SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the transition period from                                         to                                         

Commission file number: 0-23576

CELERITEK, INC.

(408) 986-5060
(Registrant’s telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes þ No o

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

     Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date.

     Common Stock, No Par Value: 12,982,644 shares as of January 28, 2005

CELERITEK, INC.

Table of Contents

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PART I       FINANCIAL INFORMATION

Item 1.        Financial Statements

CELERITEK, INC.

See accompanying notes.

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CELERITEK, INC.

See accompanying notes.

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CELERITEK, INC.

See accompanying notes

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Celeritek, Inc.

December 31, 2004

1.	Basis of Presentation
	The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
	The Company’s reporting period consists of a thirteen-week period ending on the Sunday closest to the calendar month end. The third quarters of fiscal 2005 and fiscal 2004 ended January 2, 2005 and December 28, 2003, respectively. For convenience, the accompanying financial statements have been shown as ending on the last day of the calendar month.
	Operating results for the three and nine months ended December 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2005. This financial information should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended March 31, 2004 as filed with the Securities and Exchange Commission.
	On October 22, 2004, the Company completed the sale of its defense subsystem business to Teledyne Wireless, Inc. for $32.7 million in cash, net of a working capital adjustment, and the assumption of specified liabilities related to the defense subsystem business. The gain on the sale after subtracting transaction costs and the net assets sold to Teledyne was $26.4 million. The Company’s defense subsystem business had sales of $19.7 million for the fiscal year ended March 31, 2004. On December 1, 2004, the Company paid an extraordinary cash dividend of $38.9 million or $3.00 per share of common stock to shareholders of record on November 17, 2004.
	The sale of the defense subsystem business represents the sale of assets related to the Company’s GaAs-based subsystem product line. The Company has not historically collected separate financial data for this product line and, in this regard, discrete financial information with respect to its operations and cash flows is not available for this product line. Furthermore, the Company’s chief operating decision maker does not review the operating results of this product line as a basis for making decisions about resources to be allocated to this product line. Based on the foregoing, the Company has determined that the sale of the GaAs-based subsystem product line does not meet the definition of a discontinued operation.
	Certain amounts reported in previous years and interim periods have been reclassified to conform to the current year presentation.

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2.	Stock Based Compensation
	The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares on the date of grant. The Company records compensation related to employee stock awards under the intrinsic value method and accordingly, no compensation expense is recognized in the Company’s financial statements in connection with stock options granted to employees with exercise prices not less than fair value.
	Pro forma information regarding net loss and net loss per share under the fair value method is presented below (in thousands, except per share amounts):

Pro forma information regarding net loss and net loss per share is required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation (SFAS 123), as amended by SFAS 148, and has been determined as if the Company had accounted for its stock options granted subsequent to December 31, 1994 under the fair value method of SFAS 123. The fair market value for options granted was estimated at the date of grant using the Black-Scholes option-pricing model. The Company valued its employee stock options using the following weighted-average assumptions:

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	The Black-Scholes option valuation model was developed for use in estimating the fair market value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair market value estimate, in management’s opinion, the existing models do not necessarily provide a reliable measure of the fair market value of its options.
	The weighted average grant date fair value of options granted during the three months ended December 31, 2004 was $0.80. There were no options granted during the three months ended December 31, 2003. The Company granted no Employee Stock Purchase Plan shares during the three months ended December 31, 2004 and 2003.
	The Company declared an extraordinary cash dividend of $4.50 per share payable to shareholders of record as of February 5, 2004, payable on March 11, 2004. The total dividend paid was $57.8 million. Under the intrinsic value method of accounting for stock options, the Company was required to adjust its stock option exercise price by the dividend amount, or $4.50 per share, because the dividend was a return of capital. Since the Company’s stock option plan did not allow it to reprice options, the Company was required to change to the variable method of accounting for its outstanding stock options. Under variable accounting, compensation expense is recognized over the life of the option (until exercised, forfeited, or cancelled) generally to the extent that there are any increases in the per share market price of the Company’s common stock. It is difficult to estimate the impact that expensing stock options will have on the Company’s statement of operations as this expense is dependent upon future events that are difficult to predict, such as the number of options to be granted during a period, the price of the Company’s common stock at the time of grant, the stock price volatility, the risk free interest rate during the period and the expected average life of the option. A slight change in any one of these variables can materially affect the amount of compensation expense to be recorded. This change to the variable method of accounting on March 12, 2004 has had no financial impact on the first, second or third quarter financial statements. of fiscal 2005.
3.	Inventories
	Inventories, stated at the lower of standard cost (which approximates actual cost on a first-in, first-out method) or market, consists of the following components (in thousands):

4.	Income (Loss) Per Share
	Basic income (loss) per common share is computed using the weighted average common shares outstanding during the period. The effect of outstanding stock options is excluded from the calculation of diluted net loss per share, as their inclusion would be antidilutive.

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5.	Comprehensive Income (Loss)
	The components of comprehensive income (loss) for the three and nine month periods ended December 31, 2004 and 2003 are as follows (in thousands):

6.	Strategic Investments
	The Company regularly reviews its investments for circumstances of other than temporary impairment and assesses the carrying value of the assets against market value. When an other than temporary impairment exists, the Company records an expense to the extent that the carrying value exceeds fair market value in the period the assessment was made. The fair value of strategic investments is dependent on the performance of the companies invested in, as well as the marketability of these investments. In assessing potential other than temporary impairment of these investments, management considers these factors as well as forecasted financial performance of the investees. If these forecasts are not met or if market conditions change, the Company may have to record additional impairment charges.
	Handset Design Company
	In December 2001, the Company invested $0.5 million in a Korean handset design company. On April 1, 2002, the Company invested an additional $2.0 million in the handset design company. The Company does not have significant influence over the management of the handset design company and accordingly has accounted for the investment on a cost basis in all reported periods. The Company reviewed the investment as of December 31, 2004 and determined no indicators of impairment were present that would indicate the current carrying value of the investment was impaired.
	GaAs Foundry
	In December 2000, the Company invested approximately $2.4 million in a GaAs foundry under construction in Taiwan in exchange for a strategic interest in the foundry. The Company does not have significant influence over the management of the GaAs foundry and accordingly has accounted for the investment on a cost basis in all reported periods.
	The Company had previously recorded approximately $2.2 million in impairment charges against its strategic investments in the Taiwanese foundry in fiscal 2002 and 2003. During the first quarter of fiscal 2005, the Company recorded an impairment charge equal to the remaining value of approximately $0.2 million against its strategic investment in the Taiwanese foundry, which

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	was deemed to have an other than temporary decline in value. At the end of the first quarter of fiscal 2005, the carrying value of this investment awas zero. The Company has completely written off its investment in the GaAs foundry due to the insolvency of its parent company, which the Company believes was the foundry’s main source of funding.
7.	Special Charges
	At December 31, 2004, the Company held an accrual for $0.3 million relating to its fiscal 2003 and fiscal 2004 restructuring activities. Lease termination cost accrual of $0.4 million represented the present value of future minimum payments under operating leases covering unused equipment in fiscal 2003. Such amounts will be paid through to lease expiry in fiscal 2005. Relocation cost accrual of $0.7 million represented the present value of future minimum payments under a building lease agreement for a building the Company vacated in fiscal 2004. Such amounts will be paid through to lease expiry in fiscal 2006.
	The following table summarizes the Company’s special charges activity (in thousands):

8.	Product Warranty

The Company warrants its products against defects in design, materials, and workmanship, generally for one year from the date of shipment for all of its products. The actual term could vary depending on the specific customers. An accrual for estimated future costs relating to warranty expense is recorded, as a percentage of revenue based on prior experience, when revenue is recorded and is included in cost of goods sold. Factors that affect the Company’s warranty liability include historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

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9.	Cost Related to Shareholder and Strategic Actions
	In the fourth quarter of fiscal 2003, a group of shareholders (the “Shareholder Committee”) called a special meeting to remove the Company’s Board of Directors from office and replace them with a different slate of candidates. In May 2003 the Company’s Board of Directors entered into an agreement with the Shareholder Committee. Under the terms of the agreement, the Company expanded its Board of Directors from six directors to seven. The new Board was composed of three of the Company’s directors who were directors prior to the agreement, three directors nominated by the Shareholder Committee and one member who is not affiliated with either the Company or the Shareholder Committee. On November 3, 2004, one of the directors nominated by the Shareholder Committee resigned from his Board position. In fiscal 2004, expenses of $1.4 million related to the special meeting of shareholders and $1.7 million in investment banking fees were incurred and reported in loss from operations under the caption “Cost related to shareholder and strategic actions.” The Company did not incur any costs related to shareholder and strategic actions during the first nine months of fiscal 2005.
10.	Recent Accounting Pronouncements
	In November 2002, the Emerging Issues Task Force (the “EITF”) reached a consensus on Issue No. 00-21 Accounting for Revenue Arrangements with Multiple Deliverables. The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements entered into in fiscal periods beginning after June 15, 2003. Management adopted the consensus in the second quarter of fiscal 2004, and it did not have a material effect on the Company’s results of operations or financial condition.
	In November 2003, the EITF issued EITF No. 03-6 “Participating Securities and the Two-Class Method under FASB Statement No. 128,” which provides for a two-class method of calculating earnings per share computations that relate to certain securities that would be considered to be participating in conjunction with certain common stock rights. This guidance was applicable to the Company starting with the second quarter beginning July 1, 2004 and it did not have a material effect on the Company’s results of operations or financial condition.

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11.	Sale of the Company’s Defense Subsystem Business
	On October 22, 2004, the Company completed the sale of its defense subsystem business to Teledyne Wireless, Inc. The following unaudited pro forma condensed consolidated statements of operations give effect to the consummation of the sale in exchange for $32.7 million in cash, net of a working capital adjustment, and the assumption of specified liabilities related to the defense subsystem business. The gain on the sale after subtracting transaction costs and the net assets sold to Teledyne was $26.4 million. The unaudited pro forma condensed consolidated statements of operations for the three and nine month periods ended December 31, 2004 give effect to the asset sale as if it occurred on April 1, 2004.
	The pro forma adjustments presented below reflect the elimination of the revenues and direct costs of the Company’s defense subsystem business. The pro forma adjustments presented below do not reflect any elimination of indirect costs and expenses, such as those that are attributable to centralized functions that the defense subsystem business may have utilized but that the Company is retaining in connection with the asset sale (e.g. expenses associated with the Company’s fabrication facility). The following unaudited pro forma financial information is being presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that the Company would have obtained had it completed the asset sale as of the dates assumed, or the Company’s future results.
	The unaudited pro forma condensed consolidated statements of operations presented herein should be read in conjunction with our historical condensed consolidated statements of operations and the related notes that are included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2004.

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Unaudited Pro Forma Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

See accompanying notes to unaudited pro forma condensed consolidated financial information.

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Unaudited Pro Forma Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

See accompanying notes to unaudited pro forma condensed consolidated financial information.

Notes to Unaudited Pro forma Condensed Consolidated Financial Information

Note A. Basis of Presentation

               On October 22, 2004, the Company completed the sale of its defense subsystem business to Teledyne in exchange for $32.7 million in cash, net of a working capital adjustment, and the assumption of specified liabilities related to its defense subsystem business. The gain on the sale after subtracting transaction costs and the net assets sold to Teledyne was $26.4 million.

               The unaudited pro forma condensed consolidated statements of operations for the three and nine month periods ended December 31, 2004 give effect to this asset sale as if it occurred on April 1, 2004.

Note B. Pro Forma Adjustments

               Adjustments to present the unaudited pro forma condensed consolidated financial statements are set forth below. The pro forma adjustments only give effect to amounts that are directly attributable to the asset sale:

a.

These adjustments reflect the elimination of the revenue and direct costs of the Company’s defense subsystem business as if the sale had occurred on April 1, 2004.

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b.

In the third quarter of fiscal 2005, the Company did not have any revenue from the defense subsystem business, but did incur expenses directly related to that business until the sale of the business was completed on October 22, 2004. As a result, in the third quarter of fiscal 2005, the defense subsystems business had a negative gross margin as compared to the nine month period in which there was $8.5 million of revenue and gross profit of $2.3 million.

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

Forward-Looking Statements

     This report contains forward-looking statements, which are identified by words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. In addition, forward-looking statements in this report include, but are not limited to, those regarding: our focus on market areas where we believe our resources and core competencies will give us the greatest opportunity for success in our goal of returning to profitability; our future gross margins; our expected research and development expenses and selling, general and administrative expenses; and our belief that our cash resources will be sufficient to meet our liquidity needs through at least the next twelve months. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in this Form 10-Q and other reports or documents we file from time to time with the Securities and Exchange Commission.

Critical Accounting Policies

     The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts. Some of the estimation processes affect current assets and liabilities and are therefore critical in assessing our financial and operating status. These estimates involve certain assumptions that, if incorrect, could have a material adverse impact on our operations and financial position.

     We review our estimates, including, but not limited to, allowance for doubtful accounts, inventory write-downs, and impairments of long-lived assets and investments, on a regular basis and make adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed regularly and adjustments are made as information is available. We believe that these estimates are reasonable; however, actual results could differ from these estimates. The following paragraphs describe the methodology we use in making some of our principal accounting estimates, in evaluating some of the uncertainties inherent in accounting estimates and in evaluating some of the ways that our estimates may impact our financial condition.

     Revenue Recognition. Revenue related to product sales is recognized when the products are shipped to the customer, title has transferred and no obligations remain. In circumstances where the collection of payment is not probable at the time of shipment, we defer recognition of the revenue until payment is collected. We provide for expected returns based on past experience as well as current customer activities. Our customers do not have rights of return outside of products returned under warranty and, to date, returns have not been material. Shipping and handling costs are included in costs of goods sold for all periods presented.

     Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate our

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customers’ financial position and order level to determine if an allowance should be established. Any change in the allowance from our assessment of the likelihood of receiving payment is reflected in the selling, general, and administrative costs in the period the change in assessment is made.

     Inventory Write-downs. We record inventory write-downs for estimated obsolescence or unmarketable inventory. Our write-downs for excess and obsolete inventory are primarily based upon forecasted demand and our backlog of orders for the product. Any inventory write-downs are reflected in cost of sales in the period the write-downs are made.

     Long-lived Assets and Strategic Investments. We regularly review our long-lived assets and strategic investments for indicators of impairment and assess the carrying value of the assets against market values. When impairment exists, we record an expense to the extent that the carrying value exceeds fair market value in the period the assessment is made.

     We record impairment losses on long-lived assets used in operations or expected to be disposed of when events and circumstances indicate that the undiscounted cash flow estimated to be generated by these assets is less than the carrying amounts of those assets. We consider sensitivities to capacity, utilization and technological developments in making related assumptions.

     The fair value of strategic investments is dependent on the performance of the companies in which we have invested, as well as the marketability of these investments. In assessing potential impairment of these investments, we consider these factors as well as forecasted financial performance of the investees. If these forecasts are not met or if market conditions change, we may assess the value of the strategic investment to be other than temporarily impaired and accordingly record an impairment charge.

     Intangible Assets. We recorded intangible assets at fair value. Intangible assets with finite useful lives were amortized over their estimated useful life and amortization expense was classified as part of operating expenses. To date, we have only had intangible assets with finite useful lives. We regularly performed reviews to determine if the carrying values of our intangible assets were impaired. We looked for facts, circumstances, either internal or external, that may have indicated we may not have recovered the carrying value of the assets. We recorded impairment losses based on the amount by which the carrying amounts of such assets exceeded their fair values.

Overview

     On October 22, 2004, we completed the sale of our defense subsystem business to Teledyne Wireless, Inc. for $32.7 million in cash, net of a working capital adjustment, and the assumption of specified liabilities related to the defense subsystem business. The gain on the sale after subtracting transaction costs and the net assets sold to Teledyne was $26.4 million. Our defense subsystem business had sales of $19.7 million for the fiscal year ended March 31, 2004. On December 1, 2004, we paid an extraordinary cash dividend of $38.9 million, or $3.00 per share of common stock, to shareholders of record on November 17, 2004. Currently, we have 67 employees, as compared to 195 at September 30, 2004.

Result of Operations – Third Quarter of Fiscal 2005 Compared to Third Quarter of Fiscal 2004

     Total net sales were $2.8 million for the third quarter of fiscal 2005, compared to $7.7 million for the third quarter of fiscal 2004, a decrease of 64%. The decrease in sales was primarily due to the sale of our defense subsystem business in October 2004.

     Semiconductor sales were $2.8 million in the third quarter of fiscal 2005, compared to $3.0 million in the third quarter of fiscal 2004, a decrease of 7%. Sales in the third quarter of fiscal 2005 included $0.2

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million in sales of power amplifier modules for handsets. Sales in the third quarter of fiscal 2004 included $0.7 million in sales of power amplifier modules for handsets. We do not expect any further sales of power amplifier modules for handsets.

     Subsystem sales were zero in the third quarter of fiscal 2005, compared to $4.7 million in the third quarter of fiscal 2004, a decrease of 100%. Subsystems sales were zero in the third quarter of fiscal 2005 because we completed the sale of our defense subsystem business in October 2004.

     Gross margin was a negative 15% of net sales in the third quarter of fiscal 2005, compared to a positive 34% of net sales in the third quarter of fiscal 2004. Included in the cost of sales in the third quarter of fiscal 2005 was $0.6 million in overhead costs related to the defense subsystem business, which we sold in October 2004. The decline in gross margin is due to reduced revenue levels from the sale of the defense subsystem business, without a comparable reduction in manufacturing overhead costs. We do not expect significant improvement in gross margin until sales volumes increase because of fixed costs related to our fabrication facility.

     Research and development expenses were $1.3 million, or 46% of net sales, in the third quarter of fiscal 2005 compared to $1.9 million, or 24% of net sales, in the third quarter of fiscal 2004, a decrease of 31%. The decrease in research and development expense was primarily the result of the sale of our defense subsystem business. Selling, general and administrative expenses were $1.1 million, or 40% of net sales, in the third quarter of fiscal 2005 compared to $1.9 million, or 25% of net sales, in the third quarter of fiscal 2004, a decrease of 42%. The decrease was primarily due to lower selling costs associated with lower revenues and lower administrative expenses.

     There were no costs related to shareholder and strategic actions in the third quarter of fiscal 2005. The $0.3 million in costs related to shareholder and strategic actions in the third quarter of fiscal 2004 was primarily for investment banking fees.

     There were no special charges during the third quarter of fiscal 2005. During the third quarter of fiscal 2004, we incurred $1.9 million in special charges due to our exit of the wireless handset power amplifier market. The charges were comprised of $0.9 million of building lease termination costs, $0.2 million of facilities consolidation costs, $0.7 million in employee termination expense and $0.1 million to close our Korean sales office.

     Interest income and other, net was $0.1 million in the third quarter of fiscal 2005 compared to $0.3 million in the third quarter of fiscal 2004. The decrease was primarily due to a loss on the disposal of fixed assets and less interest income from lower cash and short-term investment balances offset by lower interest expense.

Result of Operations – First Nine Months of Fiscal 2005 Compared to the First Nine Months of Fiscal 2004

     Total net sales were $17.6 million for the first nine months of fiscal 2005, compared to $21.4 million for the first nine months of fiscal 2004, a decrease of 18%. The decrease in sales was due to the sale of our defense subsystem business in October 2004.

     Semiconductor sales were $9.1 million in the first nine months of fiscal 2005, compared to $6.7 million in the first nine months of fiscal 2004, an increase of 36%. Sales in the first nine months of fiscal 2005 included $2.0 million in sales of power amplifier modules for handsets and $0.7 million in revenues

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from a development contract. Sales in the first nine months of fiscal 2004 included $0.7 million in sales of power amplifier modules for handsets.

     Subsystem sales in the first nine months of fiscal 2005 were $8.5 million, compared to $14.7 million in the first nine months of fiscal 2004, a decrease of 42%. The decrease in sales was primarily due to the sale of our defense subsystem business in October 2004.

     Gross margin was 26% of net sales in the first nine months of fiscal 2005, compared to 21% of net sales in the first nine months of fiscal 2004. Most of the improvement in gross margin was due to the sale in the first fiscal quarter of 2005 of products previously written off as obsolete inventory and the revenue related to a development contract with corresponding costs in research and development. To a lesser extent, lower overhead costs resulting from our decision to exit from the wireless handset market, contributed to the improved gross margin.

     Research and development expenses were $4.8 million, or 27% of net sales, in the first nine months of fiscal 2005, compared to $7.7 million, or 36% of net sales, in the first nine months of fiscal 2004, a decrease of 37%. Research and development expenses decreased from the prior year primarily due to our decision to exit the wireless handset market in September 2003. A significant part of our research and development efforts were focused on developing wireless handset power amplifier products for the market in South Korea. To a lesser extent, the sale of our defense subsystem business in October 2004 contributed to the reduction of research and development expenses.

     Selling, general and administrative expenses were $5.0 million, or 28% of net sales, in the first nine months of fiscal 2005, compared to $6.3 million, or 30% of net sales, in the first nine months of fiscal 2004, a decrease of 21%. The decrease was primarily due to lower administrative expenses.

     There were no costs related to shareholder and strategic actions in the first nine months of fiscal 2005. The $3.0 million in costs related to shareholder and strategic actions in the first nine months of fiscal 2004 consisted of approximately $1.4 million in expense related to the special meeting of shareholders and $1.6 million in investment banking fees.

     There were no special charges in the first nine months of fiscal 2005. The special charges of $4.5 million in the first nine months of fiscal 2004 are comprised of approximately $0.2 million of impairment charges related to the reassessment of carrying values for certain tangible and intangible assets to be sold, $1.8 million of equipment impairment charges related to exiting the wireless handset power amplifier market, and $0.6 million of equipment impairment charges related to restructuring at the Belfast facility, $0.7 million in employee termination charges, $0.9 million for building lease termination costs, $0.2 million of facilities consolidation costs, and $0.1 million to close our Korean sales office.

     The following table summarizes our special charges activity (in thousands):

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     Amortization of intangibles was $0.3 million during the first nine months of fiscal 2004. The intangible assets were acquired as part of the purchase of Tavanza’s assets during the third quarter of fiscal 2003. At the end of the second quarter of fiscal 2004, the intangible assets were reclassified to assets held for sale based on our decision in September 2003 to exit the wireless handset power amplifier market. These assets were subsequently sold on October 15, 2003; accordingly, no amortization expense will be recorded in future periods.

     During the first quarter of fiscal 2005, we recorded an impairment charge of $0.2 million against our strategic investment in the Taiwanese foundry, which was deemed to have an other than temporary decline in value. At the end of the first quarter of fiscal 2005, the carrying value of this investment awas zero. We have completely written off our investment in the Taiwanese foundry due to the insolvency of its parent company, which we believe was the foundry’s main source of funding. The Company had previously recorded approximately $2.2 million in impairment charges against its strategic investments in the Taiwanese foundry in fiscal 2002 and 2003, which was deemed, in those respective periods, to have an other than temporary decline in value.

     Interest income and other, net was $0.5 million in the first nine months of fiscal 2005 compared to $1.5 million in the first nine months of fiscal 2004. The decrease in interest income and other, net, was due to the collection of a customer’s order cancellation charge of $0.8 million in the first nine months of fiscal 2004 and lower interest rates on lower cash and short-term investment balances.

Liquidity and Capital Resources

     We have funded our operations to date primarily through cash flows from operations and sales of equity securities. As of December 31, 2004, we had $7.1 million in cash and cash equivalents, $6.1 million in short-term investments and $11.2 million in working capital.

     On October 22, 2004, we completed the sale of our defense subsystem business to Teledyne Wireless, Inc. in exchange for $32.7 million in cash, net of a working capital adjustment, and the assumption of specified liabilities related to the defense subsystem business. The net increase to cash from the transaction was approximately $30.9 million, after deducting related cash expenses. On December 1, 2004, we paid an extraordinary cash dividend of $38.9 million, or $3.00 per share of common stock, to shareholders of record on November 17, 2004.

     Net cash used in operating activities was $3.4 million in the first nine months of fiscal 2005 and was due to our quarterly operating net losses. Net cash used in operating activities was $9.1 million in the first

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nine months of fiscal 2004 and was due primarily to the quarterly net losses partially offset by non-cash impairment charges and depreciation charges.

     Net cash provided by investing activities was $48.1 million in the first nine months of fiscal 2005 and was primarily due to the gain on the sale of our defense subsystem business of $30.9 million and net sales and maturities of short-term investments of $18.0 million. Net cash used in investing activities was $5.3 million in the first nine months of fiscal 2004 and was primarily due to the net purchases, sales and maturities of short-term investments of $4.5 million.

     Net cash used in financing activities was $40.8 million in the first nine months of fiscal 2005 and was primarily due to the payment of an extraordinary dividend of $38.9 million and principal payments on long-term debt of $1.9 million. Net cash used in financing activities was $2.1 million in the first nine months of fiscal 2004 and was due to principal payments on long-term debt of $2.0 million and payments on capital leases of $0.5 million offset by cash proceeds of $0.4 million from the issuance of common stock.

     As of December 31, 2004, we had $0.9 million in outstanding letters of credit, which are secured by certificates of deposits.

     We currently do not have a line of credit. We have various equipment notes outstanding with other lenders, which are secured by the equipment.

     Our future cash requirements will depend on a number of different factors, including the timing and volume of orders from our customers, the progress of our research and development efforts, the success of our sales efforts and our ability to effect cost reductions. Currently, our principle source of liquidity consists of our existing cash balances. Assuming we are able execute on a number of factors, including the timing and volume of orders from our customers, the success of our sales efforts and our ability to effect cost reductions, we believe that our current cash resources should be sufficient to meet our liquidity requirements through at least the next twelve months. If we are unable to execute on these and other factors, we will not have sufficient cash to continue to do business and we may have to cease operations altogether.

Commitments

     We do not have any special purpose entities. We have no commercial commitments with related parties, except for employee loans. We have outstanding loans to certain employees totaling approximately $0.5 million at December 31, 2004. The notes are relocation loans collateralized by certain real property assets, bear no interest and have maturities through 2019. The principal will be repaid at various dates. If an employee voluntarily ceases being employed by us, the principal outstanding will be due and payable within 90 days.

     We have contractual obligations in the form of operating and capital leases, debt and purchase order commitments. The following table sets forth our future contractual obligations as of December 31, 2004 (in thousands):

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     Contractual Obligations

     The table records cash obligations, including future interest repayments, and includes operating lease obligations for equipment that no longer has economic value for us, for which a special charge of $1.3 million was recorded in the third quarter of fiscal 2003 income statement.

     We have outstanding letters of credit of approximately $0.9 million as security for capital leases for equipment.

RISK FACTORS

     You should carefully consider the risks described below. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our ability to continue operations, results of operations or cash flows could be adversely affected. In those cases, the trading price of our common stock could decline, and you may lose all or part of your investment.

Because of the sale of our defense subsystem business to Teledyne, our future success will depend on our semiconductor business alone.

     On October 22, 2004 we sold all of the assets related to our defense subsystem business to Teledyne Wireless, Inc. Our defense subsystem business constituted a substantial portion of our assets. As such, our asset base and revenues following the asset sale are significantly lower from those existing prior to the asset sale. The third quarter of fiscal 2005 was the first quarter in which we operated our semiconductor business as a stand-alone business. During the quarter we were unable to increase the semiconductor revenues, and because we were not able to reduce expenses commensurate with the lower revenue levels generated by the semiconductor business alone, we were not profitable. Moreover, economic and other factors may prevent us from rapidly and substantially growing our semiconductor business in the future. If we are unable to achieve profitability in our semiconductor operations in the near future, we will be unable to afford to continue to do business and we may have to cease operations altogether.

Because many of our expenses are fixed, we will not achieve profitability until our revenues significantly increase.

     Our business requires us to maintain manufacturing equipment and related support infrastructure that we must pay for regardless of our level of sales. To support our manufacturing capacity we also incur

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costs for maintenance and repairs and employ personnel for manufacturing and process engineering functions. These expenses, along with depreciation costs, are fixed and do not vary greatly, if at all, when our net sales decrease. In addition, the lead time for developing and manufacturing our products often requires us to invest in manufacturing capacity in anticipation of future demand. Although we have sold our defense subsystem business, we do not expect to achieve cost reductions commensurate with the lower revenue levels and expect to continue to report losses for some time. We are relying on increased sales of semiconductor products to manufacturers of commercial communications equipment and defense contractors in order to realize a significant increase in revenues. If these sales do not materialize, and if our revenues do not significantly increase to a level commensurate with our installed capacity, we will be unable to achieve profitability.

As a result of the cash dividend we paid in December 2004, our cash position was weakened and may affect our ability to continue operations in the future if our semiconductor operations do not achieve profitability.

     On December 1, 2004, we paid a cash dividend to shareholders of $38.9 million, or $3.00 per share. The amount of the dividend was based on the excess of cash that we had after accounting for the amount that the board of directors determined we need to retain in order to finance our continuing semiconductor operations. However, to date our semiconductor operations have not been profitable and we have not yet made progress in plans to achieve profitability, such as expanding our sales and marketing efforts and increasing our semiconductor research efforts to broaden our product offerings over time. If we are unable to implement these plans or if our future efforts are not successful, our semiconductor operations may never achieve profitability and we will continue to burn through our cash reserves. Consequently, we may be forced to seek alternative sources of funding more rapidly than we otherwise would have, had we not made the cash distribution to our shareholders, or we may be forced to cease operations.

Our operating results have fluctuated significantly in the past, and we expect these fluctuations to continue. If our results are worse than expected, our stock price could fall.

     Our operating results have fluctuated in the past, and may continue to fluctuate in the future. These fluctuations may cause our stock price to decline. Some of the factors that may cause our operating results to fluctuate include:

	•	the timing, cancellation or delay of customer orders or shipments, particularly from our largest customers;
	•	fluctuating demand from our defense customers for our semiconductor components;
	•	the timing of our introduction of new products and the introduction of new products by our competitors;
	•	variations in average selling prices of our products;
	•	the mix of products that we sell;
	•	our ability to secure manufacturing capacity and effectively utilize the capacity;
	•	the availability and cost of components;
	•	GaAs semiconductor component failures and associated support costs;
	•	variations in our manufacturing yields related to our GaAs semiconductor components;
	•	market acceptance of our products; and
	•	changes in our inventory levels.

     Any unfavorable changes in the factors listed above or general industry and global economic conditions could significantly harm our business, operating results and financial condition. For example, during the third quarter of fiscal 2003, Motorola, our largest customer, began transitioning to new handset platforms for which we were not the selected supplier of power amplifier modules and our sales were

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negatively impacted. In addition, in late September 2003, we exited the wireless handset power amplifier market entirely. Due to fluctuations in our net sales and operating expenses, we believe that period to period comparisons of our results of operations are not good indications of our future performance. It is possible that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In that case, our stock price could decline.

The cash dividend we paid in December 2004 may cause our stock to be delisted from the Nasdaq National Market.

     After the cash dividend, our stock price was adjusted downward by $3.00 and consequently opened at $0.77 per share. Since the date of the dividend, the price of our stock has fluctuated above and below $1.00. The Nasdaq National Market listing requirements with which we must comply provide that delisting procedures may be instituted against us if our stock trades for less than $1.00 for a consecutive 30-day period. If the price of our stock falls below $1.00 for more than 30 days, we may be subject to delisting, which could have a further negative impact on the price of our stock. Our board of directors has authorized our management to seek shareholder approval of a 4 for 1 reverse stock split in order to raise the price of our stock and prevent delisting. However, there can be no assurance that our shareholders will approve of a reverse split, if and when management seeks their approval, or that our stock will continue to trade at the increased price following the reverse split. Our stock may decline following the reverse split and we may again face the prospect of being delisted.

Variable accounting related to past stock option grants may impact our future earnings.

     We declared an extraordinary cash dividend of $4.50 per share payable to shareholders of record as of February 5, 2004, payable on March 11, 2004. The total dividend paid was $57.8 million. Pursuant to the Nasdaq Marketplace Rules, the ex-dividend date with respect to the cash dividend was set as March 12, 2004. Accordingly, prior to the commencement of trading on March 12, 2004, our opening bid price was reduced by $4.50 per share to reflect the payment of the cash dividend. Under the intrinsic value method of accounting for stock options, we were required to adjust our stock option exercise price by the dividend amount or $4.50 per share because the dividend was a return of capital. Since our stock option plan does not currently allow us to reprice options, we were required to change to the variable method of accounting for our outstanding stock options. Under variable accounting, compensation expense is recognized over the life of the option (until exercised, forfeited, or cancelled) generally to the extent that there are any increases in the per share market price of our common stock. It is difficult to estimate the impact that expensing stock options will have on our statement of operations as this expense is dependent upon future events that are difficult to predict, such as the number of options to be granted during a period, the price of our common stock at the time of grant, the stock price volatility, the risk free interest rate during the period and the expected average life of the option. A slight change in any one of these variables can materially affect the amount of compensation expense to be recorded.

Certain terms of the sale of our defense subsystem business to Teledyne are unfavorable to us and could cause our business to be harmed.

     Pursuant to the terms of the asset purchase agreement that we entered into with Teledyne in connection with the sale of the defense subsystem business, we remain responsible for substantially all preclosing liabilities of our defense subsystem business, except for current liabilities that were assumed by Teledyne. Currently, we are not aware of any pending liability related to our former defense subsystems business. Although we analyzed the likelihood of these liabilities arising and believe that likelihood to be minimal, there can be no assurance that they will not be incurred, nor can we assure you that we will have adequate cash to satisfy them. In addition, we are obligated to indemnify Teledyne against certain losses it may suffer arising out of the acquisition of our defense

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subsystem business. If we are required to indemnify Teledyne for any matter, it could have a material adverse impact on our business by draining our available cash reserves.

We depend on a small number of original equipment manufacturers as customers. If we lose one or more of our significant customers, or if purchases by any one of our key customers decrease, our net sales will decline and our business will be harmed.

     Historically, a limited number of customers, both in the defense subsystem business and the semiconductor business, accounted for a large percentage of our net sales. As of December 31, 2004, one customer accounted for 56% of our semiconductor backlog. In the first nine months of fiscal year 2005, sales to our top ten defense subsystem and semiconductor customers accounted for approximately 56% of our net sales, with Motorola making up approximately 12%. In fiscal year 2004, sales to our top ten defense subsystem and semiconductor customers accounted for approximately 62% of our net sales, with Raytheon making up approximately 16% and BAE Systems making up approximately 10% of those net sales. We anticipate that in the future we will continue to rely on a limited number of customers for sales of our semiconductor components. We expect that a small number of customers will account for a large percentage of our net sales in the future and will be a very important factor in our goal to return to profitability. If we lose any of our existing major customers, our operating results and business would be harmed.

We need to keep pace with rapid product and process development and technological changes to be competitive.

     We compete in markets with rapidly changing technologies, evolving industry standards and continuous improvements in products. To be competitive we must continually improve our products and keep abreast of new technology and our ability to grow will depend substantially on our ability to continue to apply our GaAs semiconductor components expertise to existing and emerging wireless communications markets. New process technologies could be developed that have characteristics that are superior to our current processes. If we are unable to develop and maintain competitive processes or design products using new technologies, and if we are unable to secure production orders for these products, we will not achieve the significant increase in revenues necessary to achieve profitability, and our business and operating results will suffer. We cannot assure you that we will be able to respond to technological advances, changes in customer requirements or changes in regulatory requirements or industry standards. Any significant delays in our development, introduction or shipment of products could seriously harm our business, operating results and financial condition.

We are exposed to general economic, market and, additionally, industry conditions.

     Our business is subject to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the wireless communications and defense industries. In recent quarters, our operating results have been adversely affected as a result of unfavorable economic conditions and reduced capital spending in the United States, Europe and Asia. In particular, sales to customers who supply equipment to service providers of voice and data services have been adversely affected due to significant decline in demand in the wireless infrastructure markets. If the economic conditions in the United States and globally do not improve, if we experience a worsening in the global economic slowdown or if the wireless infrastructure markets do not recover, we may continue to experience material adverse impacts on our business, operating results and financial condition.

We expect our products to experience rapidly declining average sales prices, and if we do not decrease costs or develop new or enhanced products, our margins will suffer.

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     In each of the markets where we compete, average sales prices of established products have been significantly declining, and we anticipate that prices will continue to decline and negatively impact our gross profit margins. There is currently over-capacity in the markets we serve, which could lead to additional pricing pressure as our competitors seek to improve their asset utilization. Accordingly, to remain competitive, we believe that we must continue to develop product enhancements and new technologies that will either slow the price declines of our products or reduce the cost of producing and delivering our products. If we fail to do so, our results of operations would be seriously harmed.

Our sales to international customers expose us to risks that may harm our business.

     Historically, international sales of both our defense subsystems and semiconductor products have accounted for a significant portion of our net sales. For example, sales to international customers accounted for 43% of our total net sales in the first nine months of fiscal 2005, 35% of our total net sales in fiscal 2004 and 67% of our total net sales in fiscal 2003. We anticipate that international sales of our semiconductor components will continue to impact our net sales in the future, as evidenced by the fact that in the first nine months of fiscal 2005, international customers accounted for 64% of our semiconductor sales. In addition, many of our domestic customers sell their products outside of the United States. These sales expose us to a number of inherent risks, including:

	•	the need for export licenses;
	•	unexpected changes in regulatory requirements;
	•	tariffs and other potential trade barriers and restrictions;
	•	reduced protection for intellectual property rights in some countries;
	•	fluctuations in foreign currency exchange rates;
	•	the burdens of complying with a variety of foreign laws;
	•	the impact of recessionary or inflationary environments in economies outside the United States; and
	•	generally longer accounts receivable collection periods.

     We are also subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with our international operations. Potential markets for our products exist in developing countries that may deploy wireless communications networks. These countries may decline to construct wireless communications networks, experience delays in the construction of these networks or use the products of one of our competitors to construct their networks. As a result, any demand for our products in these countries will be similarly limited or delayed. If we experience significant disruptions to our international sales, our business, operating results and financial condition could be harmed.

     Additionally, all of our circuit assembly and test vendors are located outside of the United States. Consequently, our ability to secure products from these vendors is subject to most of the same risks described in the above paragraphs, including: unexpected changes in regulatory requirements; tariffs and other potential trade barriers and restrictions; reduced protection for intellectual property rights in some countries; fluctuations in foreign currency exchange rates; the burdens of complying with a variety of foreign laws; and general geopolitical risks. In the event that any of our international vendors is unable to fulfill our requirements in a timely manner, we may experience an interruption in production until we locate alternative sources of supply. If we encounter shortages in component supply, we may be forced to adjust our product designs and production schedules. The failure of one or more of our key suppliers or vendors to fulfill our orders in a timely manner and with acceptable quality and yields could cause us to not meet our contractual obligations, could damage our customer relationships (including relationships with major customers) and could harm our business.

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Our backlog may not result in sales.

     Our backlog primarily represents signed purchase orders for products due to ship within 12 months. As of December 31, 2004, our backlog was approximately $3.3 million. One customer accounted for 56% of our backlog. In connection with the sale of all of our assets related to our defense subsystem business, in October 2004, our entire defense subsystem backlog was transferred to Teledyne. Backlog is not necessarily indicative of future sales as our customers may cancel or defer orders without penalty. Nevertheless, we make a number of management decisions based on our backlog, including purchasing materials, hiring personnel and other matters that may increase our production capabilities and costs. Cancellation of pending purchase orders or termination or reduction of purchase orders in progress could significantly harm our business. We do not believe that our backlog as of any particular date is representative of actual sales for any succeeding period, and we do not know whether our current order backlog will necessarily lead to sales in any future period.

     Generally, purchase orders in our backlog are subject to cancellation without penalty at the option of the customer, and from time to time we have experienced cancellation of orders in backlog. In fact, in fiscal 2002, a significant portion of our backlog was cancelled due to changing market conditions. Certain of our customers in the wireless infrastructure market delayed and cancelled long-standing contracts in response to declining market demand.

The variability of our manufacturing yields may affect our gross margins.

     The success of our business depends largely on our ability to make our products efficiently through a manufacturing process that results in a large number of usable products, or yields, from any particular production run. In the past we have experienced significant delays in our product shipments due to lower than expected production yields. Due to the rigid technical requirements for our products and manufacturing processes, our production yields can be negatively affected for a variety of reasons, some of which are beyond our control. For instance, yields may be reduced by:

	•	lack of experience in producing a new product;
	•	defects in masks that are used to transfer circuit patterns onto wafers;
	•	impurities in materials used;
	•	contamination of the manufacturing environment; and
	•	equipment failures.

     Our manufacturing yields also vary significantly among our products due to product complexity and the depth of our experience in manufacturing a particular product. We cannot assure you that we will not experience problems with our production yields in the future. Decreases in our yields can result in substantially higher costs for our products. If we cannot maintain acceptable yields in the future, our business, operating results and financial condition will suffer.

Decreases in our customers’ sales volumes could result in decreases in our sales volumes.

     Our current semiconductor product strategy is to design standard products that can be used by different customers for a variety of applications. Any significant increase in our sales volume is dependent on our achieving a considerable number of design wins. Additionally, where our products are designed into an original equipment manufacturer’s product, our sales volumes will be dependent upon the commercial success of the original equipment manufacturer’s product. Sales of our major customers’ products can vary significantly from quarter to quarter. Accordingly, our sales could be adversely affected by a reduction in demand for wireless and defense communications systems. Our operating results have been

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significantly harmed in the past by the failure of anticipated orders to be realized and by deferrals or cancellations of orders as a result of changes in demand for our customers’ products.

We depend on single and limited sources for key components. If we lose one or more of these sources, delivery of our products could be delayed or prevented and our business could suffer.

     We acquire some of the components for our semiconductor products from single sources, and some of the other components for our products are presently available or acquired only from a limited number of suppliers. Our single-sourced components include substrates and semiconductor packages. Some of these components are critical to the products we sell to our major customers. In the event that any of these suppliers are unable to fulfill our requirements in a timely manner, we may experience an interruption in production until we locate alternative sources of supply. If we encounter shortages in component supply, we may be forced to adjust our product designs and production schedules. The failure of one or more of our key suppliers or vendors to fulfill our orders in a timely manner and with acceptable quality and yields could cause us to not meet our contractual obligations, could damage our customer relationships (including relationships with major customers) and could harm our business.

Intense competition in our industry could result in the loss of customers or an inability to attract new customers.

     We compete in an intensely competitive industry and we expect our competition to increase. A number of companies produce products that compete with ours or could enter into competition with us. These competitors, or potential future competitors, include Agilent Technologies, Sirenza Microdevices, TriQuint Semiconductor and WJ Communications. In addition, a number of smaller companies may introduce competing products. Many of our current and potential competitors have significantly greater financial, technical, manufacturing and marketing resources than we have and have achieved market acceptance of their existing technologies. Our ability to compete successfully depends upon a number of factors, including:

	•	the willingness of our customers to incorporate our products into their products;
	•	product quality, performance and price;
	•	the effectiveness of our sales and marketing personnel;
	•	the ability to rapidly develop new products with desirable features;
	•	the ability to produce and deliver products that meet our customers’ requested shipment dates;
	•	the capability to evolve as industry standards change; and
	•	the number and nature of our competitors.

     We cannot assure you that we will be able to compete successfully with our existing or new competitors. If we are unable to compete successfully in the future, our business, operating results and financial condition will be harmed.

Our business will be harmed if potential customers do not use gallium arsenide components.

     Silicon semiconductor technologies are the dominant process technologies for integrated circuits, and the performance of silicon integrated circuits continues to improve. Our prospective customers may be systems designers and manufacturers who are evaluating these silicon technologies and, in particular, silicon germanium versus gallium arsenide integrated circuits for use in their next generation high performance systems. Customers may be reluctant to adopt our gallium arsenide products because of:

•

unfamiliarity with designing systems with gallium arsenide products;

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	•	concerns related to relatively higher manufacturing costs and lower yields; and
	•	uncertainties about the relative cost effectiveness of our products compared to high performance silicon components.

     In addition, potential customers may be reluctant to rely on a smaller company like us for critical components. We cannot be certain that prospective customers will design our products into their systems, that current customers will continue to integrate our components into their systems or that gallium arsenide technology will continue to achieve widespread market acceptance.

Our products may not perform as designed and may have errors or defects that could result in a decrease in net sales or liability claims against us.

     Our customers establish demanding specifications for product performance and reliability. Our standard product warranty period is one year. Problems may occur in the future with respect to the performance and reliability of our products in conforming to customer specifications. If these problems do occur, we could experience increased costs, delays in or reductions, cancellations or rescheduling of orders and shipments, product returns and discounts and product redesigns, any of which would have a negative impact on our business, operating results and financial condition. In addition, errors or defects in our products may result in legal claims that could damage our reputation and our business, increase our expenses and impair our operating results.

The sales cycle of our products is lengthy and the life cycle of our products is short, making it difficult to manage our inventory efficiently.

     Most of our products are components in commercial or defense communications systems. The sales cycle associated with our products is typically lengthy, and can be as long as two years, due to the fact that our customers conduct significant technical evaluations of our products before making purchase commitments. This qualification process involves a significant investment of time and resources from us and our customers to ensure that our product designs are fully qualified to perform with the customers’ equipment. The qualification process may result in the cancellation or delay of anticipated product shipments, thereby harming our operating results.

     In addition, our inventory can rapidly become outdated due to the short life cycle of the end products that incorporate our products. In fiscal 2003, we wrote off outdated inventory when one of our customers stopped producing the mobile handsets that incorporated our power amplifier. Our business, operating results and financial condition could be harmed by excess or outdated inventory levels if our customers’ products evolve more rapidly than anticipated or if demand for a product does not materialize.

We are subject to stringent environmental regulations that could negatively impact our business.

     We are subject to a variety of federal, state and local laws, rules and regulations related to the discharge and disposal of toxic, volatile and other hazardous chemicals used in our manufacturing process. Our failure to comply with present or future regulations could result in fines being imposed on us, suspension of our production or a cessation of our operations. The regulations could require us to acquire significant equipment or to incur substantial other expenses in order to comply with environmental regulations. Any past or future failure by us to control the use of or to restrict adequately the discharge of hazardous substances could subject us to future liabilities and could cause our business, operating results and financial condition to suffer. In addition, under some environmental laws and regulations we could be held financially responsible for remedial measures if our properties are contaminated, even if we did not cause the contamination.

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If we are unable to effectively protect our intellectual property, or if it were determined that we infringed the intellectual property rights of others, our ability to compete in the market may be impaired.

     Our success depends in part on our ability to obtain patents, trademarks and copyrights, maintain trade secret protection and operate our business without infringing the intellectual property rights of other parties. Although there are no pending lawsuits against us, from time to time we have been notified in the past and may be notified in the future that we are infringing another party’s intellectual property rights.

     In the event of any adverse determination of litigation alleging that our products infringe the intellectual property rights of others, we may be unable to obtain licenses on commercially reasonable terms, if at all. If we were unable to obtain necessary licenses, we could incur substantial liabilities and be forced to suspend manufacture of our products. Litigation arising out of infringement claims could be costly and divert the effort of our management and technical personnel.

     In addition to patent and copyright protection, we also rely on trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities. We try to protect this information with confidentiality agreements with our employees and other parties. We cannot be sure that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.

     In addition, to retain our intellectual property rights we may be required to seek legal action against infringing parties. This legal action may be costly and may result in a negative outcome. An adverse outcome in litigation could subject us to significant liability to third parties, could put our patents at risk of being invalidated or narrowly interpreted and could put our patent applications at risk of not issuing. The steps taken by us may be inadequate to deter misappropriation or impede third party development of our technology. In addition, the laws of some foreign countries in which our products are or may be sold do not protect our intellectual property rights to the same extent, as do the laws on the United States. If we are not successful in protecting our intellectual property our business will suffer.

Our manufacturing capacity and our ability to maintain sales volume is dependent on the successful retention of qualified design, assembly and test personnel and our ability to install critical assembly and test equipment on a timely basis.

     Our ability to satisfy our current backlog and any additional orders we may receive in the future will depend on our ability to successfully retain qualified design engineers, assembly and test personnel. Our design engineers reside at our headquarters in Santa Clara, California and at our design center in the United Kingdom. We contract with third parties located primarily in Asia for many of our assembly and test requirements. Our need to successfully manage and retain these personnel will intensify if in the future our production volumes are required to increase significantly from expected levels. Demand for people with these skills is intense and we cannot assure you that we will be successful in retaining sufficient personnel with these critical skills. Our business has been harmed in the past by our inability to hire and retain people with these critical skills, and we cannot assure you that similar problems will not reoccur.

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We depend heavily on our key managerial and technical personnel. If we cannot attract and retain persons for our critical management and technical functions we may be unable to compete effectively.

          Our success depends in significant part upon the continued service of our key technical, marketing, sales and senior management personnel and our continuing ability to attract and retain highly qualified technical, marketing, sales and managerial personnel. In particular, we have experienced and continue to experience difficulty attracting and retaining qualified engineers, which has harmed our ability to develop a wider range of handset products in a timely manner. Competition for these kinds of experienced personnel is intense. In addition, as discussed above, uncertainties resulting from potential business restructurings may hamper our ability to retain our executives or key personnel in our engineering and other departments. We cannot assure you that we can retain our key technical and managerial employees or that we can attract, assimilate or retain other highly qualified technical and managerial personnel in the future. Currently, we have 67 employees, as compared to 195 at September 30, 2004, therefore the loss of a key employee could have a significant impact on our operations. Our failure to attract, assimilate or retain key personnel could significantly harm our business, operating results and financial condition.

Our customers’ failure to adhere to governmental regulations could harm our business.

     A significant portion of our products are integrated into the wireless communications subsystems of our clients. These subsystems are regulated domestically by the Federal Communications Commission and internationally by other government agencies. With regard to equipment in which our products are integrated, it is typically our customers’ responsibility, and not ours, to ensure compliance with governmental regulations. Our net sales will be harmed if our customers’ products fail to comply with all applicable domestic and international regulations.

A disaster could severely damage our operations.

     A disaster could severely damage our ability to deliver our products to our customers. Our products depend on our ability to maintain and protect our computer systems, which are primarily located in or near our principal headquarters in Santa Clara, California. Santa Clara exists on or near a known earthquake fault zone. Although the facilities in which we host our computer systems are designed to be fault tolerant, the systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events. Although we maintain general business insurance against fires, floods and some general business interruptions, there can be no assurance that the amount of coverage will be adequate in any particular case.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

     Our exposure to market risk is principally confined to our cash, cash equivalents and investments which have maturities of less than two years. We maintain a non-trading investment portfolio of investment grade, liquid, debt securities that limits the amount of credit exposure to any one issue, issuer or type of instrument. At December 31, 2004, our investment portfolio comprised approximately $7.5 million in money market funds and certificates of deposit and $5.2 million of money market auction rate preferred stocks, corporate debt securities and municipal bonds. The securities in our investment portfolio are not leveraged, are classified as available for sale and are therefore subject to interest rate risk. We currently do not hedge interest rate exposure. If market interest rates were to increase by 100 basis points, or 1%, from December 31, 2004 levels, the fair value of our portfolio would decline by approximately

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$2,000. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates.

Foreign Currency Exchange Risk

     The current foreign exchange exposure in all international operations is deemed to be immaterial since all of our net sales and the majority of liabilities are receivable and payable in U.S. dollars. A 10% change in exchange rates would not be material to our financial condition and results from operations. Accordingly, we do not use derivative financial instruments to hedge against foreign exchange exposure.

Item 4. Controls and Procedures

     Our management evaluated, with the participation of our chief executive officer and our chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

     There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II       OTHER INFORMATION

Item 4.         Submission of Matters to a Vote of Security Holders

     Our Annual Meeting of Shareholders was held on October 21, 2004. The results of the voting were as follows:

               Proposal 1: Proposed Sale of our Defense Business to Teledyne Wireless, Inc.

               Proposal 2: Election of Directors.

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Proposal 3:

Ratification of Appointment of BDO Seidman, LLP as our Independent Auditors for the Fiscal Year Ending March 31, 2005.

Proposal 4:

Approval of Amendment to our 1994 Stock Option Plan; Approval of Material Terms of our 1994 Stock Option Plan; Approval of Amendment to our Outside Directors’ Stock Option Plan.

Proposal 5:

Approval of a Pricing Modification of Options Granted Prior to March 12, 2004, Under our 1994 Stock Option Plan and our Outside Directors’ Stock Option Plan.

Item 5. Other Information

     On November 17, 2004 we entered into a Second Amendment to Lease with Mission West Properties, L.P. II (formerly known as Berg & Berg Developers), in connection with our corporate headquarters located at 3236 Scott Blvd in Santa Clara, CA. Pursuant to the terms of this Second Amendment to Lease, the term of the lease was extended through September 30, 2010, with amended lease payments commencing on December 1, 2004. Total lease payments over the new term of the lease will be approximately $4.7 million.

Item 6. Exhibits

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INDEX TO EXHIBITS