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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2003

OR

o    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 000-31337

WJ COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

(408) 577-6200

(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.01 PAR VALUE

(Title of class)

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

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

        As of June 29, 2003, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $15,784,919.

        As of March 26, 2004 there were 59,974,684 shares outstanding of the registrant's common stock, $0.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

PART III—Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 15, 2004 are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) to this Form 10-K.

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

        This Annual Report on Form 10-K, the annual report, press releases and certain information provided periodically in writing or orally by the Company's officers, directors or agents contain certain forward-looking statements within the meaning of the federal securities laws that also involve substantial uncertainties and risks. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks" and "estimates" and variations of these words and similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed, implied or forecasted in the forward-looking statements. In addition, the forward-looking events discussed in this annual report might not occur. These risks and uncertainties included, among others, those described in the section of this report entitled "Risk Factors that May Affect Future Results." Readers should also carefully review the risk factors described in the other documents that we file from time to time with the Securities and Exchange Commission. We assume no obligation to update or revise the forward-looking statements or risks and uncertainties to reflect events of circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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WJ COMMUNICATIONS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

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PART I

Item 1.    BUSINESS

Overview

        We design, develop and market innovative, high-performance radio frequency ("RF") semiconductor products that target the wireless communications, broadband cable, RF identification ("RFID") and defense and homeland security markets. We have been designing RF devices for more than 45 years and have developed significant expertise in RF design, semiconductor process technology and component integration. With our team of engineering and technical employees experienced in the distinctive requirements of RF semiconductors, we seek to address the RF challenges in systems utilized in multiple markets.

        Since early 2002, we have undertaken several strategic initiatives to focus on our competitive advantages and dedicate our resources to the RF semiconductor market. As part of these initiatives, we sold our wireless repeater and thin-film product lines and exited the fiber optic and fixed wireless assemblies markets. We are also in the process of implementing a fully outsourced manufacturing model utilizing outside foundries for our manufacturing needs. We believe that our shift to fully outsourced manufacturing, which we expect to complete in 2004, will allow us to further reduce our operating costs and accelerate the time-to-market of our products, while continuing to provide access to advanced manufacturing technologies.

        WJ Communications, Inc. (formerly Watkins-Johnson Company, the "Company") was founded in 1957 in Palo Alto, California, and for many years we focused on RF microwave devices for defense electronics and space communications systems. Beginning in the 1990s, we began applying our RF design, semiconductor technology and integration capabilities to address the growing opportunities for commercial communications products. We believe that our track record of designing high quality, reliable products and our long-standing relationships with industry-leading customers are important competitive advantages. We were originally incorporated in California and reincorporated in Delaware in August 2000.

        Our principal executive offices are located at 401 River Oaks Parkway, California 95134, and our telephone number at that location is (408) 577-6200. Our Internet address is www.wj.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and Exchange Commission, or SEC, filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The information contained on our website is not intended to be part of this report. Our common stock is listed on the Nasdaq National Market and traded under the symbol "WJCI".

Recent Developments

        On January 28, 2004, we completed a secondary underwritten public offering of 2 million newly issued shares of our common stock at $5.75 per share which resulted in gross proceeds to us of $11.5 million. In addition, certain selling stockholders, including our controlling stockholder Fox Paine, sold 12.49 million currently outstanding shares of common stock in the underwritten public offering, at the same price. J.P. Morgan Securities Inc. served as the sole book-running manager for the underwritten offering and Bear, Stearns & Co., CIBC World Markets Corp. and Wells Fargo Securities, LLC served as co-managers. We plan to use the net proceeds of $10.1 million that we received from the offering for general corporate purposes, to fund working capital and for potential strategic transactions. We did not receive any proceeds from the sale of shares by the selling stockholders.

        Over the course of 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products will be developed in this fashion. We also believe that this business strategy offers considerable other advantages such as allowing us

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to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing us to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. In 2003, we began to transition to a fully outsourced business model which we expect to complete in first half of 2004.

        On October 21, 2003, we announced that our Board of Directors approved an additional $2.0 million to expand our existing share repurchase program increasing the total amount authorized to $4.0 million. These funds are available for immediate use and shares will be purchased from time to time in the open market or in private transactions at management's discretion subject to market conditions. As of December 31, 2003, approximately $2.8 million has been utilized to purchase 1,340,719 shares of our common stock at a weighted average purchase price of $2.08 per share.

Industry Background

Industry overview

        We believe several important trends provide long-term growth opportunities in the wireless communications and broadband cable markets as well as other markets dependent on RF technology and integration, such as RFID and defense and homeland security. Trends driving the growth in demand for high-performance RF products include:

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Growth of number of wireless subscribers and increase in consumer demand for advanced data services. The worldwide wireless communications industry has grown considerably in recent years and continues to grow, with the number of subscribers expected to grow from 1.3 billion in 2003 to 1.7 billion in 2007 according to IDC, representing a 7% compound annual growth rate. At the same time, mobile subscribers are increasingly demanding data services in addition to traditional voice telephony services. To meet this demand, network operators are building new and upgrading existing mobile networks to offer greater network capacity and speed to deliver voice and data services. These next generation wireless networks require new equipment based on more advanced RF semiconductor technology.



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Demand for high performance broadband cable network services. In recent years, many cable network operators have begun to upgrade their network infrastructure to support high-speed data services, a broad selection of digital television channels and voice telephony services. To support these enhanced services, cable network operators are upgrading their network infrastructure with equipment that utilizes high frequency RF technologies.



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Potential broad deployment of RFID technology. RFID offers the potential for substantial productivity gains and operational cost savings because it enables real-time knowledge of greater amounts of unique product data than can be delivered by conventional technology, such as product type, date of manufacture, serial number and expiration date. The technology has been successfully used in applications to date, such as Exxon Mobil's Speedpass™, and several recent announcements indicate a growing desire to implement RFID technology, including Wal Mart's announcement that 100 of its suppliers must be RFID compliant in 2005 and a Department of Defense statement that its suppliers must use RFID tags by early 2005. According to Venture Development Corporation, the RFID market is forecasted to grow from $965 million in 2002 to $2.7 billion in 2007, representing a 23% compound annual growth rate. We are targeting the reader device segment of that market.



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Expansion of defense and homeland security markets. Growth in defense electronic spending is expected to be driven by a newly heightened focus on defense and the need for modernization of electronic systems and platforms. New homeland security initiatives, such as the development of secure radios for law enforcement personnel, will also require advanced RF technology.

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Department of Defense and homeland security initiatives are dependent upon RF, microwave and power system applications, creating additional opportunities for RF suppliers.

Network Infrastructure

        Consumers and businesses are continually seeking improved connectivity, mobility, functionality, reliability and bandwidth from voice and data networks. Increased deployment and use of wireless communications systems and the rise of cable and wireless Internet applications has also placed additional demands on network infrastructure.

        Wireless communications and broadband cable service providers continue to make investments in network infrastructure to expand capacity and offer a broader range of services to support the changing needs of end users while reducing their operating costs. In addition, wireless network operators and service providers have begun to announce their plans for deployment of next generation wireless services and networks, referred to in the industry as 2.5G and 3G networks. These networks will offer subscribers increased speeds, additional application capabilities, and broader compatible coverage across geographies. To meet these objectives, network operators are building new and upgrading existing mobile networks to offer greater network capacity and speed to deliver voice and data services. These next generation wireless networks require new equipment based on more advanced RF semiconductor technology. In broadband cable networks, operators have begun to upgrade their network infrastructure to support high-speed data services, a broad selection of digital television channels and voice telephony services. To support these enhanced services, cable network operators are upgrading their network infrastructure with equipment that utilizes high frequency RF technologies.

        Original equipment manufacturers ("OEMs") must develop systems to meet the requirements of communications service providers. In meeting these challenges, OEMs face significant market and product performance pressures including cost reduction, higher performance, greater reliability and shorter time to market. OEMs are adopting new approaches in designing systems to deliver the performance and feature improvements that service providers require. In a typical communications system, the principal functional blocks are the RF subsystem, which receives, amplifies and transmits signals, the signal processor, which encodes and decodes digitized signals, and the antenna. Since the RF subsystem receives the signal, interfaces with the signal processor, and amplifies and transmits the signal, a system's performance and signal quality are significantly affected by the RF subsystem. Some OEMs do not have the internal resources to address every aspect of a system's RF performance. To lower their production costs and shorten product development cycles, OEMs are seeking innovative RF components from third-party suppliers.

        Many RF component suppliers have made significant investments in their own wafer fabrication facilities ("fabs") which are typically based on a single process technology. A process technology is a method of manufacturing semiconductor devices and circuits using a given wafer material. As a result, RF component suppliers with wafer fabs generally focus most of their attention on developing products using their own process technology even if another process may be more appropriate for a given application. To adopt one of these other process technologies, these component suppliers would have to migrate their current facility to the other technologies, make significant capital investments in new wafer fabrication equipment or would have to develop relationships with merchant wafer fabs. Because all of these steps are expensive and time consuming, most RF component suppliers resist changing process technologies. As a result, many of these component suppliers do not offer the broadest range of products or may offer sub-optimal products for certain applications.

        We believe that there is a substantial market opportunity for a third-party supplier of high performance RF components who can meet the needs for flexibility, performance and value required by OEMs.

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Radio Frequency Identification (RFID).

        Radio frequency identification, or RFID, is a generic term for technologies that use radio waves to automatically identify individual items. There are several methods of identifying objects using RFID, but the most common is to store a serial number that identifies a product, and perhaps other information, on a microchip that is attached to an antenna (the chip and the antenna together are called an RFID transponder or an RFID tag). The antenna enables the chip to transmit the identification information to a reader. The reader converts the radio waves returned from the RFID tag into a form that can then be passed on to computers that can make use of it.

        The system consists of a tag, which is made up of a microchip with a coiled antenna, and an interrogator or reader with an antenna. The reader sends out electromagnetic waves that form a magnetic field when they "couple" with the antenna on the RFID tag. A passive RFID tag draws power from this magnetic field and uses it to power the microchip's circuits. The chip then modulates the waves that the tag sends back to the reader and the reader converts the new waves into digital data.

        Profitable and effective commercial RFID systems have been in operation for over a decade. The current market is driven by traditional applications such as security/access control, automobile immobilization, toll collection, and transportation. Many applications are still in the early adopters phase including pallet tracking, point of sale commerce, baggage handling. There are notable obstacles to overcome before explosive growth can be seen including but not limited to: industry and application standards, cost, end user education, frequency regulations, power restrictions, the weakness of indirect channel support and the highly fragmented competitive environment.

        In addition to a high number of trial applications, there have also been many real implementations across several industries. For example, numerous libraries, labs, hospitals, warehouses, retailers, commercial laundries, and automobile manufacturers implemented RFID for applications such as item, material and asset management. This penetration into vertical industries occurs as a growing number of systems integrators and software companies who serve these industries continue to form relationships with RFID vendors. RFID hardware manufactures are also welcoming solutions providers who specialize in warehouse management, logistics services, asset management, and industrial automation into their partner programs.

        Going forward, the supply chain will begin to drive the RFID market. For example, Wal-Mart Stores Inc. (NYSE: WMT), Gillette Co (NYSE: G) and the United States Department of Defense mandates for their respective suppliers to deliver product RFID tagged at the case and pallet level have helped spur the industry to move beyond experimentation to implementation. We believe that the Realization of the Transportation Recall Enhancement, Accountability, and Documentation ("TREAD") Act mandated by the United States Congress in 2000 will also create a significant opportunity for RFID readers. The next level in the supply chain will be item level tagging leading to the need for a high volume of shelf readers so that real time inventory tracking and shrinkage reduction can be put into place. In our view, the natural evolution for RFID will be into cell phones and other portable devices for point of sale applications.

The RF Challenge

        RF semiconductor technology presents different engineering challenges than standard semiconductor design. In general, digital semiconductors are created from standard semiconductor circuit designs that have predictable performance. This permits an automated design process. Each RF component, however, has distinctly different characteristics that influence overall system performance in complex ways. Instead of having stable inputs and outputs, the RF circuit characteristics can drift based on process variations, temperature, power supply and other variables. As a result, performance characteristics are unique for each device, and the RF engineer must evaluate and develop new designs on a continuous basis for each system performance level and air interface standard. In addition to being skilled in semiconductor circuit

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design, the RF circuit designer must have a thorough understanding of signal processing principles, must understand the totality of the system for which the device is intended and must be able to create designs that function within the unique parameters of different wireless system architectures.

        The knowledge and skills required to design and to manufacture RF semiconductors, components and integrated modules are unique and can take many years to develop. Manufacturers seek companies with the technical skills and engineering resources to design, manufacture and integrate RF semiconductors and the other advanced products required by current and future generations of wireless and cable communications equipment.

The WJ Communications Solution

        With the ability to design and manufacture RF semiconductors, components, and higher level RF modules, and interface these assemblies with other network elements, we enable both current and next generation wireless and broadband cable networks, defense and homeland security systems and RFID systems worldwide. Our core technology lies within our advanced RF semiconductor designs.

        Our RF expertise covers a broad range of frequencies used in advanced communications networks today. The WJ Communications solution is comprised of the following key elements:

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RF Design Expertise. We have been designing RF and microwave products for more than 40 years and have developed significant RF design expertise. Our team of 69 highly qualified and talented engineering and technical employees is capable of applying this expertise to a variety of semiconductor products. These products are optimized to achieve high performance with minimum cost.



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Advanced Device Technology. We have substantial expertise in designing and manufacturing highly linear semiconductor products that amplify and transform signals with minimal distortion and interference. We believe that our devices are more efficient, consume less power and produce less heat than competitive products, and, consequently, enable RF systems to achieve optimal performance.



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Manufacturability. Our ability to rapidly convert new technologies and designs into completed RF semiconductors, integrated assemblies, and highly functional components products results from our flexible manufacturing operations and our manufacturing engineering expertise.

Business Strategy

        Our objective is to be the leading supplier of innovative RF semiconductor products. To meet this goal, we intend to:

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Leverage Our Technology Leadership and Our Design and Integration Expertise to Grow with Growing Markets. We intend to target multiple growth markets such as RFID and defense and homeland security and expand our addressable market opportunities in wireless communications and broadband cable. We believe that as data throughput requirements expand in wireless networks the ability to solve the RF challenges becomes increasingly important and the market for RF products will grow accordingly. We intend to apply our RF design expertise to develop additional leading-edge products in each of the rapidly growing areas of the communications markets, focusing on the markets for RF semiconductors, modules and components. Due to the commonality of the RF challenge in broadband cable and wireless communications networks, we have the flexibility to allocate our design and engineering resources to any or all of these markets and intend to use this flexibility to take advantage of market opportunities as they arise.



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Maintain and Develop Strong Collaborative Customer Relationships with Industry Leaders. We believe our reputation for product quality, technical performance, customer responsiveness, on-time

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delivery and cost competitiveness will help us to continue to maintain and develop a loyal customer base. We collaborate with many of our customers to design and develop new products for them as they develop new products. We plan to maintain our current, and develop new, customer relationships with industry leaders within wireless and cable communications markets.

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Leverage the Fabless Semiconductor Model. We are an ISO 9001 (revision 2000) certified manufacturer. We intend to extend our manufacturing capabilities to meet our customers' demand by transitioning to an outsourced business model. During 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies at third-party foundries. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products will be developed in this fashion. In 2003, we began to transition to a fully outsourced business model which we expect to complete in the first half of 2004. We believe that this manufacturing strategy offers considerable other business advantages such as allowing us to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, obtaining competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. However, there are also significant business risks associated with our dependence upon third parties for our manufacturing needs and there can be no assurance that our outsourcing strategy will be a success. We do not expect to make significant investments in new manufacturing.



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Acquire and Develop New Technologies. We intend to continue to augment our existing technology base and design capabilities by acquiring complementary technologies, design capabilities, manufacturing processes and product offerings for broadband cable applications. In addition, we intend to continue to focus our research and development efforts on emerging communications and RF technologies.

Products and Technology

        We are committed to being a leader and innovator in the RF semiconductor market and believe that we are positioned to provide a broad portfolio of RF technology solutions. Our semiconductor products are comprised primarily of amplifiers, mixers, transistors and multi-chip modules ("MCMs") that enable current and next generation wireless and wireline communications networks. Our MCMs integrate multiple RF semiconductors, process technologies and functions in a single package allowing us to significantly reduce cost, power consumption and circuit board space. Our ability to design our semiconductors in multiple process technologies enables us to address a variety of end-markets and applications.

        The following table summarizes the sales from our significant product lines:

        In the second quarter of 2003 we sold our Thin-Film product line to M/A-COM, a unit of Tyco Electronics. Our Thin- Film product line contributed approximately $855,000, $3.2 million and $3.6 million to our semiconductor sales in 2003, 2002 and 2001, respectively.

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Semiconductor Products and Process Technologies

        Our semiconductor products include a broad array of high performance semiconductors that we manufacture for our own use as well as for sale to others. The primary markets for our semiconductor products are the wireless and broadband cable infrastructure markets.

        Our semiconductor products are comprised primarily of amplifiers, mixers, multi-chip modules ("MCM") and transistors. Amplifiers and transistors increase the level of signals while mixers translate a signal from one frequency to another. The strength of our semiconductor technology lies in our ability to design and in the case of our gallium arsenide semiconductor products, manufacture highly linear products. High linearity is one of the most critical performance parameters for broadband cable and wireless networks.

        We have expertise in designing and manufacturing RF components in multiple process technologies. Some of these processes have been built in our own manufacturing operations and in other cases we have our products manufactured for us by an outside foundry. The processes we are currently designing for or evaluating include:

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Gallium arsenide metal semiconductor field effect transistor (GaAs MESFET),



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Gallium arsenide heterostructure field effect transistor (GaAs HFET),



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Silicon-germanium heterostructure bipolar transistor (SiGe HBT),



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Indium gallium phosphide heterojunction bipolar transistor (InGaP HBT),



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Gallium arsenide pseudomorphic high electron mobility transistor (GaAs pHEMT),



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Silicon bipolar junction transistor (Si BJT),



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Silicon complementary metal oxide semiconductor transistor (CMOS),



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Integrated combination of silicon bipolar transistor and complementary metal oxide semiconductor transistor (Si BiCMOS),



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Integrated combination of silicon-germanium heterostructure bipolar transistor and complementary metal oxide semiconductor (SiGe BiCMOS),



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Laterally diffused complementary metal oxide semiconductor transistor (LDMOS), and



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Silicon-on-insulator (SOI).

RFID Reader Products

        Our semiconductor products include our RFID reader products. During 2003 we formed a strategic partnership with Alien Technology to utilize our core RF design expertise and RF semiconductor integration IP to address the market's need for low cost RFID readers capable of working in real world environments. In September 2003, we introduced an Auto-ID Center Class 1 EPC compliant reader operating in the 900MHz ISM band achieving significant improvement in reader performance with a substantial reduction in cost and form factor. By the end of 2003 we began production deliveries of this product and have completed development on a Class 1 EPC compliant reader operating in the worldwide 2.4GHz band. Production deliveries of the 2.4GHz unit will begin in the first quarter of 2004.

Wireless Communications Integrated Assembly Products

        Our wireless assembly products are primarily used in wireless infrastructure equipment, such as cellular base stations, which provide a combination of voice and data services to mobile users. These products include base station RF front ends, diagnostic and support equipment and repeaters. Base station

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RF front ends consist of filters and frequency converters, and are used in virtually every communications system to translate signals from one frequency to another.

        These products have reached the end of their product life cycle and will not be a significant factor in our long term business. Aside from potential and infrequent "life time buys," our focus will predominantly be repair and maintenance of the existing product base.

Customers

        We sell our products principally to original equipment manufacturers, including their manufacturing subcontractors. We believe that we have strong relationships with market leaders in all of our target markets. A sample of our revenue-producing customers include:

        We depend on a limited number of key customers for a majority of our sales. In 2003, Richardson Electronics and Lucent Technologies each accounted for more than 10% of our sales and in aggregate accounted for approximately 70% of our sales. In 2002, Richardson Electronics Nortel Networks and Lucent Technologies each accounted for more than 10% of our sales and in aggregate accounted for 62% of our sales. In 2001, Richardson Electronics, Marconi Communications, Nortel Networks and Lucent Technologies each accounted for more than 10% of our sales and in aggregate accounted for 71% of our sales. We expect that our key customers will continue to account for a substantial portion of our sales in 2004 and in the foreseeable future. These customers and their respective contributions to our net revenue have varied and will likely continue to vary from period to period. We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty, and currently do not have agreements with any of our key customers that contain long-term commitments to purchase specified volumes of our products.

Sales, Marketing and Customer Support

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Direct Sales We have a dedicated team of direct sales people who are responsible for maintaining relationships with our key customers and generating new business with both existing and potential customers. We cultivate strong, direct relationships with our key customers through major account teams that are led by our sales professionals and are comprised of engineers and product managers. These teams are designed to address the specific product needs of our key customers.



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Distributor In June 2002, we entered into a sole worldwide distributorship agreement with Richardson Electronics, Ltd., a global provider of engineered solutions, to resell our RF semiconductor products through catalog, e-commerce and direct channels. This agreement expanded our previous relationship and includes provisions for joint marketing and promotional activities.



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Manufacturer Sales Representatives Our worldwide network of twenty independent manufacturer sales representatives is responsible for assisting our direct sales force in calling on potential customers as well as maintaining relationships with non-major accounts.



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Applications Engineering Our products are highly technical and our customers frequently consult with us to select a component for a given application, determine product performance under specified conditions unique to their system, or test a product for new applications. To meet the

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needs of our customers, we provide support in all stages of the sales process, from concept definition and product selection to post-sale support. These services are provided by our applications engineering organization, which works closely with our sales organization in all pre-and post-sale activities. We intend to continue to invest in expanding our applications engineering organization to assist our customers.

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International Sales Our sales outside the United States were 32%, 34% and 42% of our total sales in 2003, 2002 and 2001, respectively. For more detailed disclosure on our foreign sales, see Note 12 to the consolidated financial statements included elsewhere in this Form 10-K.

Manufacturing

        Our facility in Milpitas, California produces some of our gallium arsenide semiconductor products and produced our thin-film products until our second quarter of 2003. Considerable manufacturing capacity exists for gallium arsenide semiconductor. Our gallium arsenide products are packaged in Singapore, The Philippines, Malaysia, Taiwan and France at vendor facilities.

        During 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies at third-party foundries. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products will be developed in this fashion. In 2003, we began to transition to a fully outsourced business model which we expect to complete in the first half of 2004. We believe that this business strategy offers considerable advantages such as allowing us to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing us to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. However, there are also significant business risks associated with our dependence upon third parties for our manufacturing needs and there can be no assurance that our outsourcing strategy will be a success.

        Our San Jose, California facility produces our wireless communications and RFID products. We contract with external surface mount manufacturers for high volume manufacturing, using both turnkey and consignment material arrangements with these surface mount contract manufacturers depending on the characteristics of the assembly. We have used a number of capable surface mount manufacturers. Once the surface mount assembly operations are completed, the products are shipped to our facilities for testing and final configuration.

        We depend on single or limited source suppliers for the components and materials used in many of our products, including our gallium arsenide wafers, packaging, electronic components and antennas. Although we rely on limited or sole source suppliers for other components and materials, there are typically alternative sources of supply available for them. If in the future we face difficulties obtaining these components and materials from any of our limited or sole source suppliers, we may face a delay in the shipment of products which are manufactured using these components and materials while we identify and qualify an alternative source of supply if available. As a result of these delays, we may fail to satisfy customer orders and our sales may decline while we look for a suitable alternative supplier.

        We are committed to quality of the management systems governing the manufacture of our products and our systems are ISO 9001 (revision 2000) certified. The International Organization for Standardization ("ISO") is a network of the national standards institutes of 148 countries including the United States of America. The ISO 9000 family of standards is primarily concerned with "quality management," meaning the systems the organization utilizes to fulfill: the customer's quality requirements, and applicable regulatory requirements, while aiming to enhance customer satisfaction, and achieve continual improvement of its performance in pursuit of these objectives. The ISO 9001:2000 is approved as an American National Standard by the American Society for Quality. Our systems are regularly assessed by independent certifying bodies, through routine quality system audits, for adherence to ISO 9001 standards.

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Research and Development

        Our future success depends on our ability to develop new designs, technologies and product enhancements. We have assembled a core team of experienced engineers and technologists to accomplish these objectives. These employees are involved in advancing our core technologies, as well as applying these core technologies to our product development activities in our target markets. We have made, and will continue to make, a substantial investment in research and development activities. Research and development costs, which are expensed when incurred, were approximately $16.8 million, $17.8 million and $17.2 million for the years 2003, 2002 and 2001, respectively.

Intellectual Property

        The protection of our intellectual property is critical to our success. We rely on patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual provisions, to protect our proprietary rights. We believe that one of our competitive strengths is our core competence in engineering, manufacturing and understanding our customers and markets, and we take aggressive steps to protect that knowledge. We have been active in securing patents and entering into non-disclosure and confidentiality agreements to protect our proprietary technologies and know-how resulting from our ongoing research and development.

        We seek patent protection for our unique developments in circuit designs, processes and algorithms. We have 25 United States patents and 10 foreign patents. We currently have several patent applications pending in the United States Patent and Trademark Office including two we filed in 2003. Our existing United States patents will expire between June 2007 and August 2021. We have chosen to pursue foreign patent protection only in selected foreign countries. Our failure to pursue foreign protection in these countries and the fact that patent rights may be unavailable or limited in some foreign countries could make it easier for our competitors to utilize our intellectual property. We cannot assure you that any patent will be issued as a result of our pending applications or any future applications or that, if issued, these patents will be sufficient to protect our technology. In addition, we cannot assure you that any existing or future United States or foreign patents will not be challenged, invalidated or circumvented, or that any patent granted will provide us with adequate protection or any competitive advantages.

        We license various technologies from third parties that we have integrated into our products. We have a non-exclusive, non-transferable license to use particular thin-film technology and transferable, non-exclusive licenses to use particular gallium arsenide technology, and technology used in the field of commercial, or non-military, RF communications, all of which are perpetual licenses. Our failure to maintain these licenses could harm our business.

        We generally enter into non-disclosure agreements with our vendors, customers and licensees. Our employees are generally required to enter into agreements providing for the maintenance of confidentiality and the assignment of rights to inventions made by them while in our employ. We generally control access to the distribution of documentation and other information concerning our intellectual property. We also have entered into non-disclosure agreements to protect our confidential information delivered to third parties, in connection with possible strategic partnerships and for other purposes.

        We have entered into license agreements in connection with some of our recent business dispositions with respect to some of our intellectual property used in these sold businesses. We cannot assure you that the other parties to these license agreements will honor the terms of the agreements or aggressively prevent the misappropriation or infringement of our intellectual property. Further, under these license agreements, some of our intellectual property may be licensed to one or more of our competitors.

        The telecommunications industry is characterized by the vigorous protection and pursuit of intellectual property rights. We cannot assure you that actions alleging infringement by us of third-party intellectual property, misappropriation or misuse by us of third-party trade secrets or the invalidity of the

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patents held by us will not be asserted or prosecuted against us, or that any assertions of infringement, misappropriation or misuse or prosecutions seeking to establish the invalidity of our patents will not harm our competitive position or reputation or result in significant monetary expenditures.

Employees

        We believe that one of our most important assets is our base of well-trained and experienced employees. As of December 31, 2003, we had 153 employees, consisting of:

•

15 executive and administrative employees;



•

18 sales and marketing employees;



•

51 manufacturing, facilities and operations employees; and



•

69 engineering and technical employees.

        We will reduce our workforce by approximately 10% upon completion of our plan to outsource our semiconductor manufacturing in the first half of 2004. As such, we have accrued approximately $253,000 for employee severance (see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K). Our employees have an average of over five years tenure with us. Many of our engineering and technical staff have been with us for even longer. We believe that many of our engineers, as a result of their tenure and their defense electronics background, are among the most experienced high frequency engineers in the United States. None of our employees are covered by collective bargaining agreement or represented by labor unions, and we have never experienced a work stoppage. We believe our employee relations are good.

Backlog

        Our backlog is comprised of standard purchase orders and annual contracts for the delivery of products. For our annual contracts, our major customers provide us with rolling sales forecasts on at least a monthly basis. These forecasts are subject to changes, including changes as a result of changes in market conditions, and could fluctuate significantly from quarter to quarter. Due to industry practice which allows customers to cancel or change orders with limited advance notice prior to shipment, we believe that backlog is not a reliable indicator of future revenue levels.

Competition

        The markets for our products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. We compete primarily on the basis of product performance and design, reliability, quality, level of integration, delivery, price, customer support, reputation and the availability and breadth of product offerings. In each of the markets we serve, we compete primarily with other suppliers of high performance RF components. We also compete with current and potential communications equipment manufacturers who manufacture RF components internally such as Ericsson, Lucent, Motorola and Nortel Networks. We expect increased competition from existing competitors and from a number of companies that may enter the RF component market, as well as future competition from companies that may offer new or emerging technologies. Some of our competitors are large public companies that have significantly greater financial, technical, marketing and other resources than us. As a result, these competitors may be able to devote greater resources to the development, promotion, sale and support of their products. Furthermore, those of our competitors that have large market capitalization or cash reserves may be better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, these

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competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, competitors may develop technologies that more effectively address our markets with products that offer enhanced features, lower power requirements or lower cost. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.

Environmental Matters

        Our operations are subject to federal, state and local laws and regulations governing the use, storage, disposal of and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination. Our former Scotts Valley and Palo Alto sites have significant environmental liabilities for which we have entered into and funded fixed price remediation contracts and obtained cost-overrun and unknown pollution conditions insurance coverage.

        The Scotts Valley site is a federal Superfund site. Chlorinated solvent and other contamination was identified at the site in the early 1980s, and by the late 1980s we had installed a groundwater extraction and treatment system. In 1991, we entered into a consent decree with the United States Environmental Protection Agency providing for remediation of the site. In July 1999, we signed a remediation agreement with an environmental consulting firm, ARCADIS Geraghty & Miller. Pursuant to this remediation agreement, we paid approximately $3.0 million in exchange for which ARCADIS agreed to perform the work necessary to assure satisfactory completion of our obligations under the consent decree. The agreement also contains a cost overrun guaranty from ARCADIS up to a total project cost of $15.0 million. In addition, the agreement included procurement of a ten-year, claims-made insurance policy to cover overruns of up to $10.0 million from Reliance Insurance Company, along with a ten-year, claims made $10-million policy to cover various unknown pollution conditions at the site.

        The Palo Alto site is a state Superfund site and is within a larger, regional state Superfund site. As with the Scotts Valley site, contamination was discovered in the 1980s, and groundwater extraction and treatment systems have been operating for several years at both the site and the regional site. In July 1999, we entered into a remediation agreement with an environmental consulting firm, SECOR. Pursuant to this remediation agreement, we paid approximately $2.4 million in exchange for which SECOR agreed to perform the work necessary to assure satisfactory completion of our obligations under the applicable remediation orders. The payment included the premium for a 30-year, claims-made insurance policy to cover cost overruns up to $10.0 million from AIG, along with a ten-year claims-made $10.0 million insurance policy to cover various unknown pollution conditions at the site.

        With respect to our remaining current or former production facilities, to date either no contamination of significance has been identified or reported to us or the regulatory agency involved has granted closure with respect to the identified contamination. Nevertheless, we may face environmental liabilities related to these sites in the future.

Risk Factors That May Affect Future Results

        You should carefully consider the risks described below and all other information contained in this report and in our other filings with the SEC in evaluating us and our business before making an investment decision. If any of the following risks, or other risks and uncertainties that we have not yet identified or that we currently think are immaterial, actually occur and are material, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline and you may lose part or all of your investment.

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We have experienced substantial declines in sales and increases in operating losses and we anticipate additional future losses.

        Our sales for 2003, 2002 and 2001 were $26.6 million, $40.2 million and $62.2 million, respectively. This significant decrease in sales was due primarily to sharply reduced end-customer demand in many of the communications end-markets which our products address. We incurred operating losses of $16.7 million, $52.5 million, $38.0 million in 2003, 2002 and 2001, respectively.

        We expect that current reduced end-customer demand will, and other factors could, continue to adversely affect our operating results in the near term and we anticipate incurring additional losses in the future. Other factors could include, but are not limited to:

•

production overcapacity in the industry which could cause us to have to reduce the price of our products adversely affecting our sales and margins;



•

rescheduling, reduction or cancellation of significant customer orders which could cause us to lose sales that we had anticipated;



•

any loss of a key customer;



•

the ability of our customers to manage their inventories which if not properly managed could cause our customers to reschedule, reduce or cancel significant orders or return our products; and



•

political and economic instability in, foreign conflicts involving or the impact of regional and global infectious illnesses (such as the SARS outbreak) on the countries of our vendors, manufacturers, subcontractors and customers.

        In order to return to profitability, we must achieve substantial revenue growth and we currently face an environment of uncertain demand in the markets our products address. We cannot assure you as to whether or when we will return to profitability or whether we will be able to sustain such profitability, if achieved.

We operate in the highly cyclical semiconductor industry which has experienced significant fluctuations in demand.

        The semiconductor industry is highly cyclical and has historically experienced significant fluctuations in demand for products. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. These downturns have been characterized by diminished product demand of end-customers, production overcapacity, high inventory levels and accelerated erosion of average selling prices. We have experienced these conditions in our business in the past and may experience such downturns in the future. The most recent downturn, which began in the fourth quarter of 2000, has been severe and prolonged, and it is uncertain when any significant recovery will occur. Future downturns in the semiconductor industry may also be severe and prolonged. Future downturns in the semiconductor industry, or any failure of the industry to recover fully from its recent downturn, could seriously impact our revenues and harm our business, financial condition and results of operations.

        During the 1990s and continuing into 2000, the semiconductor industry enjoyed unprecedented growth, benefiting from the rapid expansion of the internet and other computing and communications technologies. During 2001, we—like many of our customers and competitors—were adversely affected by a general economic slowdown and an abrupt decline in demand for products. The terrorist attacks of September 11, 2001 also further depressed economic activity and demand for products. The impact of slowing demand has been compounded by higher than normal levels of product inventories among our customers, resulting in increasing pricing pressure. We expect that factors including, but not limited to, specific market conditions, general economic conditions, economic uncertainty and downturns relating to the threat or actual occurrence of armed international conflict or terrorist attacks, reduced end-customer

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demand for products, underutilization of our manufacturing capacity and changes in our revenue mix could materially and adversely impact our operating results in the near term.

We depend on Richardson Electronics, Ltd. for distribution of our RF semiconductor products and the loss of this relationship could materially reduce our sales.

        Richardson Electronics, Ltd. is the sole worldwide distributor of our complete line of RF semiconductor products. This sole distributor is our largest semiconductor customer and our sales to Richardson Electronics, Ltd. represent 61% of our semiconductor sales for 2003 and 51% and 35% in 2002 and 2001, respectively. We cannot assure you that this exclusive relationship will improve sales of our semiconductor products or that it is the most effective method of distribution. If this sole distributor fails to successfully market and sell our products, our semiconductor sales could materially decline. Our agreement with this distributor does not require it to purchase our products and is terminable at any time. If this distribution relationship is discontinued, our RF semiconductor sales could materially decline.

We depend upon a small number of customers that account for a high percentage of our sales and the loss of, or a reduction in orders from, a significant customer could result in a reduction of sales.

        We depend on a small number of customers for a majority of our sales. We currently have two customers, Richardson Electronics, Ltd. and Lucent Technologies, which each accounted for more than 10% of our sales and in aggregate accounted for 70% of our sales for the year ended December 31, 2003. Sales to Richardson Electronics accounted for 47% of our sales for 2003 and 24% and 11% in 2002 and 2001, respectively. Sales to Lucent Technologies accounted for 23% of our sales for the year ended December 31, 2003 and 25% and 31% in 2002 and 2001, respectively, including sales to their manufacturing subcontractors. In addition, most of our sales result from purchase orders or from contracts that can be cancelled on short-term notice. Moreover, it is possible that our customers may develop their own products internally or purchase products from our competitors. We expect that our key customers will continue to account for a substantial portion of our revenue in 2004. The loss of or a reduction in orders from a significant customer for any reason could cause our sales to decrease.

The new markets we are targeting may not grow as forecast and we may not be a successful participant in those markets.

        Our growth strategy is based in part on our success in penetrating new markets, including the RFID and defense and homeland security markets. These markets currently are not a material source of revenue for us, and we cannot assure you that our new products will succeed.

        In addition to the risks generally associated with new product development and introduction, these products are subject to the particular risks described below.

        The growth of the RFID market will depend on, among other things, the ability of suppliers to meet size, portability, cost and power consumption objectives, the ability of industry participants to agree on appropriate technology standards and the willingness of end users to invest in the required equipment and information systems. Even if the market does grow as forecasted, our ability to successfully participate in the RFID market will depend upon, among other things, our timely development and marketing of appropriate products, attracting the most advantageous industry partnerships, securing any necessary additional intellectual property and forming customer relationships.

        The success of our products for the defense and homeland security markets will require, among other things, that our products conform to the enhanced specifications often associated with products for this sector, and that we develop relationships with a category of customers with which we have not had extensive dealings in recent years. Our results in this sector may also be affected by changes in government funding levels and by contract provisions that may give customers the right to terminate contracts for convenience.

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Third party intellectual property claims could harm our business.

        As is typical in the semiconductor industry, we from time to time receive communications from third parties alleging infringement of patent and other intellectual property rights. For example, we are currently engaged in correspondence with a competitor over an alleged patent infringement claim relating to certain of our products. We believe the asserted claim is without merit and do not believe that the claim will have a material impact on our business. We intend to vigorously protect our proprietary intellectual property rights with respect to all of our products. However, we cannot assure you that this claim, or other such claims that may arise in the future, can be amicably disposed of, and it is possible that litigation could ensue. Litigation could result in substantial costs to us and diversion of our resources. If we fail to obtain a necessary license or if we do not prevail in patent or other intellectual property litigation, we could be required to discontinue using certain technologies, to seek to develop non-infringing technologies, which may not be feasible, and to pay monetary damages, any of which could harm our business.

Our future success depends significantly on strategic relationships with certain of our customers. If we cannot maintain these relationships or if these customers develop their own solution or adopt a competitor's solutions instead of buying our products, our operating results would be adversely affected.

        In the past, we have relied on our strategic relationships with certain customers who are technology leaders in our target markets. We intend to pursue and continue to form these strategic relationships in the future but we cannot assure you that we will be able to do so. These relationships often require us to develop new products that typically involve significant technological challenges. Our partners frequently place considerable pressure on us to meet their tight development schedules. Accordingly, we may have to devote a substantial amount of our limited resources to our strategic relationships, which could detract from or delay our completion of other important development projects. Delays in development could impair our relationships with our strategic partners and negatively impact sales of the products under development. Moreover, it is possible that our customers may develop their own solutions or adopt a competitor's solution for products that they currently buy from us. If that happens, our business, financial condition and results of operations could be materially and adversely affected.

Our quarterly operating results may fluctuate significantly. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

        Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet our publicly stated guidance or the expectations of securities analysts or investors, our stock price may decline. For example, in late 2002 and early 2003, we publicly announced revised lowered expectations of financial results for certain periods. Subsequent to such announcements, the trading price of our common stock declined significantly. Factors that can contribute to fluctuations in our operating results include:

•

the rescheduling, reduction or cancellation of significant customer orders;



•

the ability of our customers to manage their inventories;



•

our gain or loss of a key customer;



•

changes in the volume of our product sales and pricing concessions on volume sales;



•

the qualification, availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products;



•

the timing and success of the introduction of new products and technologies by us and our competitors, and the acceptance of our new products by our customers;

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•

the timing of customer-industry qualification and certification of our products and the risks of non-qualification or non-certification;



•

the rate of which our present and future customers and end users adopt our technologies in our target markets;



•

fluctuations in the manufacturing yields of our fabrication facilities or of any third-party semiconductor foundries we outsource to and other problems or delays in the fabrication, assembly, testing or delivery of our products;



•

changes in manufacturing capacity and the utilization of this capacity;



•

the availability and pricing of third-party semiconductor foundry and assembly and test capacity and raw materials;



•

cost and expense of outsourcing our semiconductor manufacturing;



•

changes in our product mix or customer mix;



•

the level of orders received that we can ship in a fiscal quarter;



•

recognition of non-recurring revenue generated from life-time buys of discontinued products or settlements of contract cancellations for orders containing inventory protection clauses;



•

the quality of our products and any remediation costs;



•

patent and other intellectual property disputes, customer indemnification claims and other types of litigation risks;



•

should we begin to acquire technologies and businesses, the risks inherent in these acquisitions, including the timing and successful completion of technology and product development through volume production, integration issues, costs and unanticipated expenditures, change relationships with customers, suppliers and strategic partners, potential contractual, intellectual property or employment issues, accounting treatment and charges, and the risks that the acquisition cannot be completed successfully or that anticipated benefits are not realized;



•

the eventual actual cost of our abandonment of our leased facilities;



•

our ability to sublease the excess space we abandoned in our leased facilities; and



•

the impact of natural disasters, international conflicts and acts of terrorism, regional and global infectious illnesses (such as the SARS outbreak) and other events beyond our control on economic and market conditions.

        Due to the factors discussed above, you should not rely on quarter-to-quarter comparisons of our operating results as indicators of our future performance.

Under our realigned manufacturing strategy, we will be increasingly dependent upon third parties for the manufacture of our products.

        As we transition to a complete outsourcing business model, we will obtain an increasing portion of our wafer requirements from outside wafer fabrication facilities, known as foundries. There are significant risks associated with our reliance on third-party foundries, including:

•

the ability of the outsourced foundries to complete the transfer of our semiconductor production processes;



•

the lack of ensured wafer supply, potential wafer shortages and higher wafer prices;

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•

limited control over product delivery schedules, quality assurance and control, manufacturing yields and production costs; and



•

the unavailability of, or delays in obtaining, access to key fabrication process technologies.

        We have no long-term contracts with any foundry and we do not have a guaranteed level of production capacity at any foundry. The ability of each foundry to provide wafers to us is limited by its available capacity and our foundry suppliers could provide that limited capacity to its other customers. In addition, our foundry suppliers could reduce or even eliminate the capacity allocated to us on short notice. Moreover, such a reduction or elimination is possible even after we have submitted a purchase order. If we choose to use a new foundry, it typically takes several months to complete the qualification process before we can begin shipping products from the new foundry.

        The foundries we use may experience financial difficulties or suffer damage or destruction to their facilities. If these events or any other disruption of wafer fabrication capacity occur, we may not have a second manufacturing source immediately available. We may therefore experience difficulties or delays in securing an adequate supply of our products, which could impair our ability to meet our customers' needs and have a material adverse effect on our operating results. In the event of these types of delays, we cannot assure you that the required alternate capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternate wafer production capacity is available, we may not be able to obtain it on favorable terms, which could result in a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through foundry or similar arrangements with others.

        In addition, the highly complex and technologically demanding nature of semiconductor manufacturing has caused foundries to experience from time to time lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. Lower than anticipated manufacturing yields may affect our ability to fulfill our customers' demands for our products on a timely and cost-effective basis.

        We cannot be certain that we will be able to maintain our good relationships with our existing foundries. In addition, we cannot be certain that we will be able to form relationships with other foundries as favorable as our current ones. Moreover, transferring from our internal fabrication facility or our existing foundries to another foundry, could require a significant amount of time and loss of revenue, and we cannot assure you that we could make a smooth and timely transition. If foundries are unable or unwilling to continue to supply us with these semiconductor products in required time frames and volumes or at commercially acceptable costs, our business may be harmed.

If we are unable to develop and introduce new semiconductors successfully and in a cost-effective and timely manner or to achieve market acceptance of our new semiconductors, our operating results would be adversely affected.

        The future success of our semiconductor business will depend on our ability to develop new semiconductor solutions for existing and new markets, introduce these products in a cost-effective and timely manner and convince leading equipment manufacturers to select these products for design into their own new products. Our quarterly results in the past have been, and are expected in the future to continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to customers. The development of new semiconductor devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products and lower than anticipated manufacturing yields in the early production of such products. Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:

•

accurately predict market requirements and evolving industry standards;



•

accurately define new products;

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•

timely complete and introduce new product designs;



•

timely qualify and obtain industry interoperability certification of our products and the products of our customers into which our products will be incorporated;



•

obtain sufficient foundry capacity;



•

achieve high manufacturing yields;



•

shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and



•

gain market acceptance of our products and our customers' products.

        If we are not able to develop and introduce new products successfully and in a cost-effective and timely manner, our business, financial condition and results of operations would be materially and adversely affected.

        Our new semiconductor products generally are incorporated into our customers' products at the design stage. We often incur significant expenditures for the development of a new product without any assurance that an equipment manufacturer will select our product for design into its own product. The value of our semiconductors largely depends on the commercial success of our customers' products and on the extent to which those products accommodate components manufactured by our competitors. We cannot assure you that we will continue to achieve design wins or that equipment that incorporates our products will ever be commercially successful.

The amount and timing of revenue from newly designed semiconductors is often uncertain.

        We have announced a significant number of new semiconductor products and design wins for new and existing semiconductors. Achieving a design win with a customer does not create a binding commitment from that customer to purchase our products. Rather, a design win is solely an expression of interest by potential customers in purchasing our products and is not supported by binding commitments of any nature. Accordingly, a customer may choose at any time to discontinue using our products in their designs or product development efforts. Even if our products are chosen to be incorporated in our customer's products, we still may not realize significant revenues from that customer if their products are not commercially successful. A design win may not generate revenue if the customer's product is rejected by their end market. Typically, most new products or design wins have very little impact on near-term revenue. It may take well over a year before a new product or design win generates meaningful revenue.

        Once a manufacturer of communications equipment has designed a supplier's semiconductor into its products, the manufacturer may be reluctant to change its source of semiconductors due to the significant costs associated with qualifying a new supplier and potentially redesigning its product. Accordingly, our failure to achieve design wins with equipment manufacturers, which have chosen a competitor's semiconductor, could create barriers to future sales opportunities with these manufacturers.

Our semiconductor products typically have lengthy sales cycles and we may ultimately be unable to recover our investment in new products.

        After we have developed and delivered a semiconductor product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customer may need three to six months or longer to test, evaluate and adopt our semiconductors and an additional three to nine months or more to begin volume production of equipment that incorporates our semiconductors. Moreover, in light of the significant economic slow down in the telecommunications sector, it may take significantly longer than three to nine months before customers commence volume production of equipment incorporating some of our semiconductors. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our expenses for research and development

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and sales and marketing efforts and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our semiconductors to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. In addition, our business, financial condition and results of operations could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

        The resources devoted to product research and development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant marketing and inventory expenses in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions and we still have higher cost products in inventory, our operating results would be harmed.

If we are unable to respond to the rapid technological changes taking place in our industry, our existing products could become obsolete and we could face difficulties making future sales, or as a result of rights to return, our revenues could be reduced.

        The markets in which we compete are characterized by rapidly changing technologies, evolving industry standards and frequent improvements in products and services. If the technologies supported by our products become obsolete or fail to gain widespread acceptance, as a result of a change in industry standards or otherwise, we could face difficulties making future sales.

        We must continue to make significant investments in research and development to seek to develop product enhancements, new designs and technologies on a cost effective basis. If we are unable to develop and/or gain access to and introduce new products or enhancements in a timely and cost effective manner in response to changing market conditions or customer requirements, or if our new products do not achieve market acceptance, our sales could decline. Additionally, initial lower margins are typically experienced with new products under development.

        Our sole distributor has certain rights to return unsold inventory. We recognize revenue upon shipment of our products, although we establish reserves for estimated returns. There could be substantial product returns for a variety of reasons outside of our control. If our reserves are insufficient to account for these returns or if we are unable to resell these products on a timely basis at similar prices, our revenues may be reduced. Because the market for our products is rapidly evolving, we may not be able to resell returned products at attractive prices or at all.

Our existing and potential customers operate in an intensely competitive environment and our success will depend on the success of our customers.

        The companies in our target markets face an extremely competitive environment. Some of the products we design and sell are customized to work with specific customers' systems. If the companies with whom we establish business relations are not successful in building their systems, promoting their products, including new revenue-generating services, receiving requisite approvals and accomplishing the many other requirements for the success of their businesses, our growth will be limited. Furthermore, our customers may have difficulty obtaining parts from other suppliers causing these customers to cancel or delay orders for our products. In addition, we have limited ability to foresee the competitive success of our customers and to plan accordingly.

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If the broadband cable and wireless communications markets fail to grow or they decline, our sales may not grow or may decline.

        Our future growth depends on the success of the broadband cable and wireless communications markets. The rate at which these markets will grow is difficult to predict. These markets may fail to grow or decline for many reasons, including:

•

insufficient consumer demand for broadband cable or wireless products or services;



•

the inability of the various communications service providers to access adequate capital to build their networks;



•

inefficiency and poor performance of broadband cable or wireless communications services compared to other forms of broadband access; and



•

real or perceived security or health risks associated with wireless communications.

        Throughout the last three years, the demand for telecom equipment has been very soft. This weakness in demand is currently projected to continue in the 2004 and potentially beyond based on customer forecasts for the purchase of our products. If the markets for our products in broadband cable or wireless communications decline, fail to grow, or grow more slowly than we anticipate, the use of our products may be reduced and our sales could suffer.

If we or our outsourced manufacturers fail to accurately forecast component and material requirements, we could incur additional costs or experience product delays.

        We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary products and/or components and materials. Lead times for components and materials that we, or our outsourced manufacturers, order can vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. To the extent that we rely on outsourced manufacturers, many of these factors will be outside of our direct managerial control. For substantial increases in production levels, our outsourced manufacturers and some suppliers may need six months or more lead time. As a result, we may be required to make financial commitments in the form of purchase commitments. We lack visibility into the finished goods inventories of our customers and the end-users. This lack of visibility impacts our ability to accurately forecast our requirements. If we overestimate our component, material and outsourced manufactured requirements, we may have excess inventory, which would increase our costs. An additional risk for potential excess inventory results from our volume purchase commitments with certain material suppliers, which can only be reduced in certain circumstances. Additionally, if we underestimate our component, material, and outsourced manufactured requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our sales and profitability. We have incurred, and may in the future incur, charges related to excess and obsolete inventory. These charges amounted to $251,000 and $212,000 in 2003 and 2002, respectively. While these charges may be partially offset by subsequent sales of previously written-down inventory, there can be no assurance that any such sales will be significant. As we broaden our product lines we must outsource the manufacturing of or purchase a wider variety of components. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility of customer acceptance and potential competition. Both of these factors will contribute a higher level of inventory risk in our near future.

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We depend on outsourced manufacturers and on single or limited source suppliers for some of the key components and materials in our products, which makes us susceptible to shortages or price fluctuations that could adversely affect our operating results.

        We typically purchase our components and materials through purchase orders, and we have no guaranteed supply arrangements with any of our suppliers. We currently purchase several key components and materials used in our products from single or limited source suppliers. In the event one of our sole source suppliers or outsourced manufacturers are unable to deliver us products or unwilling to sell us material components this could have a significant adverse effect on our operations. Additionally, we or our outsourced manufacturers may fail to obtain required products and components in a timely manner in the future. We may also experience difficulty identifying alternative sources of supply for the components used in our products or products we obtain through outsourcing. We would experience delays if we were required to test and evaluate products of potential alternative suppliers or products we obtain through outsourcing. Furthermore, financial or other difficulties faced by our outsourced manufacturers, or suppliers or significant changes in demand for the components or materials they use in the products and/or supply to us could limit the availability of those products, components or materials to us.

We rely on the significant experience and specialized expertise of our senior management in the RF industry and must retain and attract qualified engineers and other highly skilled personnel in a highly competitive job environment to maintain and grow our business.

        Our performance is substantially dependent on the continued services and on the performance of our senior management and our highly qualified team of engineers, who have many years of experience and specialized expertise in our business. Our performance also depends on our ability to retain and motivate our other executive officers and key employees. The loss of the services of any of our executive officers or of a number of our engineers could harm our ability to maintain and build our business. We have no "key man" life insurance policies.

        Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, marketing and customer service personnel. If we fail to attract, integrate and retain the necessary personnel, our ability to maintain and build our business could suffer significantly. Additionally, California State law can create unique difficulties for a California based company attempting to enforce covenants not to compete with employees which could be a factor in our future ability to retain key management and employees in a competitive environment.

Our business is subject to the risks of product returns, product liability and product defects.

        Products as complex as ours frequently contain undetected errors or defects, especially when first introduced or when new versions are released. The occurrence of errors could result in product returns from and reduced product shipments to our customers. In addition, any failure by our products to properly perform could result in claims against us by our customers. Such failure also could result in the loss of or delay in market acceptance of our products or harm our reputation. Due to the recent introduction of some of our products, we have limited experience with the problems that could arise with these products. If problems occur or become significant, it could result in a reduction in our revenues and increased costs related to inventory write-offs, warranty claims and other expenses which could have a material and adverse affect on our financial condition.

        Our purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provision contained in these agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. Although we maintain $25.0 million of insurance to protect against claims associated with the use of our products, our insurance coverage may not adequately cover all claims asserted against us. In addition, even ultimately unsuccessful claims could

24

result in costly litigation, divert our management's time and resources and damage our customer relationships.

We use a number of specialized technologies, some of which are patented, to design, develop and manufacture our products. Infringement of our intellectual property rights could hurt our competitive position, harm our reputation and cost us money.

        We regard the protection of our copyrights, patents, service marks, trademarks, trade dress and trade secrets as critical to our future success and plan to rely on a combination of copyright, patent, trademark and trade secret law, as well as on confidentiality procedures and contractual provisions, to protect our proprietary rights. We seek patent protection for our unique developments in circuit designs, processes and algorithms. Adequate protection of our intellectual property rights may not be available in every country where our products and services are made available. We intend, as a general policy, to enter into confidentiality and invention assignment agreements with all of our employees and contractors, as well as into nondisclosure agreements with parties with which we conduct business, to limit access to and disclosure of our proprietary information; however, we have not done so on a uniform basis. As a result, we may not have adequate remedies to preserve our trade secrets or prevent third parties from using our technology without authorization. We cannot assure you that all future employees, contractors and business partners will agree to these contracts, or that, even if agreed to, these contractual arrangements or the other steps we have taken to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. If we are unable to execute these agreements or take other steps to prevent misappropriation of our technology or to deter independent development of similar technologies, our competitive position and reputation could suffer and we could be forced to make significant expenditures.

        We regularly file patent applications with the U.S. Patent and Trademark Office and in selected foreign countries covering particular aspects of our technology and intend to prosecute such applications to the fullest extent of the law. Based upon our assessment of our current and future technology, we may decide to file additional patent applications in the future, and may decide to abandon current patent applications. We cannot assure you that any patent application we have filed or will file will result in an issued patent, or, if patents are issued to us, that such patents will provide us with any competitive advantages and will not be challenged by third parties or invalidated by the U.S. Patent and Trademark Office or foreign patent office. Any failure to protect our existing patents or to secure new patents may limit our ability to protect the intellectual property rights that such patents or patent applications were intended to cover. Furthermore, the patents of others may impair our ability to do business.

        We have several registered trademarks and service marks, in the United States and abroad, and are in the process of registering others in the United States. Nevertheless, we cannot assure you that the U.S. Patent and Trademark Office will grant us these registrations. Should we decide to apply to register additional trademarks or service marks in foreign countries, there is no guarantee that we will be able to secure such registrations. The inability to register or decision not to register in certain foreign countries and adequately protect our trademarks and service marks could harm our competitive position, harm our reputation and negatively impact our future profitability.

We must gain access to improved process technologies.

        For our semiconductor products, our future success will depend upon our ability to continue to gain access to new and/or improved process technologies in order to adapt to emerging industry standards or competitive market conditions. In the future, we may be required to transition one or more of our products to process technologies with smaller geometries, other materials or higher speed in order to reduce costs and/or improve product performance. We may not be able to gain access to new process technologies in a timely or affordable manner. In addition, products based on these technologies may not achieve market acceptance.

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Claims that we are infringing third-party intellectual property rights may result in costly litigation.

        As a provider of technologically advanced products, we are at particular risk of becoming subject to litigation based on claims that we are infringing the intellectual property rights of others. In the past, we have been subject to claims that some of our products infringe the proprietary rights of third parties. We cannot assure you that we will not be subject to any such claims in the future. Any future similar claims, whether meritorious or not, could be time-consuming to defend, damage our reputation, result in substantial and unanticipated costs associated with litigation and require us to enter into royalty or licensing agreements, which may not be available on acceptable terms or at all.

Due to our utilization of foreign vendors, manufacturers and subcontractors, we are subject to international operational, financial and political risks.

        We expect to continue to rely on vendors, manufacturers and subcontractors located in Singapore, The Philippines, Malaysia, Taiwan and France. Additionally, we utilize vendors located in such countries in our semiconductor business to provide Gallium Arsenide ("GaAs") wafers as raw material in our semiconductor fabrication, to fabricate certain products and to package the majority of our semiconductor die in plastic or ceramic. Accordingly, we will be subject to risks and challenges such as:

•

compliance with a wide variety of foreign laws and regulations:



•

changes in laws and regulations relating to the import or export of semiconductor products;



•

legal uncertainties regarding taxes, tariffs, quotas, export controls, export licenses and other trade barriers;



•

political and economic instability in, foreign conflicts involving or the impact of regional and global infectious illnesses (such as the SARS outbreak) on the countries of these vendors, manufacturers and subcontractors causing delays in our ability to obtain our product;



•

reduced protection for intellectual property rights in some countries; and



•

fluctuations in freight rates and transportation disruptions.

        Political and economic instability and changes in governmental regulations in these areas as well as the United States could affect the ability of our overseas vendors to supply materials or services. Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services from alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel orders.

We face intense competition, and, if we do not compete effectively in our markets, we will lose sales and have lower margins.

        The semiconductor industry is intensely competitive in each of the markets we serve and is characterized by:

•

rapidly changing technology;



•

swift product obsolescence;



•

manufacturing yield problems;



•

price erosion; and



•

limited supplies of components and materials.

26

        Our end markets are rapidly evolving and intensely competitive, and we expect competition to intensify further in the future. Many of our current and potential competitors have substantially greater technical, financial, marketing, distribution and other resources than we have. Price competition is intense and the market prices and margins of products frequently decline after competitors begin making similar products. A number of our competitors may have greater name recognition and market acceptance of their products and technologies. Furthermore, our competitors, or the competitors of our customers, may develop new technologies, enhancements of existing products or new products that offer superior price or performance features. These new products or technologies could render obsolete our products or the systems of our customers into which our products are integrated. If we fail to successfully compete in our markets our business and operating results would be materially and adversely affected.

We may pursue acquisitions and investments in new businesses, products or technologies that involve numerous risks, including the use of cash and diversion of management's attention.

        In the future, we may make acquisitions of and investments in new businesses, products and technologies or we may acquire operations that expand our manufacturing capabilities. If we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition. Even if we are successful, we may not be able to integrate the acquired businesses, products or technologies into our existing business and products. As a result of the rapid pace of technological change, we may misgauge the long-term potential of the acquired business or technology or the acquisition may not be complementary to our existing business. Furthermore, potential acquisitions and investments, whether or not consummated, may divert our management's attention and require considerable cash outlays at the expense of our existing operations. In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could affect our profitability.

Changes in the regulatory environment of the communications industry may reduce the demand for our products.

        The deregulation of the telecommunications industry has resulted in an increased number of service providers. Such increase, coupled with the expanding use of the Internet and data networking by businesses and consumers, has resulted in the rapid growth of the communications industry. This has led and will likely continue to lead to intense competition, short product life cycles, and, to some extent, regulatory uncertainty in and outside the United States. The course of the development of the communications industry is difficult to predict. For example, the delays in governmental approval processes that our customers are subject to, such as the issuance of site permits and the auction of frequency spectrum, have in the past caused, and may in the future cause, the cancellation, postponement or rescheduling of the installation of communications systems by our customers. A reduction in network infrastructure expenditures could negatively affect the sale of our products. Moreover, in the short term, deregulation may result in a delay or a reduction in the procurement cycle because of the general uncertainty involved with the transition period of businesses.

Our future profitability could suffer from known or unknown liabilities that we retained when we sold parts of our company.

        In the recent past, we completed the divestiture of all but our current business. In the transactions in which we sold our other businesses, we generally retained liability arising from events occurring prior to the sale. Some of these liabilities were or have since become known to us, such as the environmental condition of the production facilities we sold. We may have underestimated the scope of these liabilities, and we may become aware of additional liabilities associated with the following in the future:

•

ownership of the intellectual property we have sold;



•

the potential infringement by our sold businesses of the intellectual property of others;

27

•

the regulatory compliance of our sold defense business;



•

export control compliance with respect to our defense products purchased by the United States and foreign governments; and



•

product defect claims with respect to products manufactured by our sold businesses before they were sold.

        If these and any other unknown liabilities and obligations exceed our expectations and established reserves, our future profitability could suffer and our capital needs could increase.

If we fail to comply with environmental regulations we could be subject to substantial fines, we could be required to suspend production, alter manufacturing processes or cease operations.

        Two of our former production facilities at Scotts Valley and Palo Alto have significant environmental liabilities for which we have entered into and funded fixed price remediation agreements and obtained cost-overrun and unknown pollution insurance coverage.

        The Scotts Valley site is a federal Superfund site. Chlorinated solvent and other contamination was identified at the site in the early 1980s, and by the late 1980s we had installed a groundwater extraction and treatment system. In 1991, we entered into a consent decree with the United States Environmental Protection Agency providing for remediation of the site. In July 1999, we signed a remediation agreement with an environmental consulting firm, ARCADIS Geraghty & Miller. Pursuant to this remediation agreement, we paid approximately $3.0 million in exchange for which ARCADIS agreed to perform the work necessary to assure satisfactory completion of our obligations under the consent decree. The agreement also contains a cost overrun guaranty from ARCADIS up to a total project cost of $15.0 million. In addition, the agreement included procurement of a ten-year, claims-made insurance policy to cover overruns of up to $10.0 million from American International Specialty, along with a ten-year, claims made $10-million policy to cover various unknown pollution conditions at the site.

        The Palo Alto site is a state Superfund site and is within a larger, regional state Superfund site. As with the Scotts Valley site, contamination was discovered in the 1980s, and groundwater extraction and treatment systems have been operating for several years at both the site and the regional site. In July 1999, we entered into a remediation agreement with an environmental consulting firm, SECOR. Pursuant to this remediation agreement, we paid approximately $2.4 million in exchange for which SECOR agreed to perform the work necessary to assure satisfactory completion of our obligations under the applicable remediation orders. The payment included the premium for a 30-year, claims-made insurance policy to cover cost overruns up to $10.0 million from AIG, along with a ten-year claims-made $10.0 million insurance policy to cover various unknown pollution conditions at the site.

        We cannot assure you that this insurance will be sufficient to cover all liabilities related to these two sites. In addition, we are subject to a variety of federal, state and local governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. In the past, we have been subject to periodic environmental reviews and audits, which have resulted in minor fines. If we fail to comply with these regulations, substantial fines could be imposed on us, and we could be required to suspend production, alter manufacturing processes or cease operations any of which could have a material negative effect on our sales, income and business operations.

If RF emissions pose a health risk, the demand for our products may decline.

        Recent news reports have asserted that some radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. If it were determined or perceived that RF emissions from

28

wireless communications equipment create a health risk, the market for our wireless customers' products and, consequently, the demand for our products could decline significantly.

We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us.

        We believe that the cash, cash equivalents and investments on hand, the cash we expect to generate from operations and borrowings under our line of credit will be sufficient to meet our liquidity and capital spending requirements for at least the next twelve months. However, it is possible that we may need to raise additional funds to fund our activities during and/or beyond that time. We could raise these funds by selling more stock to the public or to selected investors, or by borrowing money. In addition, even though we many not need additional funds, we may still elect to sell additional equity securities or obtain credit facilities for other reasons. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

        It is possible that our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:

•

whether we operate on a positive cash flow basis;



•

the market acceptance of our products;



•

the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace;



•

volume price discounts;



•

our business, product, capital expenditure and research and development plans and product and technology roadmaps;



•

the levels of inventory and accounts receivable that we maintain;



•

capital improvements to new and existing facilities;



•

technological advances;



•

our competitors' response to our products; and



•

our relationships with suppliers and customers.

        In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies.

There are inherent risks associated with sales to our foreign customers.

        We sell a significant portion of our product to customers outside of the United States. Sales to customers outside of the United States accounted for approximately 32%, 34% and 42% of our sales in 2003, 2002, and 2001, respectively. We expect that sales to customers outside of the United States will continue to account for a significant portion of our sales. Although all of our foreign sales are denominated in U.S. dollars, such sales are subject to certain risks, including, among others, changes in regulatory requirements, the imposition of tariffs and other trade barriers, the existence of political, legal and economic instability in foreign markets, language and cultural barriers, seasonal reductions in business

29

activities, our ability to receive timely payment and collect our accounts receivable, currency fluctuations, and potentially adverse tax consequences, which could adversely affect our business and financial results.

Our facilities are concentrated in an area susceptible to earthquakes.

        Our facilities are concentrated in an area where there is a risk of significant earthquake activity. Substantially all of the production equipment that currently accounts for our sales, as well as planned additional production equipment, is or will be located in a known earthquake zone. We cannot predict the extent of the damage that our facilities and equipment would suffer in the event of an earthquake or how such damage would affect our business. We do not maintain earthquake insurance.

You may be unable to recover damages from Arthur Andersen LLP in the event financial information audited by Arthur Andersen LLP included or incorporatedin this Annual Report on Form 10-K and any of our other public filings is determined to contain false statements.

        This Annual Report on Form 10-K, which includes the report of Arthur Andersen on our consolidated statements of operations, shareholders' investment and cash flows for the year ended December 31, 2001 is incorporated by reference into our previously filed Registration Statements, File Nos. 333-52408, 333-66244 on Form S-8 and 333-110111 on form S-3 (collectively, the "Registration Statements"). After reasonable efforts, we have been unable to obtain Arthur Andersen's consent to incorporate by reference into the Registration Statements its audit report with respect to the financial statements of the Company as of December 31, 2001 and the three years then ended. Under these circumstances, Rule 437(a) under the Securities Act of 1933, as amended, permits us to file this Form 10-K without such consent from Arthur Andersen. However, as a result, the absence of such consent may limit recovery by investors on certain claims, including the inability of investors to assert claims against Arthur Andersen under Section 11 of the Securities Act of 1933, as amended, for any untrue statements of a material fact contained, or any omissions to state a material fact required to be stated, in those audited financial statements. In addition, the ability of Arthur Andersen to satisfy any claims (including claims arising from Arthur Andersen's provision of auditing and other services to us) may be limited as a practical matter due to recent events regarding Arthur Andersen.

Sales of substantial amounts of our common stock by Fox Paine and others, could adversely affect the market price of our common stock.

        As of March 26, 2004, Fox Paine was the beneficial owner of 42.5% of our common stock which represents 25.5 million of our approximately 60.0 million outstanding shares of common stock. Sales of substantial amounts of our common stock into the public market by Fox Paine, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock.

        In addition to the adverse effect a price decline would have on holders of our common stock, a price decline in our common stock could impede our ability to raise capital through the issuance of additional shares of common stock or other equity or convertible debt securities. A price decline in our common stock below the Nasdaq minimum bid requirements due to substantial sales of our common stock by Fox Paine, could result in our common stock being delisted from the Nasdaq National Market. Delisting could in turn reduce the liquidity of our common stock and inhibit or preclude our ability to raise capital.

        In addition, Fox Paine currently has the right, subject to various conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or for other stockholders. By exercising their registration rights as reflected by this registration statement and selling a large number of shares, these stockholders could cause the price of our common stock to fall. The perception of a large number of shares able to be sold under this registration statement could cause the price of our common stock to fall or preclude our common stock from rising.

30

        Furthermore, future sales of substantial amounts of common stock by our officers, directors and other stockholders in the public market or otherwise or the awareness that a large number of shares is available for sale, could adversely affect the market price of our common stock. In addition to the adverse effect a price decline would have on holders of our common stock, that decline would impede our ability to raise capital through the issuance of additional shares of common stock or other equity or convertible debt securities.

Since Fox Paine no longer owns a majority of our shares, we are not a "controlled company" which will subject us to additional Nasdaq requirements.

        Pursuant to recently adopted Nasdaq listing rules we were considered a controlled company because Fox Paine owned more than 50% of our common stock and as such we were not required to have a majority of our directors be independent directors. Fox Paine's ownership interest dropped below 50% on January 28, 2004 and as a result, our board of directors will be required to be composed of a majority of independent directors no later than one year after we ceased to be a "controlled company". There can be no assurance that there will be qualified persons available and willing to serve on our board of directors. If our Board is not composed of a majority of independent directors, we could be delisted by NASDAQ. In addition, changes in the composition of our board of directors could result in the following:

•

a change in the composition of our board and its committees;



•

changes in management;



•

a change in strategic direction and/or our policies; and



•

a loss of Fox Paine's services to us.

        Any of the foregoing could adversely effect our future operations.

If our common stock ceases to be listed for trading on the Nasdaq National Market, it may harm our stock price and make it more difficult for you to sell your shares.

        Our common stock is listed on the Nasdaq National Market and the bid price for our common stock has been below $1.00 per share during certain periods. The Nasdaq National Market rules for continued listing require, among other things, that the bid price for our common stock not fall below $1.00 per share for a period of 30 consecutive trading days. During 2003, the per share price of our common stock has traded below the $1.00 per share minimum bid price required to maintain its listing on the Nasdaq National Market. On May 6, 2003, we received a letter from Nasdaq notifying us that the bid price of our common stock did not meet the $1.00 minimum bid price and that we would be given a one hundred and eighty (180) day grace period to regain compliance or face delisting. Nasdaq subsequently notified us on May 30, 2003 that we regained compliance since the closing bid price of our common stock was $1.00 per share or higher for at least ten consecutive trading days during the grace period. Prior to the May 6, 2003 letter, we received a similar letter from Nasdaq on August 16, 2002, notifying us that the bid price of our common stock did not meet the minimum bid price. Following receipt of the August 16, 2002 letter, we were also able to regain compliance within the applicable grace period. Although we have been able to regain compliance in the past, because of the volatility in our common stock price, there can be no assurance that we will be able to maintain compliance in the future. While there are steps we can take to address this situation in the future, including a reverse stock split or share repurchase, we cannot assure you that our stock will maintain such minimum bid price requirement or that we will be able to meet or maintain all of the Nasdaq National Market continued listing requirements in the future. If, in the future, our minimum bid price is again below $1.00 for 30 consecutive trading days, under the current Nasdaq National Market rules we will have a period of 180 days to attain compliance by meeting the minimum bid price requirement for 10 consecutive days during the compliance period.

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        If our common stock ceases to be listed for trading on the Nasdaq National Market for failure to meet the minimum bid price requirement, we expect that our common stock would be traded on the NASD's Over-the-Counter Bulletin Board unless Nasdaq grants an additional grace period for transfer to Nasdaq's SmallCap Market, which also has a similar $1.00 minimum bid requirement. In addition, our stock could then potentially be subject to the Securities and Exchange Commission's "penny stock" rules, which place additional disclosure requirements on broker-dealers. These additional disclosure requirements may harm your ability to sell your shares if it causes a decline in the ability or willingness of broker-dealers to sell our common stock. We also expect that the level of trading activity of our common stock would decline if it is no longer listed on the Nasdaq National Market or SmallCap Market. As such, if our common stock ceases to be listed for trading on the Nasdaq National Market or SmallCap Market for any reason, it may harm our stock price, increase the volatility of our stock price and make it more difficult for you to sell your shares of our common stock.

Our stock price and the market for our shares could be adversely affected if our board of directors implements the reverse stock split authorized by our stockholders.

        Our stockholders recently authorized our board of directors to implement a reverse stock split at their discretion in a range of one for two to one for ten. There can be no assumption that our board will exercise its discretion to effect a reverse stock split. However, to the extent our stock price falls and our board exercises its discretion to proceed with a reverse stock split, the principal potential risks include:

•

There can be no assurance that even if we satisfy the $1.00 per share minimum bid price after any authorized reversed split we would be able to continue to meet the continued listing requirements for inclusion on the Nasdaq National Market;



•

There can be no assurance that the total market capitalization of our common stock (the aggregate value of all our common stock at the then market price) after any authorized reverse stock split will be equal to or greater than the total market capitalization before the proposed reverse stock split or that the per share market price of our common stock following the reverse stock split will either equal or exceed the current per share market price;



•

There can be no assurance that the market price per new share of our common stock after any authorized reverse stock split will remain unchanged or increase in proportion to the reduction in the number of old shares of our common stock outstanding before the reverse stock split;



•

Because some investors may view the reverse stock split negatively, there can be no assurance that a reverse stock split will not adversely impact the market price of our common stock;



•

If the reverse stock split is effected, the resulting per-share stock price may not attract institutional investors or investment funds and may not satisfy the investing guidelines of such investors and, consequently, the trading liquidity of our common stock may not improve or may be adversely impacted;



•

A decline in the market price of our common stock after any authorized reverse stock split may result in a greater percentage decline than would occur in the absence of a reverse stock split, and the liquidity of our common stock could be adversely affected following such a reverse stock split; and



•

A reverse stock split will likely increase the number of stockholders who own odd lots (less than 100 shares) and stockholders who hold odd lots typically may experience an increase in the cost of selling their shares, and may have greater difficulty effecting sales.

        As such, our stock price and the market for our shares could be adversely affected if our board should decide to implement the reverse stock split authorized by our stockholders.

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Our largest stockholder could have the ability to take action that may adversely affect our business, our stock price and our ability to raise capital.

        As of March 26, 2004, Fox Paine & Company, LLC ("Fox Paine") is the indirect beneficial owner of 42.5% of our outstanding share capital. As a result, Fox Paine has and will continue to have significant influence over the outcome of matters requiring stockholder approval, including the power to:

•

elect all of our directors and the directors of our subsidiaries;



•

amend our charter or by-laws; and



•

agree to or prevent mergers, consolidations or the sale of all or substantially all our assets or our subsidiaries' assets.

        Fox Paine's significant ownership interest could also delay, prevent or cause a change in control relating to us which could adversely affect the market price of our common stock.

        Fox Paine's significant ownership interest could also subject us to a class action lawsuit which could result in substantial costs and divert our management's attention and financial resources from more productive uses. Fox Paine, on September 18, 2002, made a proposal to acquire all of the shares held by unaffiliated stockholders, which was subsequently withdrawn on March 27, 2003. Prior to Fox Paine's withdrawal of such proposal, four lawsuits, three of which were purported class action lawsuits, were filed against us and Fox Paine in connection with such proposal. Among other things, these lawsuits sought an injunction against the consummation of the proposal and an award of unspecified compensatory damages. These lawsuits were voluntarily dismissed after Fox Paine's withdrawal of such proposal without any consideration being required to be paid to the plaintiff's and each party was obligated to bear its own attorney's fees, costs and expenses. We can make no assurance, however, that Fox Paine will not at some point in the future make another proposal regarding us and, if so, what the terms and outcome of such proposal might be. If Fox Paine were in the future to make a proposal involving us then, depending on the terms of such proposal, the resulting transaction could result in litigation which could adversely affect our business or our stock price.

        In addition, Fox Paine receives management fees from us which could influence their decisions regarding us. Under our management agreement with Fox Paine, we are obligated to pay Fox Paine a fee in the amount of 1% of the prior year's income before interest expense, interest income, income taxes, depreciation and amortization and equity in earnings (losses) of minority investments, calculated without regard to the fee. Due to our loss incurred in 2001, no management fee was paid to Fox Paine for the year ended December 31, 2002. We have not paid Fox Paine a management fee during in 2003. We paid Fox Paine management fees of $122,800 in 2001. We have also agreed to reimburse Fox Paine for its expenses and have reimbursed Fox Paine approximately $6,000, $82,000 and $25,000 in 2003, 2002 and 2001, respectively.

        Fox Paine may in the future make significant investments in other communications companies. Some of these companies may be our competitors. Fox Paine and its affiliates are not obligated to advise us of any investment or business opportunities of which they are aware, and they are not restricted or prohibited from competing with us.

        The sale of a substantial number of shares of our common stock by Fox Paine or the perception that such sale could occur, could negatively affect the market price of our common stock and could also materially impair our future ability to raise capital through an offering of securities.

Our stock price is highly volatile.

        The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. Since our initial public offering in August, 2000, through December 31, 2003, our common stock has traded at prices as low as $0.560 and as high as $59.875

33

per share. These fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:

•

shares sold by the selling stockholders;



•

quarter-to-quarter variations in our operating results;



•

announcements of technological innovations or new products by our competitors, customers or us;



•

general conditions in the semiconductor industry and telecommunications and data communications equipment markets;



•

changes in earnings estimates or investment recommendations by analysts;



•

changes in investor perceptions; or



•

changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

        In addition, the market prices of securities on the NASDAQ National Market and that of our customers and competitors have been especially volatile. This volatility has significantly affected the market prices of securities for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were the object of a securities class action litigation, it could result in substantial losses and divert management's attention and resources from other matters.

We do not expect to pay any dividends for the foreseeable future.

        Although we had cash, cash equivalents and short-term investments of approximately $60.1 million at December 31, 2003, we do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not invest in our common stock.

Item 2.    PROPERTIES

        We have two leased sites: a building in Milpitas, California with over 35,000 square feet and two buildings in San Jose, California totaling over 124,000 square feet. The San Jose facility consists of two buildings: a larger building of approximately 82,000 square feet and a smaller building of approximately 42,000 square foot. Both buildings are leased for ten years. The larger building has a beginning base monthly rent of $158,340 for the first twelve months, which increases by 4% over each succeeding twelve month period. The smaller building has a beginning base monthly rent of $94,500 for the first twelve months which will also increase by 4% over each succeeding twelve month period.

        In September 2001, we decided to abandon the smaller building at our San Jose facility based on revised anticipated demand for our products and market conditions. As of December 31, 2003, we have signed three tenants to cover approximately 86% of the excess leased space. In September 2002, we decided to abandon a portion of the larger building at our San Jose facility based on revised anticipated demand for our products and market conditions. This excess space is located on the first floor of our current corporate headquarters and originally housed a portion of our optics and integrated assemblies manufacturing operations. We are actively seeking tenants to occupy the excess leased space. We have decided to abandon the Milpitas facility upon completion of our plan to completely outsource our internal wafer fabrication which is expected to occur in the first half of 2004. At that time, we will have a remaining

34

31 month commitment for this excess space. For further discussion, see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K.

        We believe that our present facilities are in good condition and suitable for our operations. We also believe that we have excess capacity, which more than meets our anticipated requirements for the foreseeable future.

Item 3.    LEGAL PROCEEDINGS

        We currently are involved in litigation and regulatory proceedings incidental to the conduct of our business and expect that we will be involved in other litigation and regulatory proceedings from time to time. While we believe that any adverse outcome of such pending matters will not materially affect our business or financial condition, there can be no assurance that this will be the case.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        There were no matters submitted to a vote of security holders in the fourth quarter of 2003.

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

        Our common stock is listed on the Nasdaq National Market and traded under the symbol "WJCI". The following table sets forth, for the periods indicated the high and low sales prices as reported on the Nasdaq National Market for WJ Communications, Inc. common stock, as adjusted for all stock splits.

        As of December 31, 2003, there were approximately 108 stockholders of record of our common stock.

Dividend Policy

        We did not pay any dividends in 2003 and 2002. We do not intend to pay cash dividends on our common stock for the foreseeable future. Instead, we intend to retain all earnings for use in the operation and expansion of our business. Our board of directors will make any future determination of the payment of dividends based upon various factors then existing, including, but not limited to, our financial condition, operating results and current and anticipated cash needs. In addition, covenants in our revolving credit facility limit our ability to declare and pay cash dividends on our common stock.

Report of Public Offering of Securities and Use of Proceeds

        We completed our initial public offering ("IPO") on August 18, 2000, pursuant to a Registration Statement Form S-1 (File No. 333-38518), which was declared effective by the Securities and Exchange Commission on August 17, 2000. In the IPO we sold an aggregate of 6,210,000 shares of common stock, par value of $0.01 per share. The sale of the shares of common stock generated aggregate proceeds of $99.4 million. The aggregate net proceeds were approximately $88.4 million after deducting underwriters discounts and commissions of approximately $7.0 million and directly paid expenses of the offering of $4.0 million. Chase H&Q, CIBC World Markets and Thomas Weisel Partners LLC were the lead underwriters for the IPO.

        Since the completion of our IPO through December 31, 2003 we reasonably estimate that we have used the net proceeds from the initial public offering as follows: approximately $40.0 million to repay outstanding debt amounts, approximately $23.5 million to purchase and install equipment and construct various leasehold improvements, and approximately $24.9 million for working capital and general corporate purposes (including compensation to employees, officers and directors in accordance with their standard agreements). Except as indicated above, all of the payments described above were direct or indirect payments to entities or persons other than directors, officers or greater than 10% owners of our equity securities.

Recent Sales of Unregistered Securities

        We did not sell any of our securities that were not registered under the Securities Act during 2003, 2002 or 2001.

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Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this report. The statements of operations data for the years ended December 31, 2003, 2002, and 2001 and the selected balance sheet data as of December 31, 2003 and 2002 are derived from our audited consolidated financial statements which are included elsewhere in this annual report on Form 10-K. The statements of operations data for the years ended December 31, 2000 and 1999 and the selected consolidated balance sheet data as of December 31, 2001, 2000 and 1999 are derived from our audited consolidated financial statements which are not included in this annual report on Form 10-K. The selected consolidated statements of operations data represent our results from continuing operations only and the selected consolidated balance sheet data exclude net assets from discontinued operations. The selected consolidated statements of operations data excludes our extraordinary item resulting from the write-off of unamortized deferred financing costs associated with our early extinguishment of debt and includes our preferred stock dividend—assumed beneficial conversion. The historical results are not necessarily indicative of results to be expected for any future period.

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1)

Per share amounts available to common stockholders reflect a $10 million preferred stock dividend for the assumed beneficial conversion on our preferred stock. In July 2000, the Company sold 1,498,800 shares of its Series A Preferred Stock to a group of investors. Proceeds from these sales totaled approximately $11.2 million, net of expenses. Under the terms of the Series A Preferred Stock, the shares converted into common stock of the Company simultaneous with the Company's initial public offering in August, 2000. In connection with this conversion, the Company recorded a $10.0 million non-cash preferred stock dividend based on an assumed beneficial conversion. This amount was computed based upon the difference between the IPO price and the price paid for the preferred stock.

2)

Our 2003 and 2002 recapitalization merger and other expense is a non-recurring expenditure comprised of expenses incurred by the special committee to our Board of Directors to review a proposal from an affiliate, Fox Paine & Company LLC to acquire all of the shares of the Company's common stock held by unaffiliated stockholders. In 2003, Fox Paine & Company LLC withdrew its proposal. Our 2000 and 1999 recapitalization merger and other expense is a non-recurring expenditure comprised of employee retention and severance compensation, legal, professional and other costs associated with our recapitalization merger and the sale of our telecommunications group.

3)

During 2003, we revised our lease loss accrual downward for the four month additional operation of our wafer fab and reduced facility costs at our other two abandoned facilities. This credit was largely offset by an additional lease loss accrual for reductions in estimated sublease occupancy and market rates and disposal of our remaining unsold assets held for sale. We also reversed a portion of our severance accrual for one employee slated to be terminated but instead retained for another position. Our 2002 restructuring charge reflects further consolidation and abandonment of leased space and associated impairment of tenant improvements, severance costs, an asset impairment charge and the initiation of a program to sell excess manufacturing equipment resulting from the prolonged downturn in the telecommunications industry, especially related to our fiber optics products. The 2002 restructuring charge also includes an additional charge for the leased facility we abandoned in 2001 based on our downward revised assumptions regarding sublease occupancy rates and market rates due to an overall deteriorating real estate market and difficulties encountered in subleasing the available space. Also during 2002, we recorded a restructuring charge related to our decision in December 2002 to completely outsource our internal wafer fabrication. Our 2001 restructuring charge reflects our decision to abandon a leased facility based on revised anticipated demand for our products and current market conditions. For further discussion of our restructuring charges, see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K.

4)

Our 2001 gain on dispositions of real property is related to the release of escrow funds related to our sale of leasehold interests in our Palo Alto site which was partially offset by residual expenses from the sale of the property. In 2000, our pre-tax gain primarily related to our sale of the remaining leasehold interest in our Palo Alto site.

5)

Working capital excludes net assets of discontinued operations in the amount of $20,237,000 as of December 31, 1999.

6)

Total assets exclude net assets of discontinued operations in the amount of $20,237,000 as of December 31, 1999. Net assets of discontinued operations were fully liquidated as of December 31, 2000.

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS

        Special Notice Regarding Forward-Looking Statements. The following discussion and analysis contains forward-looking statements including financial projections, statements as to the plans and objectives of management for future operations, and statements as to our future economic performance, financial condition or results of operations. These forward-looking statements are not historical facts but rather are based on current expectations, estimates, projections about our industry, our beliefs and our assumptions. Words such as "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks" and "estimates" and variations of these words and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from those projected in these forward-looking statements as a result of a number of factors, including, but not limited to, those factors described in "Risk Factors That May Affect Future Results" above. Readers of this report are cautioned not to place undue reliance on these forward-looking statements.

        The following discussion should be read in conjunction with our consolidated financial statements and related disclosures included elsewhere in this annual report on Form 10-K. Except for historic actual results reported, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. See "Special Notice Regarding Forward-looking Statements" above and "Risk Factors That May Affect Future Results" above for a discussion of certain factors that could cause future actual results to differ from those described in the following discussion.

Overview

        We design, develop and market innovative, high-performance radio frequency ("RF") semiconductor products that target the wireless communications, broadband cable, RF identification ("RFID") and defense and homeland security markets. We have been designing RF devices for more than 45 years and have developed significant expertise in RF design, semiconductor process technology and component integration. With our team of engineering and technical employees experienced in the distinctive requirements of RF semiconductors, we seek to address the RF challenges in systems utilized in multiple markets.

        Beginning in the 1990s, we began applying our RF design, semiconductor technology and integration capabilities to address the growing opportunities for commercial communications products. When we began our operations in the commercial communications market, we initially benefited from significant increases in spending on capital equipment by communications service providers, which resulted in increased demand for our products. However, the demand for telecommunications equipment has been very weak for the last three years, particularly effecting our wireless integrated assembly and fiber optics product lines. We project this weakness in demand to continue in 2004 and potentially beyond based on customer forecasts for the purchase of our products.

        Since early 2002, we have undertaken several strategic initiatives to focus on our competitive advantages and dedicate our resources to the RF semiconductor market. As part of these initiatives, we sold our wireless repeater and thin-film product lines and exited the fiber optic and fixed wireless assemblies markets. We are also in the process of implementing a fully outsourced manufacturing model utilizing outside foundries for our manufacturing needs. We believe that our shift to fully outsourced manufacturing, which we expect to complete in 2004, will allow us to further reduce our operating costs and accelerate the time-to-market of our products, while continuing to provide access to advanced manufacturing technologies.

        Our progress in semiconductors has been driven by our rapid introduction of new, innovative products. In 2002 and 2003, we introduced 54 new products, including in 2003 our first product for the RFID market, the SX2000, an RFID reader engine. Our commitment to providing innovative and high quality products resulted in an increase in design wins to 157 in 2003 from 109 in 2002. A design win occurs when a customer informs us that it has included our product in the bill of materials for a product that we

39

expect the customer to begin shipping in the next 12 months. Our design wins were realized in the wireless communications, broadband cable, RFID and defense and homeland security markets, demonstrating our ability to leverage our RF semiconductor expertise across multiple markets. In addition to our internal research and development, we also collaborate with many of our customers to design and develop new semiconductors for their next generation products. For example, we recently formed an arrangement with Alien Technologies to supply high performance RFID reader engines that function in partnership with Alien Technologies' RFID systems and tags. We are also working with a third party to design and develop new high-powered amplifiers for wireless infrastructure applications that we expect to introduce in 2004. We will continue to concentrated our resources on the development of new RF semiconductors and target multiple growth markets such as RFID and defense and homeland security and expand our addressable market opportunities in wireless communications and broadband cable and expect to maintain our accelerated pace of new product introductions and design wins. While customer interest, new product introductions, accelerating pace of design wins and new orders are encouraging, there is no assurance that they will have a positive impact on our overall sales.

        Since the beginning of 2001, we have been taking aggressive steps designed to more closely align our production costs with our customers' current forecasted demand for our products. As part of this effort, we reduced our headcount and other non-employee costs during 2001 and 2002 (see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K). During 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies at third-party foundries, which offers considerable advantages such as allowing us to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing us to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products would be developed in this fashion. In December 2002, we determined that over the course of 2003 we would transition to a fully outsourced business model and we recorded related restructuring charges. There are significant business risks associated with our dependence upon third parties for our manufacturing needs and there can be no assurance that our outsourcing strategy will be a success.

        Under our historical manufacturing approach we were required to make significant investments in equipment and fixed overhead. As a result, the volume of product we produce and sell has had a significant impact on our gross profit margin, and will continue to have this effect until we complete our until we transition to a fully outsourced business model. In addition, we typically generate lower gross margin on new product introductions. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through introducing lower cost elements to the product designs. We expect our new product introductions to continue to be a higher percentage of our sales mix, which will continue to have a negative impact on our gross margin. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility and predictability of customer demand and potential competition which will contribute to a higher level of inventory risk in our near future.

Sales

        We sell our products to a broad group of communications original equipment manufacturers ("OEMs") and their suppliers and subcontractors. Our major customers provide forecasted demand on at least a monthly basis, which assists us in managing our inventory requirements. These forecasts, however, are subject to changes, including changes as a result of market conditions, and could fluctuate from quarter to quarter.

        We depend on a small number of customers for a majority of our sales. Sales to our customers which account for more than 10% of our total annual sales were, in aggregate, 70% of our sales for the year ended December 31, 2003 and 62% and 71% in 2002 and 2001, respectively. For the identity of our

40

customers who contributed greater than 10% of our total sales for each of the preceding three years and the annual amount of those sales, see Note 12 to the consolidated financial statements included elsewhere in this Form 10-K. We have diversified our customer base over the last few years and intend to further diversify our customer base and product offering in the future. However, we anticipate that we will continue to sell a majority of our products to a relatively small group of customers. In addition, most of our sales result from purchase orders or contracts that can be cancelled on short-term notice. Delays in manufacturing or supply procurement or other factors, including general market slow downs, have caused and could potentially continue to cause cancellation, reduction or delay in orders by or in shipments to a significant customer. If the markets for our products in broadband cable or wireless communications decline, fail to grow, or grow more slowly than we anticipate, the use of our products may be reduced with a significant negative impact on our sales, earnings, inventory valuations and cash flow.

        Revenues from product sales are recognized when all of the following conditions are met: the product has been shipped and title has passed to the customer, we have the right to invoice the customer at a fixed price, the collection of the receivable is reasonably assured and there are no significant obligations remaining. Generally, title passes upon shipment of our products. Certain contracts are under a consignment arrangement under which title to our products does not pass until the customer utilizes these products in its production processes. As a consequence, we recognize revenue on these contracts only when the customer notifies us of product consumption. In addition to our internal sales efforts, we use a sole distributor (Richardson Electronics, Ltd.) to sell semiconductor products. Revenues from this distributor are recognized upon shipment based on the following factors: our sales price is fixed and determinable by contract at the time of shipment, payment terms are fixed at shipment and are consistent with terms granted to other customers, the distributor has full risk of physical loss, the distributor has separate economic substance, we have no obligation with respect to the resale of the distributor's inventory, and we believe we can reasonably estimate the potential returns from our distributor based on their history and our visibility in the distributor's success with its products and into the market place in general.

        Based on specific terms of the customer contract or purchase order, we may negotiate a final delivery and settlement in connection with customer order cancellations. Due to the uncertain and lengthy nature of these negotiations, a substantial portion, if not all, of the inventory subject to the cancellation may be written off. In the fourth quarter of 2001, we reached final agreement with one customer and recognized revenue of $3.5 million related to the delivery of specific fixed wireless products that have previously been written off. In the first quarter of 2002, we completed a second fixed wireless contract with one customer resulting in $3.0 million of sales for final product delivery. Substantially all of this inventory had been written off in 2001. In the second quarter of 2002, we completed our largest long-haul fiber optic contract for our OC-192 dielectric resonator oscillator ("DRO") resulting in $2.7 million of sales. The inventory sold had been previously written down by approximately $2.1 million to an adjusted cost basis of approximately $1.3 million in the first quarter of 2002. The resulting margin was similar to other deliveries of this product. In the future, we anticipate that similar arrangements for final deliveries could be made with other customers upon completion of major contracts, however there can be no assurance that this will occur.

        Generally, the selling prices of our products decrease over time as a result of increased volumes or general competitive pressures. We expect that prices will continue to decline as a result of volume increases or these competitive pressures.

Cost of Goods Sold

        Our cost of goods sold consists primarily of:

•

direct material costs of product components;



•

production wages, taxes and benefits;

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•

costs of assembly and test by third party contract manufacturers;



•

wafer costs from third-party semiconductor foundries;



•

labor contracted on a temporary basis;



•

supplies consumed in the manufacturing process;



•

depreciation and amortization of manufacturing and test equipment and leasehold improvements;



•

lease expense for our manufacturing facilities;



•

allocated occupancy costs;



•

scrapped material used in the production process; and



•

write-downs of excess and obsolete inventory.

        We recognize cost of goods sold upon recognition of revenue. We recognize losses on contracts, including purchase order commitments, when identified. We have not recognized any such losses during 2003, 2002 or 2001.

Operating Expenses

        Our operating expenses are classified into two general categories: research and development, and selling and administrative. We classify all charges to these two categories based on the nature of the expenditures. Although each of these two categories includes expenses that are unique to the category type, there are commonly recurring expenditures that are typically included in these categories, such as wages, fringe benefit costs, depreciation and allocated overhead.

Research and Development

        Research and development expense represents wages, supplies and allocated overhead costs to design, develop and improve products and processes. These costs are expensed as incurred.

Selling and Administrative

        Selling and administrative expense consists primarily of wages, travel and facility costs incurred by and other expenses allocated to our selling and administrative departments. Selling and administrative expense also includes manufacturer representatives and distributor sales commissions, trade show and advertising expenses and fees and expenses of legal, accounting, and other professional consultants.

Amortization of Deferred Stock Compensation

        We have recorded deferred stock compensation representing the differential between the fair value of our common stock at the date of grant and the exercise price for employee stock options or restricted stock. We are amortizing this amount using the straight line method over the vesting period of the options and stock granted.

Recapitalization Merger and Other

        In September 2002 we announced the receipt of a proposal from an affiliate, Fox Paine & Company LLC ("Fox Paine") to acquire all of the shares of the Company's common stock held by unaffiliated stockholders (the "Acquisition Proposal"). On March 27, 2003, Fox Paine withdrew its Acquisition Proposal. Our 2003 and 2002 recapitalization merger and other expense is a non-recurring expenditure comprised of expenses incurred by the special committee to our Board of Directors to review the proposal from an affiliate, Fox Paine & Company LLC to acquire all of the shares of our common stock held by

42

unaffiliated stockholders for $1.10 per share in cash. These expenses include legal and financial consulting fees as well as compensation to the members of the special committee.

Restructuring Charge

        Our 2001 restructuring charge reflects our decision to abandon a leased facility based on revised anticipated demand for our products and current market conditions. It is comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and an asset impairment charge on tenant improvements. In determining this estimate, we have made certain assumptions with regards to our ability to sublease the space and have reflected off-setting assumed sublease income in line with our best estimate based on the current market conditions. Our 2002 restructuring charge reflects further consolidation and abandonment of leased space and associated impairment of tenant improvements, severance costs, an asset impairment charge and the initiation of a program to sell excess manufacturing equipment resulting from the prolonged downturn in the telecommunications industry, especially related to our fiber optics products. The 2002 restructuring charge also includes an additional charge for the leased facility we abandoned in 2001 based on our downward revised assumptions regarding sublease occupancy rates and market rates due to an overall deteriorating real estate market and difficulties encountered in subleasing the available space. Also during 2002, we recorded a restructuring charge related to our decision in December 2002 to completely outsource our internal wafer fabrication within one year. As a result of the planned fab closure, we have accrued associated severance expenses, accrued the eventual abandonment of additional excess space for which we will have a remaining two year commitment and recorded an impairment on our internal wafer fabrication equipment and related leasehold improvements. During 2003, we revised our lease loss accrual downward for the four month additional operation of our wafer fab and reduced facility costs at our other two abandoned facilities. This credit was largely offset by an additional lease loss accrual for reductions in estimated sublease occupancy and market rates and disposal of our remaining unsold assets held for sale. We also reversed a portion of our severance accrual for one employee slated to be terminated but instead retained for another position.

Critical Accounting Policies and Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a continuous basis, we evaluate all our significant estimates including those related to doubtful accounts receivable, inventory valuation, impairment of long-lived assets, income taxes, restructuring including accruals for abandoned lease properties, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstance, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. See Note 2 to the consolidated financial statements included elsewhere in this Form 10-K for a detailed discussion of all our significant accounting policies.

Revenue Recognition

        We recognize revenue in accordance with SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" and SAB No. 104, "Revenue Recognition." These SABs require that

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four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. Revenues from our distributor are recognized upon shipment based on the following factors: our sales price is fixed and determinable by contract at the time of shipment, payment terms are fixed at shipment and are consistent with terms granted to other customers, the distributor has full risk of physical loss, the distributor has separate economic substance, we have no obligation with respect to the resale of the distributor's inventory, and we believe we can reasonably estimate the potential returns from our distributor based on their history and our visibility in the distributor's success with its products and into the market place in general. We accrue for distributor right of return, authorized price reductions for specific end-customer sales opportunities and price protection based on known events and historical trends. Through 2003 the amount of those reserves has not been material. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Write-down of Excess and Obsolete Inventory

        We write down our inventory for estimated obsolete or unmarketable inventory for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Management specifically identifies obsolete products and analyzes historical usage, forecasted production generally based on a rolling eighteen month demand forecast, current economic trends and historical write-offs when evaluating the valuation of our inventory. Due to rapidly changing customer forecasts and orders, additional write-downs of excess or obsolete inventory, while not currently expected, could be required in the future. In addition, the sale of previously written down inventory could result from significant unforeseen increases in customer demand. Material differences in estimates of excess and obsolete inventory may result in the amount and timing of cost of sales for any period if management made different judgments or utilized different estimates.

Income Taxes

        In accordance with Statement of Financial Accounting Standards ("SFAS") No. 5 "Accounting for Contingencies" we have established reserves for income tax contingencies in the amount of $10.5 million. These reserves relate to various tax years subject to audit by tax authorities including our federal tax filings for 1996 to 2000 which are currently under examination. The reserves represent our best estimate of our liability of income taxes, interest and penalties. The actual liability could differ significantly from the amount of the reserve, which could have a material effect on our results of operations.

        In addition, as part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves us estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.

        We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

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Restructuring

        During fiscal 2002 and 2001, we recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses and the costs of downsizing our business. Such charges were established in accordance with Emerging Issues Task Force Issue 94-3 ("EITF 94-3") "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." These charges include abandoned leased properties comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and asset impairment charges on tenant improvements deemed no longer realizable. In determining these estimates, we make certain assumptions with regards to our ability to sublease the space and reflected offsetting assumed sublease income in line with our best estimate of current market conditions. Should there be a further significant change in market conditions, the ultimate losses on these could be higher and such amount could be material. During 2002, we recorded restructuring charges of $27.9 million related to restructuring activities initiated in 2002 and also recorded additional charges of $6.3 million related to restructuring activities initiated in 2001, primarily due to changes in estimated sublease income. During 2003, we revised our lease loss accrual downward for the four month additional operation of our wafer fab and reduced facility costs at our other two abandoned facilities. This credit was largely offset by an additional lease loss accrual for reductions in estimated sublease occupancy and market rates.

Impairment of Long-Lived Assets

        In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Factors we consider that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative industry or economic trends; or significant technological changes, which would render equipment and manufacturing process obsolete. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of these assets to future undiscounted cash flows expected to be generated by these assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During 2002, we recognized an asset impairment of $4.4 million for assets held and used and $3.9 million for assets held for sale.

        Significant management judgment is required in the forecasting of future operating results which are used in the preparation of projected cash flows and should different conditions prevail, material write downs of our long-lived assets could occur.

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Current Operations

        The following table sets forth certain statements of operations data expressed as a percentage of sales for the periods indicated. As a result of our new products, changing market conditions and other factors, the historical percentages and comparisons set forth below may not reflect our expected future operations.

Comparison of Years Ended December 31, 2003, 2002 and 2001

        Sales—We recognized $26.6 million, $40.2 million and $62.2 million in sales for the fiscal years ended December 31, 2003, 2002 and 2001, respectively. The decline in sales from 2002 to 2003 primarily reflects the decline in our wireless assembly sales as these products near the end of their life cycle as well as our strategic decisions in 2002 to to focus on our competitive advantages and dedicate our resources to the RF semiconductor market by selling our wireless repeater and thin-film product lines and exiting the fixed wireless assembly and fiber optics markets. The decline in sales from 2001 to 2002 resulted primarily from a decline in the sale of our wireless assembly products due to overall reduction of capital spending by communication service providers resulting in our customers attempting to reduce their inventory levels of our products. Fiber optic sales also declined significantly due to the oversaturation of the long-haul fiber optic market.

        Semiconductor sales during 2003 totaled $20.2 million, representing 76% of total sales which was a $1.0 million or 5% increase in comparison to 2002 sales of $19.2 million (48% of total sales) and our 2002 semiconductor sales decreased $600,000 or 3% in comparison to 2001 sales of $19.8 million (32% of total sales). Our semiconductor sales includes sales of RF semiconductor products as well as sales of our Thin-Film products which represents approximately $855,000, $3.2 million and $3.6 million for 2003, 2002 and 2001, respectively. In May 2003 we sold our Thin-Film product line to M/A COM (a unit of Tyco Electronics). Our RF semiconductor sales increased $3.4 million or 21% to $19.4 million in 2003 from $16.0 million in 2002 and our RF semiconductor sales decreased $200,000 or 1% from 2002 to

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$16.2 million in 2001. The increase in our RF semiconductor sales from 2002 to 2003 related to an increase in the volume of our RF semiconductor products sold due, in part, to our introduction of over 50 new products and our increasing sales in Asia (particularly China, which accounted for 7% of total sales in 2003 compared to 3% in 2002). Based on our current backlog at December 31, 2003 and customer forecasts, we expect that RF semiconductor sales in the first quarter of 2004 will increase from the $6.0 million of sales recorded during the fourth quarter of 2003.

        Wireless assembly sales for 2003 totaled $6.3 million, representing 24% of total sales and a decrease of $8.4 million or 57% from sales of $14.7 million (37% of total sales) in 2002. Our 2002 wireless assembly sales decreased $17.8 million or 55% from sales of $32.5 million in 2001, or 52% of total sales. The decrease in wireless assembly sales in 2003 related to a drop in the volume of our wireless assembly products sold as these products are nearing the end of their product life cycle. The decrease in wireless assembly sales in 2002 resulted primarily from the overall reduction of capital spending by communication service providers resulting in our customers attempting to reduce their inventory levels of our products. Also, we made the decision in early 2002 to exit the fixed wireless assembly market. Wireless assembly sales for 2002 included $3.7 million for final product delivery of our last major fixed wireless contract. The decline in our wireless assembly sales, including fixed wireless assembly sales, over the last two years caused the decline in our sales in the United States and contributed to the decline in our sales to Europe. These products have reached the end of their product life cycle and will not be a significant factor in our long term business. Aside from potential and infrequent "life time buys," our focus will predominantly be repair and maintenance of the existing product base.

        Fiber optic sales were $12,000 in 2003, representing less than 1% of total sales. We exited the fiber optic market in mid-2002 based on the protracted lack of demand for long-haul fiber optic products. Fiber optic sales in 2003 represents sales of residual inventory, primarily manufactured in prior years. Fiber optic sales in 2002 totaled $6.2 million, representing 15% of total sales a decrease of $3.8 million or 38% from sales of $10.0 million (16% of total sales) in 2001. Fiber optic sales declined significantly in 2002 due to the oversaturation of the long-haul fiber optic market which caused a significant reduction in demand for our fiber optic products. The decline in our fiber optic sales over the last two years caused the decline in our sales to Canada nad contributed to the decline in our sales to Europe. There will be no more sales from our fiber optic products in future periods.

        Cost of Goods Sold—Our cost of goods sold for 2003 was $15.5 million, a decrease of $13.4 million or 46% as compared with cost of goods sold of $28.9 million in 2002. As a percentage of sales, our cost of goods sold decreased to 58% in 2003 from 72% in 2002. This decrease in our cost of goods sold as a percentage of sales for 2003 reflects the change in our product sales mix to a greater percentage of higher margin semiconductor products from relatively lower margin wireless assembly products and the cost reductions generated by our restructuring program implemented in our third quarter of 2002 including reductions in wages and benefits, rent, and depreciation expenses. These reduced costs were partially offset by additional expenses incurred to transition our semiconductor manufacturing processes to outside foundries. In absolute dollars, the decrease in our cost of goods sold reflects the factors previously noted as well as our decline in sales during 2003. Our cost of goods sold was $58.9 million in 2001. As a percentage of sales, our cost of goods sold decreased to 72% of sales in 2002 from 95% in 2001. The decrease in our cost of goods sold as a percentage of sales primarily relates to the following costs which were incurred in 2001: a $6.6 million write-down of excess and obsolete inventory, approximately $983,000 of severance expenses related to manufacturing personnel, and high variable costs on fixed wireless products which were being transitioned into manufacturing. The $6.6 million write-down of excess and obsolete inventory largely related to inventory ordered to build base station products for our largest mobile wireless customer. Inventory levels of this product were purchased based on this customer's forecasted demand which had since been revised downward. In addition, given the overall slowdown in market demand, we made write-downs for other product lines where customer forecasts have significantly declined. During 2002, our cost of goods sold benefited from the sale of $5.9 million of fixed wireless CPE inventory, which had previously

47

been written down by $3.1 million in 2001. Due to rapidly changing customer forecasts and orders, additional write-downs of excess or obsolete inventory, while not currently expected, could be required in the future. In addition, the sale of previously written down inventory could result from significant unforeseen increases in customer demand. In addition, 2002 cost of goods sold benefited from a reduction of approximately $4.0 million in salaries, fringe benefits and payroll taxes due to our manufacturing workforce reductions initiated during 2001. Our 2002 cost of goods sold also benefited from an insurance settlement of approximately $590,000 for raw material inventory stolen in 2001. In absolute dollars, the decrease in our cost of goods sold reflects the factors noted above as well as our decline in sales during 2002.

        We have continued to experience a significant amount of unabsorbed overhead costs related to the increased manufacturing infrastructure we put in place to support our customers' demand in the second half of 2000. This increased infrastructure includes, among other things, a new manufacturing facility and investments in equipment. Our 2002 restructuring program mitigated our unabsorbed overhead through the write down of excess facilities and equipment, but we will still have fixed manufacturing costs that these efforts will not impact until we complete our transition to a fully outsourced business model. In addition, we typically generate lower gross margin on new product introductions which we expect to be a higher percentage of our sales mix going forward. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through introducing lower cost elements to the product designs. New product lines also contain a greater degree of inventory risk due to uncertainty regarding a lack of visibility and predictability of customer demand and potential competition.

        Research and Development—Our research and development for 2003 was $16.8 million, a decrease of approximately $1.0 million or 6% as compared with research and development expense of $17.8 million in 2002. Our 2002 research and development expense increased by approximately $600,000 or 3% as compared with our research and development expense of $17.2 million for 2001. The decrease in absolute dollars in 2003 is primarily related to a decrease in procured materials used in our research and development. Research and development efforts in 2003 and 2002 were primarily attributable to spending on the development of RF semiconductor products. During 2002, we greatly increased our expenditures on RF semiconductor development projects while significantly reducing or eliminating development efforts on other product lines. Research and development efforts in 2001 were attributable to increased spending on the development of fixed wireless broadband CPE, new RF semiconductor and new fiber optic products. During 2003, research and development expenses were 63% as a percentage of sales which compares to 44% in 2002 and 28% in 2001. The increases in research and development expense as a percentage of sales from 2001 to 2002 and from 2002 to 2003 relates to our decline in sales. Product research and development is essential to our future success and we expect to continue to make investments in new product development and engineering talent. In 2004 we will focus our research efforts and resources on RF semiconductor development which target multiple growth markets such as RFID and defense and homeland security and while expanding our addressable market opportunities in wireless communications and broadband cable. We will also explore process capabilities of third party foundries and develop products under new process technologies such as SiGe BiCMOS. In absolute dollars, we expect our 2004 research and development expenditures to remain relatively constant with the prior year.

        Selling and Administrative—Selling and administrative expense for 2003 was $10.2 million or 38% of sales, a decrease of approximately $549,000 or 5% as compared with selling and administrative expense of $10.8 million or 27% of sales in 2002. The decrease in absolute dollars is primarily related to $983,000 of cost reductions generated by our restructuring program implemented in our third quarter of 2002 including reductions in wages and benefits, rent and tax expenses. Additionally, we benefited from a $238,000 reduction in our Board of Directors' compensation plan that was approved at our Annual Meeting of Stockholders held on July 15, 2003. These reduced expenses were partially offset by a $200,000 increase in insurance premiums, a $184,000 increase in commission costs due to increased sales of our RF semiconductor products and a $136,000 increase in bonus expense. Selling and administrative expense for

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2001 was $13.8 million or 22% of sales. The decrease in absolute dollars from 2001 to 2002 is primarily related to reduced commission, advertising and promotion expenses, legal expenses and rent expense. The reduced rent expense is related to our decision to abandon our new leased facility in September 2001 (see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K). Until that time, the rent expense for that excess office space was included in selling and administrative expense. As a percentage of sales, the increase in selling and administrative expenses from 2001 to 2002 and 2002 to 2003 reflects the decline in sales over the three year period.

        Amortization of Deferred Stock Compensation—Amortization of deferred stock compensation expense of $149,000, $513,000 and $593,000 for 2003, 2002 and 2001, respectively, is related to the granting of restricted stock during 2002 and 2003 at a price below fair market value and the issuance of employee stock options during 2000 at prices deemed below fair market value. Included in the total deferred stock compensation described above is $32,000, $30,000 and $72,000 for 2003, 2002 and 2001, respectively, which is included in cost of goods sold in the consolidated statements of operations. As of December 31, 2003, the balance of our remaining unamortized deferred stock compensation was approximately $375,000 to be amortized over the next 22 months.

        Recapitalization Merger—We incurred recapitalization merger expense of $680,000 in 2003 and $509,000 in 2002 related to our consideration of the Acquisition Proposal from Fox Paine. These expenses include legal and financial consulting fees as well as compensation to the members of the Special Committee. On March 27, 2003, Fox Paine withdrew its Acquisition Proposal.

        Restructuring charges—During 2003, we revised our lease loss accrual downward for the four month additional operation of our wafer fab and reduced facility costs at our other two abandoned facilities. This credit was largely offset by an additional lease loss accrual for reductions in estimated sublease occupancy and market rates and disposal of our remaining unsold assets held for sale. We also reversed a portion of our severance accrual for one employee slated to be terminated but instead retained for another position.

        During 2002, we recorded a restructuring charge of $25.4 million reflecting consolidation and abandonment of leased space and associated impairment of tenant improvements, severance costs, an asset impairment charge and the initiation of a program to sell excess manufacturing equipment resulting from the prolonged downturn in the telecommunications industry, especially related to our fiber optics products. In the third quarter of 2002, we decided to abandon a portion of our leased facility based on revised anticipated demand for our products and current market conditions. This excess space, for which we had a remaining eight year commitment, is located on the first floor of our current corporate headquarters and originally housed a portion of our optics and integrated assemblies manufacturing operations. This decision resulted in a lease loss of $11.3 million, comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and an asset impairment charge of $3.2 million on tenant improvements deemed no longer realizable. In determining this estimate, we made certain assumptions with regards to our ability to sublease the space and reflected offsetting assumed sublease income in line with our best estimate of current market conditions. In addition, our management made a decision during the third quarter of 2002 to exit the fiber optics business after current contractual obligations had been satisfied. This decision resulted in a significant overcapacity of certain manufacturing equipment and we initiated a plan to sell this equipment before the end of the first quarter of 2003. Our excess manufacturing equipment resulted in a total charge of $3.9 million. Assets to be held for sale are measured at the lower of carrying amount or fair value less cost to sell. Fair market value was determined by obtaining an independent third party appraisal. The majority of these impaired assets was sold in the fourth quarter of 2002. Also during the third quarter of 2002, our management identified manufacturing equipment exclusively supporting certain in-warranty optics and fixed wireless products as well as manufacturing equipment supporting final orders for certain other optics and fixed wireless products and determined that the estimated future cash flows did not support the carrying value of these assets. As such, the carrying value of these assets were written down to the estimated future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of these

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assets. Fair market value was determined by obtaining an independent third party appraisal. This action resulted in a $200,000 asset impairment charge. During 2002, we incurred severance expense of approximately $507,000 related to a reduction of approximately 50 employees.

        Also during 2002, we recorded a restructuring charge of $8.8 million related to our decision in December 2002 to completely outsource our internal wafer fabrication. As a result of the closure of our wafer fabrication facility, approximately 10% of the Company's workforce (approximately 20 employees) will be eliminated, which will result in severance payments of approximately $279,000. The closure of this facility will result in additional excess space of approximately 35,000 square feet for which we will have a remaining two year commitment. This decision has resulted in a lease loss of $4.3 million, comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs. In determining this estimate, we made certain assumptions with regards to our ability to sublease the space and reflected offsetting assumed sublease income in line with our best estimate of current market conditions. This decision triggered an impairment analysis under SFAS No. 144. Recoverability of these assets were measured by a comparison of the carrying amount of these assets to future undiscounted cash flows expected to be generated by these assets over their remaining year of life. As such, the carrying value of these assets were written down to the estimated future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of these assets, which was determined by obtaining an independent third party appraisal. This action resulted in a $4.2 million asset impairment charge.

        For 2001, we recorded a restructuring charge of $9.8 million related to our decision to abandon an excess facility. In September 2001, we decided not to occupy a new leased facility based on revised anticipated demand for our products and current market conditions. This excess facility, for which we had a ten year commitment, is located adjacent to our current corporate headquarters and was originally developed to house additional administrative and corporate offices to accommodate planned expansion. This decision resulted in a pre-tax lease loss of $7.2 million, comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and a pre-tax asset impairment charge of $2.6 million on tenant improvements deemed no longer realizable. The 2002 restructuring charge also includes an additional charge for the leased facility we abandoned in 2001 based on our downward revised assumptions regarding sublease occupancy rates and market rates due to an overall deteriorating real estate market and difficulties subleasing our available space. In determining this estimate, we made certain assumptions with regards to our ability to sublease the space and reflected off-setting assumed sublease income in line with our best estimate of the current market conditions.

        For further discussion, see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K.

        Interest Income—Interest income primarily represents interest earned on cash equivalents and short-term available-for-sale investments. Our interest income for 2003 was $755,000, a decrease of approximately $463,000 or 38% as compared with interest income of $1.2 million in 2002, which decreased by approximately $1.8 million or 60% compared with interest income of $3.0 million in 2001. These decreases primarily resulted from decreased average amounts of funds available for investment and a decrease in interest rates. On January 28, 2004, we completed a secondary offering whereby we sold 2,000,000 shares of common stock at $5.75 per share resulting in gross proceeds of $11.5 million. Pending use of the net proceeds, we have invested them in short-term, interest-bearing, investment-grade securities which will increase interest income. This increase will be partially offset to the extent we continue to utilize our cash in the operation of our business. Additionally, our interest income will be impacted by changes in the market interest rates of our investments.

        Interest Expense—Our interest expense for 2003 was $117,000, a decrease of $25,000 or 18% as compared with interest expense of $142,000 in 2002 and a decrease of approximately $96,000 or 40% as 2002 is compared with interest income of $238,000 in 2001. Interest expense for all periods relates to fees

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associated with our revolving credit facility and outstanding letters of credit. An additional $75,000 of fees was incurred in 2001 as we transitioned from our former credit facility with CIBC World Markets Corp. to our current credit facility.

        Other Income-Net—The other income realized in 2003 was primarily related to a $1.1 million gain we recorded related to the sale of our Thin-Film product line. The sale includes equipment, inventory, intellectual property, training and services for which we received total proceeds of approximately $1.8 million. For further discussion, see Note 12 to the consolidated financial statements included elsewhere in this Form 10-K. The other income realized in 2001 was primarily related to a $345,000 realized gain on the sale of short-term investments, a business interruption insurance settlement of $112,000, net of expenses, related to a power outage at our Milpitas facility and a $235,000 refund of an insurance premium for potential environmental liabilities on our former Scotts Valley facility.

        Gain on Dispositions of Real Property—During 2001, we recorded a gain on dispositions of real property related to the release of $500,000 of escrow funds related to our sale of leasehold interests in our Palo Alto site during the fourth quarter of 2000. This gain was partially offset by $175,000 of residual expenses from the sale of the property.

        Income Tax Benefit—In 2003, we recorded a tax benefit of $647,000 related to an income tax refund of $480,000 from the State of Maryland, as the result of amending our 1999 state tax return, and an adjustment to our deferred tax asset of $167,000 for additional federal income tax refund determined after finalizing our 2002 carryback claim filed in the first quarter of 2003. Beginning in 2002, it was determined that it was not more likely than not that any additional deferred tax assets would be realized through the application of carryforward claims, thus we have not recorded income tax benefits on our 2003 or 2002 net operating losses.

Liquidity and Capital Resources

        Cash, cash equivalents and short-term investments at December 31, 2003 were $60.1 million, a decrease of $4.6 million or 7% compared to the balance of $64.7 million at December 31, 2002.

        In December of 2000, we entered into a revolving credit facility ("Revolving Facility") with a bank, the terms of which were amended and restated in September 2003. Under the new terms, the Revolving Facility provides for a maximum credit extension of $20.0 million with a $15.0 million sub-limit to support letters of credit and matures on September 22, 2005. Interest rates on outstanding borrowings are periodically adjusted based on certain financial ratios and are initially set, at our option, at LIBOR plus 1.0% or Prime minus 0.5%. The Revolving Facility requires us to maintain certain financial ratios and contains limitations on, among other things, our ability to incur indebtedness, pay dividends and make acquisitions without the bank's permission. The Revolving Facility is secured by substantially all of our assets. We were in compliance with the covenants as of December 31, 2003. As of December 31, 2003 and 2002, there were no outstanding borrowings under the Revolving Facility. The Company has letters of credit of $3.2 million outstanding as of December 31, 2003 against which no amounts have been drawn.

        Net Cash Provided (Used) by Operating Activities—Net cash provided (used) by operations was ($5.9) million, $9.3 million and ($24.5) million in 2003, 2002 and 2001, respectively. Net loss in 2003, 2002 and 2001 was ($14.3) million, ($51.4) million and ($21.7) million, respectively.

        Significant items impacting the difference between net loss and cash flows from operations in 2003 were $949,000 used in working capital and $6.0 million provided by the realization of deferred tax assets. The $949,000 used in working capital primarily relates to a $2.2 million decrease in restructuring liabilities, which was offset by a $1.5 million decrease in inventories. The $1.5 million decrease in inventories relates to the decrease in our sales from $40.2 million in 2002 to $26.6 million in 2003. The $6.0 million provided by the realization of deferred tax assets relates to the receipt of an income tax refund generated by the carryback of our 2002 net operating loss. Starting in the second quarter of 2003, we were required to offer

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more favorable payment terms to significant customers in order to remain competitive in the current business environment. As a result, our average payment terms have increased from 30 days to 60 days. We expect this increase in our average payment terms to negatively impact our working capital.

        Significant items impacting the difference between net loss and cash flows from operations in 2002 were $11.6 million provided by working capital, a $34.2 million increase in our restructuring accrual and $8.2 million provided by the realization of deferred tax assets. The $11.6 million provided by working capital primarily relates to a $6.3 million decrease in inventories and a $8.7 million decrease in receivables which were partially offset by a $2.2 million decrease in accruals, accounts payable and income taxes payable. The decreases in inventories and receivables both relate to the decrease in our sales from $62.2 million in 2001 to $40.2 million in 2002. The decrease in accruals, accounts payable and income taxes payable was primarily due to decreased inventory levels and purchases resulting from lower sales volumes and more restrictive spending efforts, as well as headcount reductions realized as part of our restructuring efforts. The $8.2 million provided by the realization of deferred tax assets relates to the receipt of an income tax refund generated by the carryback of our 2001 net operating loss.

        Significant items impacting the difference between net loss and cash flows from operations in 2001 were $9.7 million used by working capital, a $9.8 million increase in our restructuring accrual and an increase of $9.4 million in deferred tax assets. The $9.7 million used in working capital relates to a $25.9 million decrease in accruals, accounts payable and income taxes payable which was partially offset by a $4.2 million decrease in inventories, a $11.1 million decrease in receivables and a $1.3 million decrease in other assets. The decreases in inventories and receivables both relate to the decrease in our sales from $115.8 million in 2000 to $62.2 million in 2001. The decrease in accruals, accounts payable and income taxes payable was primarily due to decreased inventory levels and purchases resulting from lower sales volumes and more restrictive spending efforts, as well as headcount reductions realized as part of our restructuring efforts. The $1.3 million decrease in other assets relates to a reduction in prepayments for capital equipment purchases. In addition, the decrease in accruals, accounts payable and income taxes payable was also related to a $9.6 million income tax payment generated primarily from the approximately $30.1 million pre-tax gain from the sale of our remaining Palo Alto leasehold interest during our fourth quarter of 2000.

        Net Cash Provided (Used) by Investing Activities—Net cash provided (used) by investing activities was ($27.3) million, $8.4 million, and ($680,000) in 2003, 2002 and 2001, respectively. In 2003, we used $92.6 million to purchase short-term investments and $841,000 to invest in property, plant and equipment which was partially offset by $64.6 million provided by our sale of short-term investments and $1.6 million proceeds form the sale of our Thin-Film product line (see Note 12 to the consolidated financial statements included elsewhere in this Form 10-K). In 2002, we realized $59.7 million in proceeds from the sale of short-term investments and $1.9 million in proceeds from sales of equipment which was partially offset by $51.1 million used to purchase short-term investments and $2.0 million to invest in property, plant and equipment. In 2001, we used $75.9 million to purchase short-term investments and $11.1 million to invest in property, plant and equipment which were largely offset by $85.8 million provided by our sale of short-term investments. During 2004, we expect to increase our capital expenditures to approximately $1.0 to $2.0 million. We have funded our capital expenditures from cash, cash equivalents and short-term investments and expect to continue to do so throughout 2004.

        Net Cash Provided by Financing Activities—Net cash provided by financing activities totaled $617,000, $553,000, and $1.4 million in 2003, 2002 and 2001, respectively. In 2003, we received net cash of approximately $3.5 million from the sale of our common stock to employees through our option plans which was partially offset by approximately $2.8 million of cash used to repurchase our common stock under our stock repurchase program (see Note 6 to the consolidated financial statements included elsewhere in the Form 10-K). In 2002, we received net cash of approximately $565,000 from the sale of our common stock to employees through our employee stock purchase and option plans. In 2001, we received net cash of approximately $1.4 million from the sale of our common stock to employees through our

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employee stock purchase and option plans. On January 28, 2004, we completed a secondary offering whereby we sold 2,000,000 shares of common stock at $5.75 per share, resulting in gross proceeds of $11.5 million.

        Based on our current plans and business conditions, we believe that our existing cash, cash equivalents and short-term investments together with available borrowings under our line of credit will be sufficient to meet our liquidity and capital spending requirements for at least the next twelve months. Thereafter, we will utilize our cash, cash flows and borrowings to the extent available and, if desirable or necessary, we may seek to raise additional capital through the sale of debt or equity. There can be no assurances, however, that future borrowings and capital resources will be available on favorable terms or at all. Our cash flows are highly dependent on demand for our products, timing of orders and shipments with key customers and our ability to manage our working capital, especially inventory and accounts receivable, as well as controlling our production and operating costs in line with our revenue.

Contractual Obligations and Off-Balance Sheet Arrangements

        We do not have any special purpose entities or off-balance sheet financing arrangements except for operating leases as discussed in Note 8 to the consolidated financial statements included elsewhere in this Form 10-K. The following table summarizes our contractual obligations at December 31, 2003 and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

(1)

Operating leases net of subleases includes $18.8 million which is included in our restructuring accrual (current and long-term).

(2)

Purchase obligations are orders for manufacturing and non-manufacturing related goods and services. While the purchase orders are generally cancelable without penalty, certain vendor agreements provide for percentage-based cancellation fees or minimum restocking charges based on the nature of the product or service.

(3)

Total does not include our reserves for income tax contingencies which are recorded on our consolidated balances sheets under Other Long-Term Obligations. Our income tax reserves of approximately $10.5 million relate to various tax years subject to audit by tax authorities including our Federal tax filings for 1996 to 2000 which are currently under examination. This liability has been excluded from the above table as the timing of payments is uncertain.

        The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Other Matters

        Recent Accounting Pronouncements—In November 2002, the Emergining Issues Task Force ("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

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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 us. The provisions of EITF Issue No. 00-21 are applicable to agreements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 had no impact on our operating results or financial condition.

        In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. We did not have any derivative instruments or hedging activities during 2003. The adoption of SFAS No. 149 had no impact on our operating results or financial condition.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no impact on our operating results or financial condition.

        In December 2003, the Securites and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition". SAB 104 updates portions of existing interpretative guidance in order to make this guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 had no impact on our operating results or financial condition.

        The FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", in January 2003, and a revised interpretation of FIN 46 ("FIN 46R") in December 2003. FIN 46 requires certain variable interest entities ("VIEs") to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. We have not invested in any entities that we believe are variable interest entities for which we are the primary beneficiary. The adoption of FIN 46 had no impact, and we do not expect the adoption of FIN 46R to have an impact on our operating results or financial condition.

        Environmental Matters—Of our former production facilities, two have known environmental liabilities of significance, the Scotts Valley site and the Palo Alto site. Prior to the recapitalization merger, we entered into and funded fixed price remediation contracts, as well as cost overrun and unknown pollution conditions liability coverage, with respect to both these sites. For a more detailed description, see "Business—Environmental Matters."

        Litigation—We currently are involved in litigation and regulatory proceedings incidental to the conduct of our business and expect that we will be involved in other litigation and regulatory proceedings from time to time. While we believe that any adverse outcome of such pending matters will not materially affect our business or financial condition, there can be no assurance that this will be the case.

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Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

        The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates. We do not use derivative financial instruments for speculative or trading purposes.

        Cash, Cash Equivalents and Investments—Cash and cash equivalents consist of municipal bond funds and commercial paper acquired with remaining maturity periods of 90 days or less and are stated at cost plus accrued interest which approximates market value. Short-term investments consist primarily of high-grade debt securities (A rating or better) with maturity greater than 90 days from the date of acquisition and are classified as available-for-sale. Short-term investments classified as available-for-sale are reported at fair market value with unrealized gains or losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax, until realized. These available-for-sale securities are subject to interest rate risk and will rise or fall in value if market interest rates change. They are also subject to short-term market risk. We have the ability to hold our fixed income investments until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

        The following table provides information about our investment portfolio and constitutes a "forward-looking statement." For investment securities, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.

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Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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INDEPENDENT AUDITORS' REPORT

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

        We have audited the accompanying consolidated balance sheets of WJ Communications, Inc. and subsidiaries ("the Company") as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for the years then ended. Our audits also included the consolidated financial statement schedule for the years ended December 31, 2003 and 2002 listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WJ Communications, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule for the years ended December 31, 2003 and 2002 listed in Item 15(a)(2), when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

San Jose, California
March 29, 2004

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        We are including in this Annual Report on Form 10-K, pursuant to Rule 2-02(e) of Regulation S-X, a copy of a prior year's Report of Independent Public Accountants from the prior independent public accountants, Arthur Andersen LLP ("Andersen"). This report was previously issued by Andersen, for filing with our Annual Report on Form 10-K for fiscal year 2001, and has not been reissued by Andersen. This report refers to previous consolidated financial statements that are not included in the current filing (consisting of the consolidated balance sheets as of December 31, 2001 and December 31, 2000 and the consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years ended December 31, 2000 and December 31, 1999). Certain financial information for the year ended December 31, 2001 was not reviewed by Andersen and includes reclassifications to conform to our fiscal 2003 financial statement presentation and additional disclosures to conform with new accounting pronouncements and SEC rules and regulations issued during such fiscal year.

SUPPLEMENTAL REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

        We have audited the accompanying consolidated balance sheets of WJ Communications, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WJ Communications, Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

ARTHUR ANDERSEN LLP

San Jose, California
January 22, 2002

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

See notes to consolidated financial statements.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

See notes to consolidated financial statements.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

See notes to consolidated financial statements.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share amounts)

See notes to consolidated financial statements.

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