after one year with the remaining vesting evenly over the following three years thereafter. The options expire ten years from
the date of grant. During the fourth quarter of 2003, four executives who held options under this plan left the Company. At the time of termination, vesting of these options was accelerated for two executives. As a result, a compensation charge of
$43,000 was recorded in 2003.



In November 2003, the Company issued stock
options to purchase a total of 150,000 shares of stock to three members of the Board of Directors. The options were granted with an exercise price equal to the stocks fair market value on the date of grant. The options vest at a rate of 25%
after one year with the remaining vesting evenly over the following three years thereafter. The options expire ten years from the date of grant.



In the fourth quarter of 2003, the Company issued a total of 60,000 shares of restricted stock from the 1999 Stock Option Plan to four members of the Board of Directors.
This resulted in unearned stock-based compensation of $104,000, which is being amortized over the vesting period of four years. Amortization expense associated with the unearned stock-based compensation totaled $26,000 and $7,000 for the year ended
December 31, 2004 and 2003, respectively.



During 2004, the Company issued
options to purchase a total of 2,157,500 shares of stock to seven executives of the Company. The options were granted with an exercise price equal to the stocks fair market value on the date of grant. The options vest at a rate of 25% after
one year with the remaining vesting evenly over the following three years thereafter. The options expire ten years from the date of grant. During 2004, the Company also issued an additional 250,000 options to purchase shares of stock to the Chief
Executive Officer. This performance option will vest as to 100% of the shares subject to the performance option six years after the date of grant; provided, however, that, commencing in the Companys 2005 fiscal year, such performance option
shall vest as to 50,000 shares subject to the performance on the last day of each of the Companys fiscal years, but only to the extent that the Company exceeds net revenue and net income targets established by the Board of Directors by at
least twenty percent (20%) for such fiscal year, in all cases subject to Chief Executive Officers continued service to the Company on the relevant vesting dates.



In May 2004, the Company issued stock options to purchase a total of 15,000 shares of stock to one member of the Board of Directors. The
options were granted with an exercise price equal to the stocks fair market value on the date of grant. The options vest at a rate of 25% after one year with the remaining vesting evenly over the following three years thereafter. The options
expire ten years from the date of grant.



In January 2004, the Board elected
not to increase the number of options available for grant pursuant to the provisions of the Plan. In January 2003, and 2002, the Board approved the increase in the number of options available for grant by 1,956,086, and 1,948,502, respectively,
pursuant to the provisions of the Plan. This represents the annual increase calculated as 4% of the total outstanding shares as of the beginning of the fiscal year.



1999 Director Option Plan



In September 1999, the Company adopted the 1999 Director Option Plan (the Director Plan), which provides for the grant of non-statutory stock options to
non-employee directors. The Director Plan has a term of ten years. A total of 300,000 shares of the Companys common stock, plus an annual increase equal to the number of shares needed to restore the number of shares of common stock that are
available for grant under the Director Plan to 300,000 shares, have been reserved for issuance under the Director Plan.



In August 2004, the Board of Directors terminated the 1999 Director Option Plan.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Executive Stock Option Agreements



In September 2001, the Company issued stock options to purchase 1,923,000 and 500,000 shares
of common stock in two separate stock option agreements to two officers of the Company. The options were granted with an exercise price equal to the stocks fair market value on the date of grant. The options vest at a rate of 25% after one
year with the remaining vesting evenly over the following three years thereafter. The options expire ten years from the date of grant.



In September 2001, the Company issued stock options to purchase 824,000 shares of stock to an officer of the Company. The options were granted with an exercise price
equal to the stocks fair market value on the date of grant. The options are time accelerated restricted stock awards which become fully vested seven days prior to their expiration date, September 2007. The options were subject to accelerated
vesting if certain performance criteria are met.



In 2003, the executives who
held granted options under these stock option agreements left the Company. For one executive, the Board of Directors agreed to amend the stock option grants to extend the period during which the executive may exercise the vested option grants for an
additional 12 months from his termination date. For the other executive, the Board of Directors agreed to amend the stock option grants to extend the period during which the executive may exercise the vested option grants for an additional 36 months
from his termination date. In 2003, 1,042,750 options to purchase common stock previously granted to the executives were canceled as a result of the executives departure from the Company. In 2004, the remaining 1,923,000 options to purchase
common stock previously granted to one of the executives were cancelled as the extended vesting period expired. As of December 31, 2004, 281,250 options were outstanding under these option agreements.



Stock Option Plan Summary



Activity under the Companys Stock Option Plans, which includes the 1999 Stock Option
Plan, 1999 Director Option Plan, and the Executive Stock Option Agreements, is set forth below:



|                            |  |                     |   |  |                     |   |  |                                 |     
|--------------------------- |  | ------------------- | - |  | ------------------- | - |  | ------------------------------- | ----
|                            |  | Available For Grant |   |  | Outstanding Options |   |  | Weighted Average Exercise Price
|Balances, December 31, 2001 |  | 2,236,264           |   |  | 10,004,506          |   |  | $                               | 7.58
|Annual increase             |  | 1,948,502           |   |  |                    |   |  |                                 |    
|Options granted             |  | (5,274,921          | ) |  | 5,274,921           |   |  |                                 | 4.36
|Options exercised           |  |                    |   |  | (21,646             | ) |  |                                 | 7.02
|Options canceled            |  | 1,963,205           |   |  | (1,963,205          | ) |  |                                 | 8.41
|                            |  |                     |   |  |                     |   |  |                                 |     
|Balances, December 31, 2002 |  | 873,050             |   |  | 13,294,576          |   |  |                                 | 6.18
|                            |  |                     |   |  |                     |   |  |                                 |     
|Annual increase             |  | 1,956,086           |   |  |                    |   |  |                                 |    
|Options granted             |  | (3,606,250          | ) |  | 3,606,250           |   |  |                                 | 1.35
|Options exercised           |  |                    |   |  |                    |   |  |                                 |    
|Options canceled            |  | 7,616,855           |   |  | (7,616,855          | ) |  |                                 | 5.42
|                            |  |                     |   |  |                     |   |  |                                 |     
|Balances, December 31, 2003 |  | 6,839,741           |   |  | 9,283,971           |   |  |                                 | 4.95
|                            |  |                     |   |  |                     |   |  |                                 |     
|Options granted             |  | (4,475,000          | ) |  | 4,475,000           |   |  |                                 | 1.57
|Options exercised           |  |                    |   |  | (420,762            | ) |  |                                 | 2.69
|Options canceled            |  | 3,757,174           |   |  | (5,980,174          | ) |  |                                 | 4.68
|                            |  |                     |   |  |                     |   |  |                                 |     
|Balances, December 31, 2004 |  | 6,121,915           |   |  | 7,358,035           |   |  | $                               | 3.50
|                            |  |                     |   |  |                     |   |  |                                 |     



At December 31, 2004, 2,876,357
options outstanding were exercisable.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The aggregate of the Companys options outstanding and currently exercisable by exercise
price at December 31, 2004 are as follows:



|                    |  |                     |  |                                                     |  |                                 |       |                    |           |                                 |   |      
|------------------- |  | ------------------- |  | --------------------------------------------------- |  | ------------------------------- | ----- | ------------------ | --------- | ------------------------------- | - | -----
|Options Outstanding |  | Options Exercisable
|Exercise Price      |  | Outstanding         |  | Weighted Average Remaining ContractualLife in Years |  | Weighted Average Exercise Price |       | Number Exercisable |           | Weighted Average Exercise Price
|$ 1.08 - $1.88      |  | 4,394,302           |  | 9.25                                                |  | $                               | 1.37  |                    | 518,798   |                                 | $ | 1.42 
|$ 2.60 - $3.00      |  | 894,521             |  | 8.28                                                |  |                                 | 2.79  |                    | 354,758   |                                 |   | 2.75 
|$ 4.50 - $8.50      |  | 1,231,264           |  | 5.99                                                |  |                                 | 6.52  |                    | 1,152,301 |                                 |   | 6.53 
|$10.75 - $13.50     |  | 850,500             |  | 5.28                                                |  |                                 | 10.91 |                    | 850,500   |                                 |   | 10.91
|                    |  |                     |  |                                                     |  |                                 |       |                    |           |                                 |   |      
|                    |  | 7,370,587           |  | 8.13                                                |  | $                               | 3.50  |                    | 2,876,357 |                                 | $ | 6.44 
|                    |  |                     |  |                                                     |  |                                 |       |                    |           |                                 |   |      



The table above excludes 60,000 shares
of restricted stock grants which were issued from the available option pool and are included in the table of activity under the Companys Stock Option Plans.



Employee Stock Purchase Plan



In September 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the ESPP), which provides eligible employees with
an opportunity to purchase the Companys common stock at a discount through accumulated payroll deductions, during each six-month offering period. The price at which the stock is sold under the ESPP is equal to 85% of the fair market value of
the common stock, on the first or last day of the offering period, whichever is lower. A total of 300,000 shares of common stock have been reserved for the issuance under the ESPP. In February and August 2004, 102,428 and 86,954 shares,
respectively, were issued under the ESPP, generating contributions of $232,000. In February and August 2003, 194,935 and 105,034 shares, respectively, were issued under the ESPP, generating contributions of $320,000. In February and August 2002,
69,298 and 98,679 shares, respectively, were issued under the ESPP, generating contributions of $586,000. The weighted average estimated fair values of the ESPP awards issued during fiscal 2004, 2003, and 2002 were $1.23, $1.07, and $3.48 per share,
respectively.



Note 8Warranties and Financial Guarantees:



The Company provides for future warranty costs for equipment sales at the
time of the sale. The specific terms and conditions of those warranties may vary depending upon the product sold and the country in which the Company does business. In general, the Company offers warranties that match the manufacturers
warranty for that specific product. In addition, the Company offers a one-year warranty from date of shipment for all equipment. The liability under these warranties is to repair or replace defective equipment. Longer warranty periods are provided
on a very limited basis in instances where the original equipment manufacture (OEM) warranty is longer or it is a requirement to sell to a specific customer or market.



Factors that affect the Companys warranty liability include historical and anticipated rates of warranty claims and cost per claim.
Adequacy of the recorded warranty liability is reassessed every quarter and adjustments are made to the liability if necessary.



Changes in the warranty liability, which is included as a component of Other Accrued Liabilities in the Consolidated Balance Sheet, during the period are as
follows (in thousands):



|                                 |  |      |        |   |      |   |        |  
|-------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                 |  | 2004 |        |   | 2003 |  
|Balance as of beginning of year  |  | $    | 915    |   |      | $ | 990    |  
|Provision for warranty liability |  |      | 2,132  |   |      |   | 1,617  |  
|Settlements                      |  |      | (1,919 | ) |      |   | (1,692 | )
|                                 |  |      |        |   |      |   |        |  
|Balance as of end of year        |  | $    | 1,128  |   |      | $ | 915    |  
|                                 |  |      |        |   |      |   |        |  



Financial
Guarantees:



The Company occasionally guarantees contingent commitments
through borrowing arrangements, such as letters of credit and other similar transactions. The term of the guarantee is equal to the remaining term of the related debt, which is short term in nature. No guarantees or other borrowing arrangements
exist as of December 31, 2004. If the Company enters into guarantees in the future, the Company will assess the impact under FASB Interpretation No. 45 (FIN No. 45), Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others.



Note 9401(k) Savings Plan:



In February 1998, the
Company adopted a 401(k) Savings Plan (the Savings Plan) which covers all employees. Under the Savings Plan, employees are permitted to contribute up to 15% of their gross compensation not to exceed the annual IRS limitation for any plan
year ($13,000 in 2004). The Company matches 25% of employee contributions on the first 5% of their contributions for all employees who receive less than 50% of their total compensation in the form of incentive compensation. The Company made matching
contributions of $100,000, $133,100, and $48,050, for the years ended December 31, 2004, 2003, and 2002, respectively.



Note 10Related Party Transactions and Loans to Officers:



In December 2002, the Company subleased approximately 1,300 square feet of space in its then Santa Barbara, California corporate headquarters to a former director for
$2,300 per month. The lease expired on March 31, 2003.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On October 20, 1999, the Company entered into a mortgage loan agreement under which it
advanced $1,351,000 to an officer of the Company. The mortgage loan was interest free, collateralized by the principal residence of the officer, and must be repaid when the residence is sold. Notwithstanding the foregoing, $300,000 of the amount
advanced will be forgiven over eight years as to $25,000 on each of the first four anniversaries of the note and $50,000 on each of the fifth through eighth anniversaries. In June 2000, the officer repaid $425,000 of the principal balance. In
September 2000, the Company re-loaned $300,000 to the officer on an interest free basis. In August 2002, the officer repaid $225,000 of the principal balance. Under the terms of the loan, $75,000 had previously been forgiven by the Company. The
officer repaid the remaining balance on January 1, 2003.



On May 1, 2001, the
Company entered into a mortgage loan agreement under which it advanced $300,000 to an officer of the Company. The mortgage loan had a term of eight years, was interest free and was collateralized by the principal residence of the officer. Under the
terms of the mortgage loan the amount advanced was forgiven as to $22,500 on the first anniversary of the note. The officer repaid the remaining balance of $277,500 in May 2003.



On May 3, 2002 the Company entered into a mortgage loan agreement under which it advanced $2.0 million to an officer of the Company as part
of an employment agreement. The mortgage loan had a term of eight years, was interest free and was collateralized by the principal residence of the officer. Under the terms of the mortgage loan, the amount advanced, assuming the officer remained
employed with the Company at such time, was to be forgiven in the amount of $200,000 on each of the first two anniversaries of the note, $250,000 on each of the third through sixth anniversaries of the note, and $300,000 on each of the seventh and
eighth anniversaries. The loan could have been forgiven in full in the event that, within 12 months of a change in control of the Company, the officers employment was either terminated without cause or was constructively terminated. If the
officers employment with the Company ceased for any other reason, the remaining balance became repayable to the Company. The term of repayment was dependent upon the reason for the officers employment termination and ranged up to twelve
months from the date of termination of employment. Under the terms of the mortgage loan, the outstanding balance of the loan was due for full repayment upon the earlier of (i) the sale of the residence, or (ii) 12 months after the employment
termination date. In the fourth quarter of 2003, the officer left the Company. As of December 31, 2003, the remaining balance under this loan was $1.8 million, and was classified as other current assets on the consolidated balance sheet at December
31, 2003. In May 3, 2004, in accordance with the terms of the loan agreement, the Company forgave an additional $200,000 reducing the remaining balance under this loan to $1.6 million. This forgiveness was recorded in the consolidated balance sheet
as of December 31, 2003. Following this forgiveness, in accordance with the terms of the loan arrangement, the balance owed to the Company was due in full by December 2004, unless the former officer completed a sale of his residence prior to such
time. In December 2004, the officer repaid the remaining balance on the loan in addition to certain interest amounts as specified in the loan agreement.



As a result of the above, the Company recorded compensation charges of $0, $267,000, and $203,000, equal to the total amounts forgiven under these loans in 2004, 2003,
and 2002, respectively. The amounts scheduled to be repaid or forgiven during the year ended December 31, 2003 were included in other current assets. There is no corresponding amount for the year ended December 31, 2004.



Note 11Restructuring and Asset Impairment Charges:



In the fourth quarter of 2002, the Company announced and began implementation of its
operational restructuring plan to reduce operating costs and streamline its operating facilities. This initiative involved the reduction of employee staff by 29 positions throughout the Company in managerial, professional, clerical and operational
roles. In addition, we paid severance related to 50 employee positions that were eliminated as a result of the closure of the Oxnard, California, Norcross, Georgia, and Euless, Texas distribution and repair facilities. These positions were re-hired
for roles in the new centralized location in Coppell, Texas.



Continuing lease
obligations primarily relate to closure of the Oxnard, Euless and Norcross facilities. Amounts expensed represent estimates of undiscounted future cash outflows, offset by anticipated third-party sub-leases. At December 31, 2004, the Company remains
obligated under lease obligations of $288,000 associated with its December 2002 operational restructuring. The lease obligations expire in 2006.



Termination benefits are comprised of severance-related payments for all employees to be terminated in connection with the operational restructuring. Termination benefits
do not include any amounts for employment-related services prior to termination.



At December 31, 2004, the accrued liability associated with the restructuring charge was $288,000 and consisted of the following (in thousands):



|                     |  |                             |       |                |   |        |                              |  |                |     |  |                             |      |   |  |   |    
|-------------------- |  | --------------------------- | ----- | -------------- | - | ------ | ---------------------------- |  | -------------- | --- |  | --------------------------- | ---- | - |  | - | ---
|                     |  | Balance atDecember 31, 2002 |       | Payments- 2003 |   |        | Balance at December 31, 2003 |  | Payments- 2004 |     |  | Balance atDecember 31, 2004
|Lease obligations    |  | $                           | 995   |                | $ | (444   | )                            |  | $              | 551 |  |                             | (263 | ) |  |   | 288
|Termination benefits |  |                             | 1,609 |                |   | (1,609 | )                            |  |                |    |  |                             |     |   |  |   |   
|                     |  |                             |       |                |   |        |                              |  |                |     |  |                             |      |   |  |   |    
|Total                |  | $                           | 2,604 |                | $ | (2,053 | )                            |  | $              | 551 |  | $                           | (263 | ) |  | $ | 288
|                     |  |                             |       |                |   |        |                              |  |                |     |  |                             |      |   |  |   |    



As of December 31, 2002, 20 employees
had been terminated, and actual termination benefits paid were $155,000. As of December 31, 2003, the remaining 59 terminations occurred and severance of $1.6 million was paid in full. Remaining lease obligations as of December 31, 2004 consist of
the Atlanta, Georgia distribution center.



During 2002, the Company recorded an
asset impairment of $1.6 primarily relating to the write down of the remaining carrying value of the e-commerce software the Company invested in, in anticipation of on-line sales. The online market did not materialize and in December 2002, the
Company terminated on-line sales, eliminated the department and wrote-off the assets.



Restructuring charges in 2001 relate to a reorganization in which the domestic workforce was reduced by 28 people, or approximately 10% of the then existing workforce. The total charges associated with the reorganization were $352,000 and
represented accrued salaries and wages, severance, accrued vacation, payroll taxes and other directly related costs, all which were paid in 2001.



Note 12Income Taxes:



Under Generally Accepted Accounting Principles, the Company must establish valuation allowances against its deferred tax assets if it is determined that it is more likely
than not that these assets will not be recovered. In assessing the need for a valuation allowance, both positive and negative evidence must be considered. It was determined that the Companys cumulative losses in recent years represented
significant negative evidence which required a full valuation allowance to be recorded. Accordingly, the Company took a non-cash charge of $24.8 million in the fourth quarter of 2003 to establish a full valuation allowance against its net deferred
tax assets. In 2004, the Company increased the valuation allowance by $8.6 million, primarily as a result of additional net operating loss carryforwards to continue to provide for a full valuation allowance against the net deferred tax assets. The
Company will continue to assess the need to record valuation allowances against any



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



future deferred tax assets resulting from tax benefits for future losses. Approximately
$388,000 of the Companys net operating loss carryforwards relates to tax deductible stock-based compensation in excess of amounts recognized for financial reporting purposes. To the extent that any of the net operating loss carryforwards that
relate to stock based-compensation are realized, the resulting tax benefits will be recorded to shareholders equity.



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The provision for (benefit from) income taxes for the years ended December 31, 2004, 2003,
and 2002 consists of the following (in thousands):



|          |  |      |    |      |   |        |      |  |   |        |  
|--------- |  | ---- | -- | ---- | - | ------ | ---- |  | - | ------ | -
|          |  | 2004 |    | 2003 |   |        | 2002 | 
|Current:  |  |      |    |      |   |        |      |  |   |        |  
|Federal   |  | $    |   |      | $ | (8,718 | )    |  | $ | (1,361 | )
|State     |  |      |   |      |   |       |      |  |   | 40     |  
|Foreign   |  |      | 58 |      |   | 71     |      |  |   | (50    | )
|          |  |      |    |      |   |        |      |  |   |        |  
|          |  |      | 58 |      |   | (8,647 | )    |  |   | (1,371 | )
|Deferred: |  |      |    |      |   |        |      |  |   |        |  
|Federal   |  |      |   |      |   | 18,046 |      |  |   | (1,602 | )
|State     |  |      |   |      |   | 3,267  |      |  |   | (535   | )
|          |  |      |    |      |   |        |      |  |   |        |  
|          |  |      |   |      |   | 21,313 |      |  |   | (2,137 | )
|          |  |      |    |      |   |        |      |  |   |        |  
|          |  | $    | 58 |      | $ | 12,666 |      |  | $ | (3,508 | )
|          |  |      |    |      |   |        |      |  |   |        |  



The net deferred tax asset as of
December 31, 2004 and 2003 was comprised of the following (in thousands):



|                                                                    |  |              |         |   |      |   |         |  
|------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                    |  | December 31, |        
|                                                                    |  | 2004         |         |   | 2003 |  
|Deferred tax asset (liability):                                     |  |              |         |   |      |   |         |  
|Property and equipment                                              |  | $            | 1,165   |   |      | $ | 125     |  
|Reserves and accruals                                               |  |              | 4,357   |   |      |   | 3,882   |  
|Difference in tax and book basis of net assets upon conversion, net |  |              | 16,854  |   |      |   | 18,602  |  
|Net operating loss carryforward                                     |  |              | 11,829  |   |      |   | 2,449   |  
|Tax credit carryforward                                             |  |              | 440     |   |      |   | 440     |  
|                                                                    |  |              |         |   |      |   |         |  
|Total deferred tax assets                                           |  |              | 34,645  |   |      |   | 25,498  |  
|Valuation allowance                                                 |  |              | (34,645 | ) |      |   | (25,498 | )
|                                                                    |  |              |         |   |      |   |         |  
|Net deferred tax asset                                              |  | $            | 0       |   |      | $ | 0       |  
|                                                                    |  |              |         |   |      |   |         |  



A reconciliation of the federal
statutory income tax rate to effective income tax rate follows:



|                                         |  |                         |    |  |        |    |  |        |   
|---------------------------------------- |  | ----------------------- | -- |  | ------ | -- |  | ------ | --
|                                         |  | Year Ended December 31, |   
|                                         |  | 2004                    |    |  | 2003   |    |  | 2002   |   
|Tax at federal statutory rate            |  | (35.00                  | )% |  | (35.00 | )% |  | (35.00 | )%
|State taxes (net of federal tax benefit) |  | (5.72                   | )% |  | (4.33  | )% |  | (5.88  | )%
|Non-deductible goodwill                  |  | 0.00                    | %  |  | 8.48   | %  |  | (0.21  | )%
|Valuation allowance                      |  | 40.61                   | %  |  | 61.56  | %  |  |       |   
|Other                                    |  | 0.37                    | %  |  | (3.02  | )% |  | 0.59   | % 
|                                         |  |                         |    |  |        |    |  |        |   
|Effective tax rate                       |  | 0.26                    | %  |  | 27.69  | %  |  | (40.50 | )%
|                                         |  |                         |    |  |        |    |  |        |   



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The domestic and foreign components of earnings (losses) before taxes are:



|        |  |                         |         |   |      |   |         |      |  |   |        |  
|------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|        |  | Year Ended December 31, |        
|        |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|U.S.    |  | $                       | (20,514 | ) |      | $ | (45,319 | )    |  | $ | (8,523 | )
|Non-U.S |  |                         | (2,056  | ) |      |   | (525    | )    |  |   | (139   | )
|        |  |                         |         |   |      |   |         |      |  |   |        |  
|        |  | $                       | (22,570 | ) |      | $ | (45,844 | )    |  | $ | (8,662 | )
|        |  |                         |         |   |      |   |         |      |  |   |        |  



At December 31, 2004, the Company has
federal and state net operating loss carryforwards of approximately $24.9 million and $46.0 million, respectively, available to offset future regular and alternative minimum taxable income. The federal carryforwards will begin to expire in 2020 and
the state carryforwards will begin to expire in 2013 if not utilized.



The
Company has not provided for U.S. Federal income taxes on any of its foreign subsidiaries undistributed earnings as of December 31, 2004. Undistributed earnings of the Companys foreign subsidiaries amounted to approximately $600,000,
$650,000 and $150,000 at December 31, 2004, 2003 and 2002, respectively. The Company intends to invest these earnings indefinitely in operations outside the United States.



Note 13Segment Information:



The Company buys and sells new and re-used equipment and provides services to telecommunications operators to support the equipment lifecycle requirements of mature
networks. In accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, operating segments are identified as components of an enterprise about which separate discrete financial information is
available that is evaluated by the chief operating decision maker, currently the chief executive officer, or decision making group to make decisions about how to allocate resources and assess performance. To date the Company has reviewed its
operations in principally three segments comprised of New equipment, Re-used equipment, and Services. The chief operating decision maker assesses performance based on the gross profit generated by each segment.



The Company does not report operating expenses, depreciation and amortization, interest
expense, capital expenditures or identifiable net assets by segment. All segment revenues are generated from external customers. Segment information is as follows (in thousands):



|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                             |  | For the year ended December 31, |        
|                                             |  | 2004                            |         |   | 2003 |   |         | 2002 | 
|Net revenue:                                 |  |                                 |         |   |      |   |         |      |  |   |         |  
|New equipment                                |  | $                               | 20,181  |   |      | $ | 28,816  |      |  | $ | 57,750  |  
|Re-used equipment                            |  |                                 | 66,939  |   |      |   | 90,913  |      |  |   | 123,866 |  
|Services                                     |  |                                 | 12,914  |   |      |   | 16,838  |      |  |   | 17,584  |  
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Total                                        |  |                                 | 100,034 |   |      |   | 136,567 |      |  |   | 199,200 |  
|                                             |  |                                 |        
|Gross profit:                                |  |                                 |         |   |      |   |         |      |  |   |         |  
|New equipment                                |  |                                 | 2,727   |   |      |   | 3,158   |      |  |   | 6,480   |  
|Re-used equipment                            |  |                                 | 17,385  |   |      |   | 28,113  |      |  |   | 40,410  |  
|Services                                     |  |                                 | 3,435   |   |      |   | 3,540   |      |  |   | 6,720   |  
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Total                                        |  |                                 | 23,547  |   |      |   | 34,811  |      |  |   | 53,610  |  
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Operating expenses:                          |  |                                 |         |   |      |   |         |      |  |   |         |  
|Sales and marketing                          |  |                                 | 23,676  |   |      |   | 28,164  |      |  |   | 31,289  |  
|General and administrative                   |  |                                 | 23,017  |   |      |   | 26,997  |      |  |   | 26,979  |  
|Impairment of goodwill and intangible assets |  |                                 |        |   |      |   | 25,347  |      |  |   | 1,593   |  
|Amortization of intangible assets            |  |                                 | 67      |   |      |   | 751     |      |  |   | 689     |  
|Restructuring charges                        |  |                                 |        |   |      |   |        |      |  |   | 2,759   |  
|Total operating expenses                     |  |                                 | 46,760  |   |      |   | 81,259  |      |  |   | 63,309  |  
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Loss from operations                         |  |                                 | (23,213 | ) |      |   | (46,448 | )    |  |   | (9,699  | )
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Other income, net                            |  |                                 | 643     |   |      |   | 604     |      |  |   | 1,037   |  
|Loss before income taxes                     |  |                                 | (22,570 | ) |      |   | (45,844 | )    |  |   | (8,662  | )
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Income tax provision (benefit)               |  |                                 | 58      |   |      |   | 12,666  |      |  |   | (3,508  | )
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  
|Net loss                                     |  | $                               | (22,628 | ) |      | $ | (58,510 | )    |  | $ | (5,154  | )
|                                             |  |                                 |         |   |      |   |         |      |  |   |         |  



---

SOMERA COMMUNICATIONS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Net revenue information by geographic area is as follows (in thousands):



|              |  |                         |         |      |   |         |  |   |        
|------------- |  | ----------------------- | ------- | ---- | - | ------- |  | - | -------
|              |  | Year Ended December 31,
|              |  | 2004                    |         | 2003 |   | 2002   
|Net revenue:  |  |                         |         |      |   |         |  |   |        
|United States |  | $                       | 78,197  |      | $ | 106,546 |  | $ | 169,512
|Canada        |  |                         | 1,894   |      |   | 1,907   |  |   | 1,927  
|Latin America |  |                         | 3,529   |      |   | 7,328   |  |   | 13,572 
|Europe        |  |                         | 13,998  |      |   | 11,655  |  |   | 8,293  
|Asia          |  |                         | 1,688   |      |   | 6,532   |  |   | 4,998  
|Africa        |  |                         | 728     |      |   | 1,434   |  |   | 383    
|Other         |  |                         |        |      |   | 1,165   |  |   | 515    
|              |  |                         |         |      |   |         |  |   |        
|Total         |  | $                       | 100,034 |      | $ | 136,567 |  | $ | 199,200
|              |  |                         |         |      |   |         |  |   |        



Substantially all long-lived assets
are maintained in the United States.



---

Note 14Unaudited Quarterly Operating Results:



Selected quarterly financial data is as follows:



|                                |  |                |        |   |               |   |         |                |  |   |               |   |  |   |         |  
|------------------------------- |  | -------------- | ------ | - | ------------- | - | ------- | -------------- |  | - | ------------- | - |  | - | ------- | -
|                                |  | Quarters Ended |       
|                                |  | March31, 2004  |        |   | June 30, 2004 |   |         | Sept. 30, 2004 |  |   | Dec. 31, 2004 |  
|Net sales                       |  | $              | 28,388 |   |               | $ | 25,767  |                |  | $ | 22,693        |   |  | $ | 23,186  |  
|Gross profit                    |  |                | 6,480  |   |               |   | 6,987   |                |  |   | 3,892         |   |  |   | 6,188   |  
|Operating expense               |  |                | 10,304 |   |               |   | 10,911  |                |  |   | 12,614        |   |  |   | 12,931  |  
|Net income (loss)               |  |                | (4,056 | ) |               |   | (3,876  | )              |  |   | (8,489        | ) |  |   | (6,207  | )
|Basic earnings (loss) per share |  | $              | (0.08  | ) |               | $ | (0.08   | )              |  | $ | (0.17         | ) |  | $ | (0.12   | )
|                                | 
|                                |  | Quarters Ended |       
|                                |  | March31, 2003  |        |   | June 30, 2003 |   |         | Sept. 30, 2003 |  |   | Dec. 31, 2003 |  
|Net sales                       |  | $              | 35,837 |   |               | $ | 35,954  |                |  | $ | 30,760        |   |  | $ | 34,016  |  
|Gross profit                    |  |                | 9,936  |   |               |   | 9,052   |                |  |   | 6,444         |   |  |   | 9,379   |  
|Operating expense               |  |                | 13,568 |   |               |   | 38,350  |                |  |   | 12,764        |   |  |   | 16,577  |  
|Net income (loss)               |  |                | (2,078 | ) |               |   | (22,759 | )              |  |   | (4,487        | ) |  |   | (29,186 | )
|Basic earnings (loss) per share |  | $              | (0.04  | ) |               | $ | (0.46   | )              |  | $ | (0.09         | ) |  | $ | (0.59   | )



---

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULE



|(a) | 3. Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Report:
|--- | ---------------------------------------------------------------------------------------------------------



|               |  |                                                                                                                                
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Title                                                                                                                  
|23.1           |  | Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm                                           
|               | 
|31.1           |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.                                
|               | 
|31.2           |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.                                
|               | 
|32.1           |  | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.



---

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized on this 11th day of July 2005.



SOMERA COMMUNICATIONS, INC.By:

/s/    DAVID W. HEARD(David W. Heard President and Chief Executive Officer)




POWER OF
ATTORNEY



Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on July 11, 2005:



|                                                  |  |                                                                              
|------------------------------------------------- |  | -----------------------------------------------------------------------------
|Signature                                         |  | Title                                                                        
|                                                  | 
|/s/    DAVID W. HEARD(David W. Heard)             |  | President and Chief Executive Officer, Director (Principal Executive Officer)
|                                                  | 
|/s/    KENT COKER(Kent Coker)                     |  | Senior Vice President, Chief Financial Officer (Principal Financial Officer) 
|                                                  | 
|/s/    BARRY PHELPS *(Barry Phelps)               |  | Chairman of the Board                                                        
|                                                  | 
|/s/    WALTER G. KORTSCHAK *(Walter G. Kortschak) |  | Director                                                                     
|                                                  | 
|/s/    CHARLES E. LEVINE *(Charles E. Levine)     |  | Director                                                                     
|                                                  | 
|/s/    CASIMIR SKRZYPCZAK *(Casimir Skrzypczak)   |  | Director                                                                     
|                                                  | 
|/s/    DAVID A. YOUNG *(David A. Young)           |  | Director                                                                     
|                                                  | 
|/s/    DAVID W. HEARD                             |  | Attorney-in-Fact (for the above-listed persons)                              
|(David W. Heard)                                  |  |                                                                              



---

Valuation and Qualifying Accounts and Reserves



SCHEDULE II



VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                                                     |  |                              |        |                                      |   |            |  |                        |        |  |   |       
|---------------------------------------------------- |  | ---------------------------- | ------ | ------------------------------------ | - | ---------- |  | ---------------------- | ------ |  | - | ------
|                                                     |  | Balance atBeginning ofPeriod |        | AdditionsCharged toCosts andExpenses |   | Deductions |  | Balance atEnd ofPeriod
|Year ended December 31, 2002                         |  |                              |        |                                      |   |            |  |                        |        |  |   |       
|Allowance for sales returns and warranty obligations |  | $                            | 994    |                                      | $ | 3,371      |  | $                      | 3,375  |  | $ | 990   
|Allowance for doubtful accounts                      |  |                              | 1,701  |                                      |   | 1,876      |  |                        | 2,885  |  |   | 692   
|Allowance for excess and obsolete inventory          |  |                              | 3,241  |                                      |   | 13,667     |  |                        | 2,409  |  |   | 14,499
|Year ended December 31, 2003                         |  |                              |        |                                      |   |            |  |                        |        |  |   |       
|Allowance for sales returns                          |  | $                            | 0      |                                      | $ | 351        |  | $                      | 0      |  | $ | 351   
|Allowance for warranty obligations                   |  |                              | 990    |                                      |   | 1,617      |  |                        | 1,692  |  |   | 915   
|Allowance for doubtful accounts                      |  |                              | 692    |                                      |   | 1,221      |  |                        | 970    |  |   | 943   
|Allowance for excess and obsolete inventory          |  |                              | 14,499 |                                      |   | 8,583      |  |                        | 19,378 |  |   | 3,704 
|Income Tax Valuation Allowance                       |  |                              | 0      |                                      |   | 25,498     |  |                        | 0      |  |   | 25,498
|Year ended December 31, 2004                         |  |                              |        |                                      |   |            |  |                        |        |  |   |       
|Allowance for sales returns                          |  | $                            | 351    |                                      | $ | 372        |  | $                      | 0      |  | $ | 723   
|Allowance for warranty obligations                   |  |                              | 915    |                                      |   | 2,132      |  |                        | 1,919  |  |   | 1,128 
|Allowance for doubtful accounts                      |  |                              | 943    |                                      |   | 568        |  |                        | 937    |  |   | 574   
|Allowance for excess and obsolete inventory          |  |                              | 3,704  |                                      |   | 7,266      |  |                        | 5,377  |  |   | 5,593 
|Income Tax Valuation Allowance                       |  |                              | 25,498 |                                      |   | 9,147      |  |                        | 0      |  |   | 34,645