TRIQUINT SEMICONDUCTOR INC - 10-Q Quarterly Report

PART I—FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

TRIQUINT SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Revenues	$	92,648		$	72,815		$	182,551		$	144,470
Cost of goods sold	62,610			54,090			123,033			109,822
Gross profit	30,038			18,725			59,518			34,648
Operating expenses:
Research, development and engineering	15,340			17,702			31,415			35,062
Selling, general and administrative	13,458			14,404			25,468			27,415
In-process research and development	—			—			—			500
Severance costs	133			2,643			428			2,793
Lease termination costs	—			41,962			—			41,962
Total operating expenses	28,931			76,711			57,311			107,732
Income (loss) from operations	1,107			(57,986		)	2,207			(73,084		)
Other income (expense):
Interest income	1,694			1,635			3,316			3,489
Interest expense	(2,712		)	(3,023		)	(5,731		)	(6,027		)
Gain on retirement of debt	539			—			539			—
Other, net	(220		)	(139		)	(146		)	(286		)
Total other expense, net	(699		)	(1,527		)	(2,022		)	(2,824		)
Income (loss) before income tax	408			(59,513		)	185			(75,908		)
Income tax expense (benefit)	121			47			(104		)	167
Net income (loss)	$	287		$	(59,560	)	$	289		$	(76,075	)
Per share data:
Basic net income (loss)	$	—		$	(0.45	)	$	—		$	(0.57	)
Weighted-average common shares	136,592,457			133,554,233			136,176,235			133,374,070
Diluted net income (loss)	$	—		$	(0.45	)	$	—		$	(0.57	)
Weighted-average common and common equivalent shares	140,665,960			133,554,233			141,573,267			133,374,070

See accompanying notes to condensed consolidated financial statements.

TRIQUINT SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

	June 30, 2004			December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	91,537			$	222,024
Investments in marketable securities	57,896				58,106
Accounts receivable, net	49,406				41,911
Inventories, net	66,547				65,286
Other current assets	26,694				14,089
Assets held for sale	23,323				24,423
Total current assets	315,403				425,839
Long-term investments in marketable securities	211,188				120,134
Property, plant and equipment, net	216,663				221,678
Other noncurrent assets, net	9,797				25,149
Total assets	$	753,051			$	792,800
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	55,287			$	55,717
Total current liabilities	55,287				55,717
Other long-term liabilities	8,079				8,207
Convertible subordinated notes	223,755				268,755
Total liabilities	287,121				332,679
Stockholders’ equity:
Common stock	468,223				460,728
Accumulated other comprehensive income	(1,916		)		59
Accumulated deficit	(377		)		(666		)
Total stockholders’ equity	465,930				460,121
Total liabilities and stockholders’ equity	$	753,051			$	792,800

See accompanying notes to condensed consolidated financial statements.

TRIQUINT SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Six Months Ended
	June 30, 2004			June 30, 2003
Cash flows from operating activities:
Net income (loss)	$	289		$	(76,075	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	20,812			18,534
Deferred income taxes	—			22
Acquired in-process research and development	—			500
Lease termination costs	—			41,962
Impairment of assets	389			—
Loss on disposal of assets	344			209
Gain on retirement of debt	(539		)	—
Changes in assets and liabilities, net of assets acquired:
Receivables	(5,250		)	(5,707		)
Inventories	(1,261		)	(9,765		)
Other assets	414			1,190
Accounts payable and accrued expenses	(2,782		)	10,080
Net cash provided by (used in) operating activities	12,416			(19,050		)
Cash flows from investing activities:
Purchase of available-for-sale investments	(234,507		)	(212,927		)
Maturity/sale of available-for-sale investments	141,666			315,939
Business acquisition	—			(40,151		)
Proceeds from sale of assets	67			10,242
Capital expenditures	(13,749		)	(19,729		)
Net cash provided by (used in) investing activities	(106,523		)	53,374
Cash flows from financing activities:
Principal payments under capital lease obligations	—			(341		)
Repurchase of convertible subordinated notes	(43,875		)	—
Issuance of common stock	7,495			3,541
Net cash provided by (used in) financing activities	(36,380		)	3,200
Net increase (decrease) in cash and cash equivalents	(130,487		)	37,524
Cash and cash equivalents at the beginning of the period	222,024			226,226
Cash and cash equivalents at the end of the period	$	91,537		$	263,750

See accompanying notes to condensed consolidated financial statements.

TRIQUINT SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands unless noted otherwise, except share and per share amounts)
(Unaudited)

1. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. However, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In addition, the preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. For TriQuint Semiconductor, Inc. (the “Company”), the accounting estimates requiring management’s most difficult and subjective judgments include the valuation of inventory, the assessment of recoverability of long-lived assets, the valuation of investments in privately held companies, the recognition and measurement of income tax assets and liabilities, and the establishment of reserves for potential warranty costs. In the opinion of management, the condensed consolidated financial statements include all normal adjustments necessary for the fair presentation of the results of the interim periods presented.

These condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company for the fiscal year ended December 31, 2003, as included in the Company’s 2003 Annual Report on Form 10-K as filed with the SEC on March 11, 2004.

The Company’s fiscal quarters end on the Saturday nearest the end of the calendar quarter. For convenience, the Company has indicated that its second quarter ended on June 30. The Company’s fiscal year ends on December 31.

Reclassifications

Where necessary, prior period amounts have been reclassified to conform to the current period presentation.

Stock-Based Compensation

The Company accounts for compensation cost related to employee stock options and other forms of employee stock-based compensation plans other than ESOP in accordance with the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company also applies FASB Statement No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair value based method defined in SFAS 123 had been applied.

The Company continues to apply the provisions of APB 25 in accounting for its plans. As the fair value was equal to the grant price on the date of grant, no compensation cost has been recognized for its stock-based compensation awards in the financial statements. Had the Company determined compensation cost based on the fair value at the date of grant for its stock-based compensation awards

under SFAS 123, the Company’s net income (loss) would have been adjusted to the pro forma amounts indicated below:

	Three Months Ended June 30						Six Months Ended June 30
	2004			2003			2004			2003
Net income (loss) as reported	$	287		$	(59,560	)	$	289		$	(76,075	)
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax	(9,362		)	(12,270		)	(20,033		)	(26,818		)
Pro forma net loss	$	(9,075	)	$	(71,830	)	$	(19,744	)	$	(102,893	)
Earnings per share:
Basic and diluted—as reported	$	0.00		$	(0.45	)	$	0.00		$	(0.57	)
Basic and diluted—pro forma	$	(0.07	)	$	(0.54	)	$	(0.14	)	$	(0.77	)

2. Business Combinations

Agere’s Optoelectronics Business

On January 2, 2003, the Company completed an acquisition of a substantial portion of the optoelectronics business of Agere Systems Inc. (“Agere”) for $40 million in cash plus acquisition costs and certain assumed liabilities. The transaction included the products, technology and some facilities related to Agere’s optoelectronics business, which includes active and passive components, amplifiers, transceivers, transponders and other products. As part of the acquisition, the Company has also assumed operation of the back-end assembly and test operations associated with these components at a leased facility in Matamoros, Mexico.

The Company acquired this business to expand its market and product offerings in its optical networks business. Through a transition services agreement, Agere provided some business infrastructure services to the Company for a short period following the close of the transaction to ensure seamless transition of the business operations. On May 6, 2003, the Company sold a portion of the assets acquired in this transaction for $6.6 million in cash.

Details of the purchase price were as follows (in thousands):

Cash paid at closing	$	40,000
Acquisition costs	200
Total purchase price	$	40,200

The purchase price was allocated to the assets and liabilities based on fair values as follows:

Inventory	$	12,000
Other assets	12,000
Property, plant and equipment	36,271
Identifiable intangibles	2,178
Acquired in-process research and development	500
Liabilities assumed	(22,749		)
Allocated purchase price	$	40,200

In connection with this acquisition, the Company obtained a third-party valuation of some of the assets for purposes of the purchase price allocation. Acquired in-process research and development

(“IPR&D”) assets were expensed at the date of acquisition in accordance with FASB Interpretation No. 4 (“FIN 4”), Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase. The value assigned to IPR&D related to research projects for which technological feasibility had not been established and no future alternative uses existed. The fair value was determined using the income approach, which discounts expected future cash flows from projects under development to their net present value using a risk adjusted rate. The project was analyzed to determine the following: the technological innovations included; the utilization of core technology; the complexity, cost and time to complete development; any alternative future use or current technological feasibility; and the stage of completion. Future cash flows were estimated based upon management’s estimates of revenues expected to be generated upon completion of the projects and the beginning of commercial sales and related operating costs. The projections assume that the technologies will be successful and that the product’s development and commercialization will meet management’s time schedule. The discount rate was 35% and was based on the novelty of the technology, the risks remaining to complete each project, and the extent of the Company’s familiarity with the technology.

3. Segment Information

FASB Statement No. 131 (“SFAS 131”), Disclosures About Segments of an Enterprise and Related Information establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company has aggregated its businesses into a single reportable segment as allowed under SFAS 131 because the segments have similar long-term economic characteristics. In addition, the segments are similar in regards to (a) nature of products and production processes, (b) type of customers and (c) method used to distribute products. Accordingly, the Company describes its reportable segment as high-performance components and modules for communications applications. All of the Company’s revenues result from sales in its product lines.

The Company’s sales outside of the United States comprised 60% and 58% of revenues for the three and six months ended June 30, 2004, and 60% and 58% of revenues for the three and six months ended June 30, 2003, respectively.

4. Net Income (Loss) Per Share

Net income (loss) per share is presented as basic and diluted net income (loss) per share. Basic net income (loss) per share is net income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is similar to basic except that the denominator includes potential common shares that, had they been issued, would have had a dilutive effect.

The following is a reconciliation of the basic and diluted shares:

	Three Months Ended June 30,		Six Months Ended June 30,
	2004	2003	2004	2003
Shares for basic net income (loss) per share:
Weighted-average common shares	136,592,457	133,554,233	136,176,235	133,374,070
Effect of dilutive securities:
Stock options	4,073,503	—	5,397,032	—
Shares for dilutive net income (loss) per share:	140,665,960	133,554,233	141,573,267	133,374,070

Stock options and other exercisable convertible securities totaling approximately 16,886,000 and 15,000,000 shares for the three and six months ended June 30, 2004, respectively, and 18,031,000 and 18,276,000 shares for the three and six months ended June 30, 2003, respectively, were not included in the diluted net income per share calculations, because to do so would have been antidilutive.

5. Inventories

Inventories, stated at the lower of cost or market, consisted of the following:

	June 30, 2004		December 31, 2003
Raw material	$	28,297		$	22,282
Work in progress	23,622			26,620
Finished goods	14,628			16,384
Total inventories, net	$	66,547		$	65,286

6. Goodwill and Other Acquisition-Related Intangible Assets

In accordance with FASB Statement No. 142 (“SFAS 142”), Goodwill and Other Intangible Assets, the Company is required to perform impairment tests of goodwill at least annually or when events and circumstances warrant. The Company intends to perform this test in the fourth quarter of each year. Goodwill and other acquisition-related intangible assets are included in “Other non-current assets, net” on the Company’s condensed consolidated balance sheet. There were no changes in the carrying amount of goodwill for the six months ended June 30, 2004.

Information regarding the Company’s other acquisition-related intangible assets is as follows:

	June 30, 2004							December 31, 2003
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Patents, trademarks and other	$	10,044		$	5,652	$	4,392	$	10,044		$	4,493	$	5,551

Amortization expense of other acquisition-related intangible assets was $580 and $1,159 for the three and six months ended June 30, 2004, respectively, and $459 and $1,097 for the three and six months ended June 30, 2003, respectively. The periods over which the Company amortizes these intangible assets range from two to 10 years, depending on the estimated useful life of the intangible asset.

7. Assets Held for Sale

In accordance with FASB Statement No. 144 (“SFAS 144”), Accounting for the Impairment or Disposal of Long-Lived Assets, the Company has classified as of June 30, 2004, the buildings and land associated with its Pennsylvania operations, totaling $22,305, and certain equipment totaling $1,018 located in Texas as assets held for sale. The Company is marketing these assets for sale and expects to sell them within a year. During the three months ended June 30, 2004, assets held for sale at the Texas operation totaling approximately $1,075 were reclassified at their carrying value as held and used. No adjustment for depreciation expense for the period of time these assets were classified as held for sale was required as these assets had never originally been placed into service.

8. Product Warranty

The Company estimates a liability for costs to repair or replace products under warranties and technical support costs when the related product revenue is recognized. The liability for product warranties is calculated based upon historical experience and specific warranty issues. The liability for product warranties is included in “Accounts payable and accrued expenses” on the Company’s condensed consolidated balance sheet.

Product warranty activity consisted of:

	Six months ended June 30, 2004
Beginning balance		$	9,293
Accruals		2,565
Deductions		(4,872		)
Ending balance		$	6,986

9. Stockholders’ Equity

Selected components of stockholders’ equity are as follows:

	June 30, 2004		December 31, 2003
Common stock, $.001 par value, 600,000,000 shares authorized, 137,305,999 and 135,403,258 outstanding at June 30, 2004 and December 31, 2003, respectively	$	137		$	135
Additional paid-in capital	$	468,086		$	460,593

10. Supplemental Cash Flow Information

	Six Months Ended
	June 30, 2004		June 30, 2003
Cash transactions:
Cash paid for interest	$	5,750	$	5,386
Cash paid for income taxes	$	271	$	688

11. Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax for 2004 and 2003, are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net income (loss)	$	287		$	(59,560	)	$	289		$	(76,075	)
Net unrealized loss on cash flow hedges	(10		)				20
Net unrealized loss on available-for-sale investments	(2,138		)	22			(1,994		)	(265		)
Comprehensive loss	$	(1,861	)	$	(59,538	)	$	(1,685	)	$	(76,340	)

12. Severance Costs

In June 2003, the Company adopted a plan to reduce its operating costs and streamline its available capacity. As part of this plan, the Company determined that it would terminate approximately 80 employees associated with its optoelectronics business in Breinigsville, Pennsylvania and its design center in Munich, Germany. In June 2003, the Company accrued and recorded as a charge to earnings $2,633 for expected severance costs. As of June 30, 2004, a liability of $61, included in “Other accrued liabilities” on the Condensed Consolidated Balance Sheet, remains for the unpaid portion of the severance costs related to the German operation.

The Company also assumed accrued severance costs of $1,800 as part of the acquisition of its optoelectronics business from Agere. As of June 30, 2004, no liability remains on the Condensed Consolidated Balance Sheet remains for these severance costs due to usage and to adjustment for attrition.

During the three and six months ended June 30, 2004, the Company recorded charges of $133 and $428, respectively, for severance costs associated with a reduction in force of 11 and 21 employees, respectively, assigned to its Texas operation. As of June 30, 2004, a liability of $107, included in “Other accrued liabilities” on the Condensed Consolidated Balance Sheet, remains for the unpaid portion of this liability.

13. Litigation

In February 2003, several nearly identical putative civil class action lawsuits were filed in the United States District Court for the Middle District of Florida against Sawtek, Inc., the Company’s wholly owned subsidiary since July 2001. The lawsuits also named as defendants current and former officers of Sawtek and the Company. The cases were consolidated into one action, and an amended complaint was filed in this action on July 21, 2003. The amended class action complaint is purportedly filed on behalf of purchasers of Sawtek’s stock between January 2000 and May 24, 2001, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act, as well as Securities and Exchange Commission Rule 10b-5, by making false and misleading statements and/or omissions to inflate Sawtek’s stock price and conceal the downward trend in revenues disclosed in Sawtek’s May 23, 2001 press release. The complaint does not specify the amount of monetary damages sought. Sawtek and the individual defendants filed their motion to dismiss on September 3, 2003, and briefing on the motion was completed on November 19, 2003. The court heard oral argument on November 21, 2003, and issued an order partially denying the motion to dismiss on December 19, 2003. Specifically, the court found that the complaint was not barred by the statute of limitations, but reserved ruling on the other aspects of the motion to dismiss. Because the statute of limitations issue is a novel question of law, the court stayed the proceedings in this case to allow the defendants to file an interlocutory appeal to the Eleventh Circuit Court of Appeals. The defendants duly filed for interlocutory appeal on January 22, 2004. Because the Court of Appeals is considering the identical issue in another matter, the appeal process has been stayed,

pending the Court of Appeals’ decision in the other matter. The Company denies the allegations contained in the complaint and intends to continue its vigorous defense against these claims.

14. Recent Accounting Pronouncements

The FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, in January 2003 and amended the Interpretation in December 2003. FIN 46 requires an investor with a majority of the variable interests (primary beneficiary) in a variable interest entity (VIE) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the voting equity investors do not have a controlling financial interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from the other parties. Development-stage entities that have sufficient equity invested to finance the activities they are currently engaged in and entities that are businesses, as defined in the Interpretation, are not considered VIEs. The provisions of FIN 46 were effective immediately for all arrangements entered into with new VIEs created after January 31, 2003. The Company does not currently have any variable interests in VIEs and does not expect the application of FIN 46 to have a significant impact on it.

On March 31, 2004, the FASB issued an exposure draft No. 1102-100, Proposed Statement of Financial Accounting Standards—Share-Based Payment, effective for fiscal periods beginning after December 15, 2004. This exposure draft outlines a methodology for the accounting treatment of stock options and certain other share-based payments. It requires these payments to be recorded as an operating expense. The exposure draft is proposed to supercede SFAS 123, which allowed for footnote disclosure of this expense. The exposure draft encourages use of the binomial model for valuing the cost. Currently, the Company uses the Black-Scholes model for option expense calculation for footnote disclosure. The Company’s proforma expense calculated for this disclosure was $53.6 million for the year ended December 31, 2003. While it is believed by some that the binomial method may result in a lower charge, the Company believes that the effect of the proposed statement will be significant and will have a material adverse impact on its consolidated financial statements. The Company is currently evaluating its share-based employee compensation programs to determine what action, if any, may be required to reduce this potential charge if this exposure draft is enacted.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Report on Form 10-Q. The discussion in this Report contains both historical information and forward-looking statements. A number of factors affect our operating results and could cause our actual future results to differ materially from any forward-looking results discussed below, including, but not limited to, those related to operating results; demand for integrated circuits, SAW filters and optoelectronic products and the products into which they are manufactured, including wireless phones; critical accounting estimates; sale of excess production assets in our optoelectronic and semiconductor manufacturing operations; any projections of revenue, gross profit, operating expenses, capital resources; and investments in new facilities. In some cases, you can identify forward-looking statements by terminology such as “anticipates”, “appears”, “believes”, “continue”, “could”, “estimates”, “expects”, “goal”, “hope”, “intends”, “may”, “our future success depends”, “plans”, “potential”, “predicts”, “projects”, “reasonably”, “seek to continue”, “should”, “thinks”, “will” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In addition, historical information should not be considered an indicator of future performance. Factors that could cause or contribute to these differences include, but are not limited to, the risks discussed in the section of this report titled “Factors Affecting Future Operating Results”. These factors may cause our actual results to differ materially from any forward-looking statement.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this Report on Form 10-Q to conform these statements to actual results. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995.

Overview

We are a leading supplier of high-performance components and modules for communications applications. Our focus is on the specialized expertise, materials and know-how for RF/IF and optical applications. We enjoy diversity in our markets, applications, products, technology and customer base. Our markets include wireless phones, wireless infrastructure networks, optical networks, and defense. We provide customers with standard and custom product solutions as well as foundry services. Our products are designed on various wafer substrates such as GaAs, InP, LiNbO3, LiTaO3 and quartz, using a variety of device technologies including pHEMT, mHEMT, HBT, HFET, MESFET and SAW. Using these materials, devices and our proprietary technology, our products can overcome the performance barriers of competing devices in a variety of applications and offer other key advantages such as steeper selectivity, lower distortion, reduced size and weight and more precise frequency control. For example, GaAs has inherent physical properties that allow its electrons to move up to five times faster than those of silicon. This higher electron mobility permits the manufacture of GaAs integrated circuits that operate at higher levels of performance than silicon devices. Our customers include major communication companies worldwide.

Strategy and Industry Considerations

Our business strategy is to provide our customers with high-performance, low-cost solutions to applications in the wireless phone, wireless infrastructure, optical network, and defense markets. Our goal is to build a strong and sustainable business by applying our core competencies and technologies to a diversified portfolio of markets within the communications industry. In wireless phones, we provide high

performance RF filters, duplexers, receivers, small signal components, power amplifiers, switches, and integrated passive components. We have also been a leader in the development of RF front-end modules with the goal of maximizing content and minimizing stacked margins. In wireless infrastructure networks, we are a leading supplier of active and passive components for RF communications and we are the dominant supplier of SAW filters to base stations. We expect the global number of subscribers to wireless communications to grow from approximately 1.3 billion in 2002 to approximately 1.7 billion by 2006. In optical networks, we are a leading supplier of laser and detector components and differentiated modules. We believe the total available market for these products will grow from approximately $600 million in 2003 to over $1.0 billion by 2006. In the defense market, we are a leading provider of phased array antenna components to the U.S. military. This has been a stable business for us due to the long lead times and long product life cycles.

The semiconductor industry in general has been subject to slumping demand and excess capacity since 2001. This has been the case for our business as well. Wafer and semiconductor manufacturing facilities represent a very high level of fixed cost due to investments in plant and equipment, labor costs, and repair and maintenance costs. During periods of low demand, selling prices also tend to decrease which, when combined with high fixed manufacturing costs, can create a material adverse impact on operating results.

Wireless phone demand, however, generally strengthened during 2003, especially during the seasonally stronger second half of the year. We believe total global unit shipments for the whole market will grow by more than 10%, resulting in projected shipments approaching 600 million handsets in 2004. We also believe we are positioned for sustained demand in the wireless phone market for 2004 due to continued demand in China, India and other emerging countries, strong interest in camera phones and color displays worldwide, and increasing acceptance of non-voice applications such as text messaging. As the handset market expands, we expect this to also create increased demand in the wireless infrastructure market for our base station and point-to-point components.

As with the semiconductor industry, the optical communication industry has also suffered since 2001. As restructuring and consolidation in the optical network market continues, we believe strengthening long-term market demand will result. Demand for our products in this market grew during 2003; however, the outlook for 2004 is somewhat mixed. Revenues in the first half of 2004 were up only slightly from the first half of 2003 due to increased shipments of legacy products such as optical amplifiers. We expect revenues to grow slightly in the second half of 2004 based on the expected launch of new products and continued penetration with current and new customers.

The defense market is stable and long-term. Revenues in the first half of 2004 were down slightly from the first half of 2003, however, we are actively engaged with multiple defense industry contractors in the development of next-generation phased array systems, have key design wins in major projects such as the Joint Strike Fighter and F-22, and expect to participate in other large projects such as the B-2 radar upgrade. We expect these programs to ramp up over the 2005-2006 timeframe.

We are incorporated under the laws of the State of Delaware. Our principal executive offices are located at 2300 N.E. Brookwood Parkway, Hillsboro, Oregon 97124 and our telephone number at that location is (503) 615-9000. Information about the company is also available at our website at www.triquint.com, which includes links to reports we have filed with the Securities and Exchange Commission (“SEC”). The contents of our website are not incorporated by reference in this Report on Form 10-Q.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make certain estimates, judgements and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets

and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Some of our accounting policies require us to make difficult and subjective judgements, often as a result of the need to make estimates of matters that are inherently uncertain. The following accounting policies involve a critical accounting estimate because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. In addition, while we have used our best estimates based on facts and circumstances available to us at the time, different estimates reasonably could have been used in the current period and changes in the accounting estimates we used are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations.

Our most critical accounting estimates include the valuation of inventory, which impacts gross margin; assessment of recoverability of long-lived assets, which primarily impacts operating expense when we impair assets or accelerate depreciation; valuation of investments in privately held companies, which impacts net income when we record impairments; deferred income tax assets and liabilities, which impacts our tax provision; and reserve for warranty costs, which impacts gross margin. We also have other policies that we consider to be key accounting policies, such as our policies for revenue recognition, valuation of accounts receivable, reserves for sales returns and allowances, and reserves for commitments and contingencies; however, these policies either do not meet the definition of critical accounting estimates described above or are not currently material items in our financial statements. We review our estimates, judgements, and assumptions periodically and reflect the effects of revisions in the period that they are deemed to be necessary. We believe that these estimates are reasonable; however, actual results could differ from these estimates.

Inventories

We state our inventories at the lower of cost or market. We use a combination of standard cost and moving average cost methodologies to determine our cost basis for our inventories. This methodology approximates actual cost on a first-in, first-out basis. In addition to stating our inventory at a lower of cost or market valuation, we also evaluate it each period for excess quantities and obsolescence. This evaluation includes identifying those parts specifically identified as obsolete and reserving for them, analyzing forecasted demand versus quantities on hand and reserving for the excess, identifying and recording other specific reserves, and estimating and recording a general reserve based on historical experience and our judgement of economic conditions. If future demand or market conditions are less favorable than our projections and we fail to reduce manufacturing output accordingly, additional inventory reserves may be required and would have a negative impact on our gross margin in the period the adjustment is made.

Long-Lived Assets

We evaluate long-lived assets for impairment of their carrying value when events or circumstances indicate that the carrying value may not be recoverable. Factors we may consider in deciding when to perform an impairment review include significant negative industry or economic trends, significant changes or planned changes in our use of the assets, plant closure or production line discontinuance, technological obsolescence, or other changes in circumstances which indicate the carrying value of the assets may not be recoverable. If impairment appears probable, we evaluate whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If this is the case, we recognize an impairment loss to the extent that carrying value exceeds fair value. Fair value is determined based on market prices or discounted cash flow analysis, depending on the nature of the asset. The fair value of the asset then becomes the asset’s new carrying value, which is depreciated over the remaining useful life of the asset.

Investments in Privately Held Companies

We have made several investments in small, privately held technology companies in which we hold less than 20% of the capital stock or hold notes receivable. We account for these investments at their cost unless their value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. We review these investments periodically for impairment and make appropriate reductions in carrying value when an other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgement. We evaluate the financial condition of the investee, market conditions, and other factors providing an indication of the fair value of the investments. Adverse changes in market conditions or poor operating results of the investees could result in additional other-than-temporary losses in future periods. In 2003, we recorded impairment charges of $2.4 million on investments in privately held companies and also recovered a previously impaired investment resulting in a gain of $8.5 million. We recorded no similar charges or gains during the three and six months ended June 30, 2004.

Income Taxes

We must apply estimates and judgements to determine our provision for income taxes and amounts payable or recoverable in numerous tax jurisdictions around the world. These estimates and judgements involve interpretations of regulations and are inherently complex. If our estimate of tax liabilities proves to be more or less than the ultimate assessment, a benefit or expense, respectively, would be recognized in the period the determination is made. In addition, we must also make a judgement as to the realizability of our deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. We record a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets may not be realized. We consider future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance. We evaluate the need for a valuation allowance on a regular basis and adjust as needed. These adjustments have an impact on our financial statements in the periods in which they are recorded. In 2002, we determined that a valuation allowance should be recorded against all of our deferred tax assets based on the criteria of Statement of Financial Accounting Standards No. 109 (“SFAS109”), Accounting for Income Taxes. As of June 30, 2004, this valuation allowance is still in place.

Warranty Costs

We sell our products with warranties that they will be free of faulty workmanship or defective materials and that they will conform to our published specifications or other specifications mutually agreed to with a customer. In some cases, we have assumed the existing warranties on products previously sold by businesses we have acquired, such as the Agere optoelectronics business. We have also established a reserve for potential catastrophic warranty claims for cases in which our obligation may extend beyond the repair and replacement of a faulty product. We estimate the potential liability associated with these warranties based on a combination of factors including historical product return experience, known product warranty issues with specific customers, and judgement of expected levels of returns based on economic and other factors. An accrual for expected warranty costs results in a charge to the financial results in the period recorded. This liability can be difficult to estimate and, if we experience warranty claims in excess of our projections, we may need to record additional accruals which would adversely affect our financial results.

Acquisitions

Acquisition of a Portion of Agere’s Optoelectronics Business

On January 2, 2003, we completed our acquisition of a substantial portion of the optoelectronics business of Agere for $40 million in cash plus acquisition costs and certain assumed liabilities. We acquired this business to expand our market and the product offerings of our optical networks business. The transaction included the products, technology and some facilities related to Agere’s optoelectronics business, which includes active and passive components, amplifiers, transceivers, transponders and other optical products. As part of the acquisition, we have also assumed operation of the back-end assembly and test operations associated with these components and modules at a leased facility in Matamoros, Mexico.

Through a transition services agreement, Agere provided some business infrastructure services to us for a short period following the close of the transaction to ensure seamless transition of the business operations. Further details regarding the allocation of the purchase price to the acquired assets and liabilities can be found at Note 2 of the accompanying Condensed Consolidated Financial Statements. On May 6, 2003, we sold a portion of the assets acquired in this transaction for $6.6 million in cash.

Assets Held for Sale

We intend to sell the land and buildings associated with our optoelectronics operation in Pennsylvania and excess equipment associated with our semiconductor manufacturing operations. The Pennsylvania property consists of several buildings comprising approximately 849,000 square feet of space on 139 acres of land. The buildings contain fab and assembly space, office space, and central services. The excess equipment associated with our semiconductor manufacturing operations consists of a variety of equipment used for semiconductor fab and assembly operations. We are actively marketing these assets and have met the accounting criteria for classifying these assets as held for sale; accordingly, they are identified on our balance sheet as assets held for sale. The amount of these assets as of June 30, 2004 was $23.3 million. We may have to impair the carrying value of these assets if we cannot sell them at a price equal to or greater than their book value.

During the three months ended June 30, 2004, assets held for sale associated with our semiconductor manufacturing operations totaling approximately $1,075 were reclassified at their carrying value as held and used. No adjustment for depreciation expense for the period of time these assets were classified as held for sale was required as these assets had never originally been placed into service.

Results of Operations

The following table sets forth the results of our operations expressed as a percentage of revenues. Our historical operating results are not necessarily indicative of the results for any future period.

	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		67.6			74.3			67.4			76.0
Gross profit		32.4			25.7			32.6			24.0
Operating expenses:
Research, development and engineering		16.6			24.3			17.2			24.3
Selling, general and administrative		14.5			19.8			14.0			19.1
In-process research and development		—			—			—			0.3
Severance costs		0.1			3.6			0.2			1.9
Lease termination costs		—			57.6			—			29.0
Total operating expenses		31.2			105.3			31.4			74.6
Income (loss) from operations		1.2			(79.6	)		1.2			(50.6	)
Interest income (expense), net		(1.1	)		(1.9	)		(1.3	)		(1.8	)
Gain on retirement of debt		0.6			—			0.3			—
Other, net		(0.3	)		(0.2	)		(0.1	)		(0.2	)
Income (loss) before income tax		0.4			(81.7	)		0.1			(52.6	)
Income tax expense		0.1			0.1			(0.1	)		0.1
Net income (loss)		0.3	%		(81.8	)%		0.2	%		(52.7	)%

Revenues

We derive revenues from the sale of standard and customer-specific products and services. Our revenues also include nonrecurring engineering revenues relating to the development of customer-specific products. Our markets during these comparative periods included wireless phones; infrastructure networks such as base station, satellite, and point-to-point radios; defense and optical networks. Our distribution channels include our direct sales staff, manufacturers’ representative firms, and distributors. The majority of our shipments are made directly to our customers, with shipments to distributors accounting for only approximately 7% of our total revenues for both the three and six months ended June 30, 2004, respectively. Our revenues increased 27.2%, or $19.8 million, to $92.6 million for the three months ended June 30, 2004 and 26.4%, or $38.1 million, to $182.6 million from $72.8 million and $144.5 million for the three and six months ended June 30, 2003, respectively. These increases in revenues from the prior year comparative periods are due to increased shipments of products to all of our end markets. Demand was steady with a book-to-bill ratio, which is a comparison of orders received to products shipped, of 0.99 to 1.00 for the three months ended June 30, 2004. Our revenues by end market were:

	% of Total Revenues
	Three Months Ended						Six Months Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Wireless phones		40	%		37	%		39	%		39	%
Infrastructure networks		36	%		32	%		35	%		31	%
Defense		12	%		16	%		12	%		16	%
Optical networks		12	%		15	%		14	%		14	%
Total		100	%		100	%		100	%		100	%

Revenues from products addressing the wireless phone market for the three and six months ended June 30, 2004 increased on an absolute dollar basis by over $10 million and $16 million, respectively, from the three and six months ended June 30, 2003. This increase has been due to the successful introduction of new products such as our GSM power amplifier modules and CDMA duplexers, receivers and switches, as well as increased unit shipments of RF SAW filters. We continue to grow revenues from products for the CDMA market and are gaining market share in the GSM market. Our GSM power amplifier modules are now designed into over 20 phone platforms. During June 2004, we also introduced our new Quad-Band GSM transmit module, which fully integrates the complete power amplifier and switch function into one product that is 60% smaller than competitive offerings. Our revenues for the three months ended June 30, 2004 from our products for GSM handsets were up 67% over the three months ended March 31, 2004. We have received the first orders for our new CDMA switch from two major Korean phone manufacturers and revenues from CDMA duplexers exceeded revenues from SAW IF filters for the first time. We shipped a record number of SAW filters during the three months ended June 30, 2004 and exceeded the volume shipped during the three months ended June 30, 2003 by 74%. Our revenues from products for TDMA applications continue to decline as this standard is widely being replaced by GSM and CDMA. Our revenues from some of our small signal devices such as mixers and low noise amplifiers have also declined as these products are being phased out in certain phone models.

GSM, CDMA, and TDMA refer to the primary wireless air interface standards used throughout the world. GSM is the most prevalent standard, utilized primarily in Europe and many parts of Asia with a growing presence in the United States. This standard accounts for over 60% of total phone sales and subscribers worldwide. CDMA is the standard used principally in North America, Korea, and parts of China and India. We historically have more sales into CDMA applications as many of our products, such as IF SAW filters, receivers, duplexers, and triplexers are better suited for CDMA and in some cases are not used in GSM. TDMA is an older digital air interface standard that wireless phone manufacturers are phasing out. For the three and six months ended June 30, 2004, our revenues in the wireless phone market were dominated by sales for CDMA applications, accounting for 75% and 78%, respectively, of our wireless phone revenues, followed by GSM applications comprising 23% and 20%, respectively, and TDMA applications comprising 2% and 2%, respectively. For the three and six months ended June 30, 2003, the same breakdown of revenues by air interface standard was CDMA comprising 82% and 83%, respectively, GSM comprising 8% and 8%, respectively, and TDMA comprising 10% and 9%, respectively. Our efforts to design and introduce products based on the GSM standard is an important element in our strategy to continue to gain additional share in this large market.

Our infrastructure network products address a variety of application areas, such as base stations, satellite, point-to-point radios, and WLAN. Our sales of products for the infrastructure networks market grew in excess of 40% for the three months ended June 30, 2004 compared to the three months ended June 30, 2003. For the six months ended June 30, 2004, our sales of products into this market grew by over $19 million, over 40%, compared to the six months ended June 30, 2003, which represents the highest growth rate of all of our end markets. Our sales in this end market have grown primarily due to increased shipments of products for base station and WLAN applications. We have gained significant market share as a supplier of foundry services for the WLAN market. These products are used to develop the cards and circuits based on the 802.11 standard that are embedded in personal computers for wireless access to the Internet. For the three and six months ended June 30, 2004, base station products accounted for 34% and 32%, respectively, of our infrastructure market revenues, with WLAN products comprising 22% and 24%, respectively, and point-to-point radios products comprising 16% and 16%, respectively. For the three months and six months ended June 30, 2003, base station products comprised 24% and 26%, respectively, WLAN products comprised 21% and 18%, respectively, and point-to-point radios comprised 15% and 16%, respectively.

Revenues from our defense related business decreased slightly in both absolute dollars and as a percentage of revenues for the three and six months ended June 30, 2004 compared to the three and six month periods ended June 30, 2003. We are actively engaged with defense contractors in the development of systems and have key design wins in major projects such as the Joint Strike Fighter and F-22. This end market is characterized by long lead times, however, and design wins can take a substantial amount of time to equate to materially increased revenues. Our business in this market is very stable and we have a strong position, particularly for phased array antenna and communications systems. We believe the overall growth of this market, however, is currently slight to moderate.

Revenues from our products for the optical networks market were essentially unchanged for the three months ended June 30, 2004 compared to the three months ended June 30, 2003. For the six months ended June 30, 2004, however, these revenues increased approximately $5.5 million, or 27%, from those for the six month period ended June 30, 2003. A significant portion of our revenues in this end market have come from our acquisition of the optoelectronics business from Agere Systems, which we completed in early January 2003. The balance of the revenues from this end market are attributable to our legacy optoelectronics products such as multiplexers, demultiplexers and transimpedance amplifiers, which have been declining in recent years but continue to sell in substantial volumes.

Domestic revenues were $37.5 million and $76.8 million for the three and six months ended June 30, 2004, respectively, as compared to $29.4 million and $59.8 million for the three and six months ended June 30, 2003, respectively. International revenues continue to grow due to the increasing demand for wireless phones and infrastructure products from countries in Asia, Africa, and South America, where wireless subscriber penetration rates are significantly lower than penetration rates in the U.S. and Europe of approximately 50%.

We are projecting our revenues for the three months ending September 30, 2004 to be in the range of $92 million to $94 million. For the full year 2004, we are projecting revenues to be in the range of $370 million to $375 million, an increase of approximately 19% from the full year 2003. We expect revenues from the defense and optical networks markets to be relatively flat, but expect increased demand from our other markets.

Gross profit

Gross profit is equal to revenues less cost of goods sold. Cost of goods sold includes direct material, labor and overhead expenses and certain production costs related to nonrecurring engineering revenues. In general, gross profit generated from the sale of customer-specific products and from nonrecurring engineering revenues is typically higher than gross profit generated from the sale of standard products. For the three months ended June 30, 2004, gross profit increased 60.4% to $30.0 million from $18.7 million for the three months ended June 30, 2003. For the six months ended June 30, 2004, gross profit increased 71.8% to $59.5 million from $34.6 million for the six months ended June 30, 2003. Our gross profit also increased as a percentage of revenues, from 25.7% and 24% for the three and six months ended June 30, 2003, respectively, to 32.4% and 32.6% for the three and six months ended June 30, 2004. This increase in our gross profitability was attributable to the increased demand and production volumes of our products, the benefit of cost and capacity reduction efforts completed during 2003, elimination of transition services associated with the acquisition of the optoelectronics business from Agere that we incurred in the first half of 2003, adjustments to our inventory and warranty reserves, the reclaim of excess precious metals, and the sale of excess assets.

The operation of our own wafer fabrication facilities entails a high degree of fixed costs and requires an adequate volume of production and sales to be profitable. During periods of decreased demand, high fixed wafer fabrication costs have a materially adverse effect on our operating results. Due to the increased

demand for our products across most of our end markets, our factory utilization has increased from June 30, 2003 to June 30, 2004.

We routinely review our accounting reserves, including those for excess and obsolete inventory and potential warranty claims, as described under “Critical Accounting Policies and Estimates” above, and make adjustments as necessary. When we initially acquired the optoelectronics business from Agere Systems in January, 2003, we established inventory and warranty reserves as of the three months ended March 31, 2003 based on the information available at the time. We have continued to refine our estimates for these reserves using additional data available since that time. For the three months ended March 31, 2004, we recorded a reduction to the warranty reserve for our optoelectronics business totaling approximately $1.6 million. In addition, we identified a portion of the remaining warranty reserve balance for catastrophic warranty claims. This was done in response to increasing requests by our customers for catastrophic warranty clauses that extend our obligation beyond the repair and replacement of a faulty product, to include other losses our customers may experience as a result of failures in our products. We experienced one such warranty claim during 2003. We also recorded combined net reductions of approximately $3.8 million to the warranty and inventory reserves for our other businesses during the three months ended March 31, 2004 as a result of increasing demand, inventory optimization efforts, and the resolution of some warranty claims. This net reduction was primarily the result of a decrease in the inventory reserve for our Oregon operation of approximately $1.9 million. This decrease was due to the disposal of obsolete material and was largely offset by a corresponding decrease in gross inventory. No adjustments of this magnitude were made to inventory and warranty reserves during the three months ended June 30, 2004.

We recorded benefits during the three months ended March 31, 2004 of approximately $2.0 million and during the three months ended June 30, 2004 of approximately $3.1 million associated with the reclaim of platinum and gold from our Pennsylvania and Texas manufacturing operations. Precious metals are a primary component of the semiconductor fabrication process. Process wastes are routinely collected and processed to reclaim the precious metal component. In the case of our Pennsylvania operation, we reclaimed $4.5 million of platinum during the six months ended June 30, 2004 that was embedded in equipment that was in excess of our needs. We do not expect any significant amounts of platinum to be reclaimed in the second half of 2004.

We expect our gross profit, as a percentage of revenue, for the three months ended September 30, 2004 to be in the range of 29% to 32% and for the full year 2004 to be in the range of 31% to 33%.

Operating expenses

Research, development and engineering

Research, development and engineering expenses include the costs incurred in the design of new products, as well as ongoing product research and development expenses. Our research, development and engineering expenses for the three months ended June 30, 2004 decreased 13.3% to $15.3 million from $17.7 million for the three months ended June 30, 2003. For the six months ended June 30, 2004, these costs were 10.4% lower than for the comparable period ended June 30, 2003 at $31.4 million and $35.1 million, respectively. Research, development and engineering expenses as a percentage of revenues decreased to 16.6% and 17.2% for the three and six months ended June 30, 2004, respectively, from 24.3% for both the three and six month periods ended June 30, 2003.

The decrease in research, development and engineering expenses on an absolute dollar basis was primarily the result of our cost reduction programs implemented during 2003. The three months ended March 31, 2003 was the first period to reflect the impact of the incremental costs associated with our acquisition of the Agere optoelectronics business. Since that time, we have achieved significant cost savings and improvement in capacity utilization across our business operations. As a percentage of revenues, the

decrease from the three and six months ended June 30, 2003 to the three months ended June 30, 2004 is also attributable to the increase in revenues between these two periods.

We intend to continue our investment in research, development, and engineering in our market areas of wireless phones, wireless infrastructure, defense, and optical networks. We are committed to substantial investments in research, development and engineering to continue to improve our product offerings, expand market opportunities, and address the needs of our customers. We expect these expenses will continue at comparable levels in the future.

Selling, general and administrative

Selling, general and administrative expenses include commissions, labor expenses for marketing and administrative personnel, and other corporate administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2004 decreased 6.6% to $13.5 million from $14.4 million for the three months ended June 30, 2003. For the six months ended June 30, 2004, these costs were 7.1% lower than for the comparable period ended June 30, 2003 at $25.5 million and $27.4 million, respectively. Selling, general and administrative expenses as a percentage of revenues decreased to 14.5% and 14.0% for the three and six months ended June 30, 2004 from 19.8% and 19.1% for the three and six months ended June 30, 2003. On an absolute dollar basis, this decrease in selling, general and administrative expense was primarily the result of our cost reduction programs implemented during 2003. In addition, during the six months ended June 30, 2004, we recorded benefits of approximately $762,000 and $1.4 million from the reduction of our reserve for expected severance costs and from the gain on sale of excess assets, respectively, associated with our optoelectronics business. We made the adjustment to the reserve for expected severance costs as normal attrition of our workforce has reduced the level of our originally estimated involuntary workforce reductions. Additionally, during the three months ended June 30, 2004, we recorded selling, general and administrative costs of approximately $389,000 associated with the closure of our Tianjin, China facility. We have terminated our plan to assemble SAW devices in China and will continue to do most of our assembly of SAW devices in Costa Rica. As a percentage of revenues, the decrease from the three months ended June 30, 2003 to the three months ended June 30, 2004 is also attributable to the increase in revenues between these two periods. We expect our selling, general and administrative costs in 2004 to be generally equivalent to those in 2003.

In-process research and development

During the six months ended June 30, 2003, we recorded a charge of $500,000 for the write-off of acquired IPR&D associated with our acquisition of the Agere optoelectronics business. We had no similar charge during the six months ended June 30, 2004.

Severance costs

During the three and six months ended June 30, 2004, we recorded charges of $133,000 and $428,000, respectively, for severance costs associated with a reduction in force of approximately 21 employees assigned to our Texas operation. This is the result of our ongoing efforts to align our costs and capacity with our levels of production and revenues. For the three months and six months ended June 30, 2003, we recorded severance costs of $2.6 million and $2.8 million, respectively. These reductions primarily impacted the workforce of our newly acquired optoelectronics business and our German engineering and marketing operation.

Lease termination costs

During the three months ended June 30, 2003, we recorded a charge of approximately $42.0 million for the termination of the lease on our Texas facility in conjunction with our acquisition of that facility. We had no similar charge during the three months ended June 30, 2004.

Interest income (expense) and other

Interest income (expense) and other was a net expense of $1.2 million and $2.6 million for the three and six month periods ended June 30, 2004, respectively. For the three and six months periods ended June 30, 2003, net interest expense and other was $1.5 million and $2.8 million, respectively. For both periods, this amount is primarily due to the excess of interest expense over interest income for the period.

Gain on retirement of debt

During the three months ended June 30, 2004, a gain on retirement of debt resulted from our repurchase of $45 million principal amount of our convertible subordinated notes at prices resulting in a gain of approximately $539,000, net of the writeoff of associated capitalized bond issuance costs of approximately $586,000. No similar benefit was recorded during the comparable period of a year ago.

Income tax expense (benefit)

We recorded income tax expense of $121,000 for the three months ended June 30, 2004 and a benefit of $104,000 for the six months ended June 30, 2004, This compares to income tax expense of $47,000 and $167,000 for the three and six months ended June 30, 2003. For the three and six months ended June 30, 2004, the income tax expense was the result of accruals for foreign taxes, offset by the receipt of various refunds. For the three and six months ended June 30, 2003, the income tax expense was attributable to taxes associated with our Pennsylvania and Germany entities. In 2002 and 2003, we determined that a valuation allowance should be recorded against all of our deferred tax assets based on the criteria of SFAS 109 concerning whether it is more likely than not that our deferred tax assets may not be realized. For the three and six months ended June 30, 2004, we also determined that a valuation allowance should be recorded against all of our deferred tax assets based on the criteria of SFAS 109.

Outlook for the Three Months Ending September 30, 2004

Based upon our forecasts of revenues and operating costs for the three months ending September 30, 2004, we expect our profitability for this period to be in the range of a loss per share of $0.01 to breakeven. This forecast is based on our expectation of revenues for the three months ending September 30, 2004 to be flat to slightly up from those for the three months ended June 30, 2004, primarily due to expected increasing demand. We expect our gross margin for the three months ending September 30, 2004 to be flat to slightly down from that for the three months ended June 30, 2004. We are also projecting our operating and nonoperating costs for the three months ending September 30, 2004 to be similar to our operating costs for the three months ended June 30, 2004. This forecast is based on our expectation of continued new product success and increased demand.

Liquidity and Capital Resources

As of June 30, 2004, we had cash, cash equivalents and short-term investments of $149.4 million, a decrease from $280.1 million as of December 31, 2003. In addition, we had $211.2 million of investments in long-term marketable securities, which are investments in high-grade securities that mature after one year but within 42 months, as of June 30, 2004; an increase from $120.1 million as of December 31, 2003. As of June 30, 2004, long-term liabilities were $231.8 million and represented 49.8% of stockholders’ equity. As of December 31, 2003, long-term liabilities were $277.0 million and represented 60.2% of stockholders’ equity. Our long-term liabilities as of June 30, 2004 were comprised of $223.8 million of our convertible subordinated notes, $7.6 million of long-term tax accruals, and approximately $500,000 of long-term accruals associated with our acquisition of the Agere optoelectronics business. This decrease in long-term liabilities, on a percent of stockholders’ equity basis, is the result of our repurchase of $45.0 million face value of our convertible subordinated notes and the increase in stockholders’ equity from earnings and the

receipt of additional paid in capital during the six months ended June 30, 2004. As of June 30, 2004, working capital decreased to $260.1 million from $370.1 million as of December 31, 2003. This decrease in working capital was primarily attributable to our use of $43.9 million to repurchase $45.0 million face value of our convertible subordinated notes, as well as a shift of a portion of our investments in marketable securities from short-term instruments to long-term instruments. This decrease was partially offset by an increase in accounts receivable resulting from a higher proportion of shipments occurring later in the period and an increase in other current assets resulting from the reclass of a noncurrent refundable deposit to current.

For the six months ended June 30, 2004, cash provided by operating activities was $12.4 million. For the six months ended June 30, 2003, cash used in operating activities was $19.1 million. Cash was provided by a small net income, adjusted for non-cash related items, as well as by increases in current assets and decreases in current liabilities. The biggest increase in current assets was in accounts receivable as described above, due to the timing of sales during the period. Days sales outstanding increased from 42 days as of December 31, 2003 to 48 days as of June 30, 2004. Inventories increased approximately $1.3 million, primarily as the result of the use of reserves and increased production volumes. Our inventory turns increased slightly from 3.7 times at December 31, 2003 to 3.8 times at June 30, 2004.

For the six months ended June 30, 2004, cash used in investing activities was $106.5 million. For the six months ended June 30, 2003, cash provided by investing activities was $53.4 million. The change from cash provided by investing activities for the six months ended June 30, 2003 to cash used in investing activities for the six months ended June 30, 2004 was primarily due to a shift in the flow of our cash and cash equivalents to and from our investments in marketable securities. In the current period, we purchased more investments than we sold or that matured. In the same period a year ago, we purchased fewer investments than we sold or that matured. The cash provided by investing activities for the six months ended June 30, 2003 was also offset by expenditures of $40.2 million for our acquisition of the Agere optoelectronics business and net capital expenditures of $9.5 million. During the six months ended June 30, 2004, we used $13.7 million of cash for capital expenditures primarily for production-related machinery and equipment.

Cash used in financing activities for the six months ended June 30, 2004 was $36.4 million, compared to cash provided by financing activities for the six months ended June 30, 2003 of $3.2 million. The cash used in financing activities for the six months ended June 30, 2004 was the result of our use of $43.9 million to repurchase $45 million face value of our convertible subordinated notes, offset by $7.5 million of receipts from stock issuances.

Transactions Affecting Liquidity

On January 2, 2003, we completed our acquisition of a substantial portion of the optoelectronics business of Agere for $40.0 million in cash plus acquisition costs of approximately $200,000 and certain assumed liabilities. Through a transitional manufacturing agreement, Agere supplied components for us for a short period following the close of the transaction to ensure seamless service to customers. Agere also provided some business infrastructure services to us for a short period following the close of the transaction to provide for an uninterrupted transition of the business operations.

On May 18, 2004, we completed the repurchase of $45 million face value of our convertible subordinated notes for $43.9 million before accrued interest. We regularly evaluate the market pricing of these notes in comparison to our cash flow forecast to determine the value to the company of repurchasing a portion of them. Since 2001, we have repurchased $121.2 million face value of the original $345 million issuance.

Capital Resources

Our current cash, cash equivalent and short-term investment balances, together with cash anticipated to be generated from operations are currently our principal sources of liquidity and we believe these will satisfy our projected working capital, capital expenditure, and possible investment needs, at a minimum, through the next 12 months. We expect our needs for capital expenditures in 2004 to be between $20.0 million and $25.0 million. The principal risks to these sources of liquidity would be capital expenditure or investment needs in excess of our expectations, in which case we may be required to finance any additional requirements through additional equity offerings, debt financings or credit facilities. We may not be able to obtain additional financings or credit facilities, or if these funds are available, they may not be available on satisfactory terms.

Impact of Inflation

We believe that inflation has not had a material impact on operating costs and expenses.

Recent Accounting Pronouncements

See Note 14 of the Notes to Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Factors that May Affect Future Results

An investment in our common stock is extremely risky. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our actual results to differ materially from those expressed or implied by such forward-looking statements. Such statements reflect management’s current expectations, assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The following are some of the factors we believe could cause our actual results to differ materially from expected and historical results. The trading price of our common stock could decline due to any of these risks and you may lose part or all of your investment. Other factors besides those listed here could also adversely affect us.

Our operating results may fluctuate substantially, which may cause our stock price to fall.

Our quarterly and annual results of operations have varied in the past and may vary significantly in the future due to a number of factors including, but not limited to, the following:

· cancellation or delay of customer orders or shipments;

· our success in achieving design wins in which our products are designed into those of our customers;

· market acceptance of our products and those of our customers;

· variability of the life cycles of our customers’ products;

· variations in manufacturing yields;

· timing of announcements and introduction of new products by us and our competitors;

· changes in the mix of products we sell;

· declining average sales prices for our products;

· ability to integrate existing and newly developed technologies;

· changes in manufacturing capacity and variations in the utilization of that capacity;

· variations in operating expenses;

· the long sales cycles associated with our customer-specific products;

· the timing and level of product and process development costs;

· performance of vendors and subcontractors;

· realization of research and development efforts;

· variations in raw material quality and costs;

· delays in new process qualification or delays in transferring processes;

· the cyclical nature of the semiconductor and electronic communications component industries;

· continued softness in the optical networks market;

· the timing and level of nonrecurring engineering revenues and expenses relating to customer-specific products;

· our ability to successfully integrate the operations of acquired businesses and to retain the customers of acquired businesses;

· significantly higher costs associated with integrating the operations of acquired businesses than we anticipated; and

· significant changes in our and our customers’ inventory levels.

We expect that our operating results will continue to fluctuate in the future as a result of these and other factors. Any unfavorable changes in these or other factors could cause our results of operations to suffer as they have in the past. Due to potential fluctuations, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of our future performance.

Additionally, if our operating results are not within the market’s expectations, then our stock price may fall. The public stock markets have experienced extreme price and trading volume volatility, particularly in high technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock.

Our financial statements will have a significant material adverse charge if we are required to expense share-based payment to employees.

If we are required to expense stock options and other share-based payments to employees and directors, we will record a significant charge to earnings. On March 31, 2004, the FASB issued an exposure draft No. 1102-100, “Proposed Statement of Financial Accounting Standards—Share-Based Payment,” effective for fiscal periods beginning after December 15, 2004. This exposure draft outlines a methodology for the accounting treatment of stock options and certain other share-based payments. It requires these payments to be recorded as an operating expense. It will supercede SFAS 123 which allowed for footnote disclosure of this expense. The exposure draft encourages uses of the binomial model for valuing the cost. Previously, we have used the Black-Scholes model for proforma stock-based compensation expense footnote disclosure. This amount was $53.6 million for our year ended December 31, 2003. While it is believed by some that the binomial method may result in a lower charge than the Black-Scholes model, the

complexity of the binomial model would result in a more subjective and more difficult to audit valuation. We are evaluating which method to use should we be required to expense stock options and other share-based payments to employees. We believe that the charge will be significant and will have a material adverse impact on the consolidated financial statements. We are currently evaluating our stock-based compensation programs to determine what actions, if any, need to be taken to reduce this potential charge if this exposure draft is enacted. If we cannot issue stock options at the levels we have in the past, we believe we will face a more difficult time in attracting and retaining the talented employees necessary for our business to grow and prosper.

Our operating results may suffer due to fluctuations in demand for semiconductors and electronic communications components.

From time to time, the wireless phone, infrastructure networks, optical networks, and defense markets have experienced significant downturns and wide fluctuations in product supply and demand, often in connection with, or in anticipation of, maturing product cycles, capital spending cycles and declines in general economic conditions. This cyclical nature of these markets has led to significant imbalances in demand, inventory levels and production capacity. It has also accelerated the decrease of average selling prices per unit. We have experienced, and may experience again, periodic fluctuations in our financial results because of these or other industry-wide conditions. For example, if demand for communications applications were to decrease substantially, demand for the integrated circuits and modules, optical components and modules and SAW filter components in these applications would also decline, which would negatively affect our operating results. Conversely, we believe that current trends such as wireless phone portability, color screens and digital photo capability, and the development of wireless infrastructure in countries such as India and China will increase the demand for our products. We do not know, however, if this will lead to a sustained level of increased demand.

We depend on the continued growth of communications markets.

We derive all of our product revenues from sales of products and services for electronic communication applications. These markets are characterized by the following:

· cyclical demand;

· intense competition;

· rapid technological change; and

· short product life cycles, especially in the wireless phone market.

The electronic communications markets have recovered some of their previous pattern of growth. These markets may not resume historical growth rates. If this recovery is not sustained and demand for electronic communications applications declines, our operating results could suffer.

Products for electronic communications applications are often based on industry standards, which are continually evolving. Our future success will depend, in part, upon our ability to successfully develop and introduce new products based on emerging industry standards, which could render our existing products unmarketable or obsolete. If communications markets evolve to new standards, we may be unable to successfully design and manufacture new products that address the needs of our customers or that will meet with substantial market acceptance.

Our revenues are at risk if we do not introduce new products and/or decrease costs.

Historically, the average selling prices of our products have decreased over the products’ lives and we expect them to continue to do so. To offset these decreases, we rely primarily on achieving yield

improvements and other cost reductions for existing products and on introducing new products that can be manufactured at lower costs. Selling prices for our SAW products have declined due to competitive pricing pressures and to the use of newer surface mount package devices that are smaller and less expensive than previous generation filters. For example, we have experienced declines in average selling prices for RF filters for wireless phones due to competitive pressure and for filters for base stations due to the use of surface mount packages. We believe our future success depends, in part, on our timely development and introduction of new products that compete effectively on the basis of price and performance and adequately address customer requirements. The success of new product and process introductions depends on several factors, including:

· proper selection of products and processes;

· successful and timely completion of product and process development and commercialization;

· market acceptance of our or our customers’ new products;

· achievement of acceptable manufacturing yields;

· our ability to offer new products at competitive prices; and

· managing the cost of raw materials and manufacturing services.

Our product and process development efforts may not be successful and our new products or processes may not achieve market acceptance. To the extent that our cost reductions and new product introductions do not occur in a timely manner, our results of operations could suffer.

Our business could be harmed if systems manufacturers do not use components made of GaAs or other alternative materials we utilize.

Silicon semiconductor technologies are the dominant process technologies for integrated circuits and the performance of silicon integrated circuits continues to improve. System designers may be reluctant to adopt our products because of:

· their unfamiliarity with designing systems with our products;

· their concerns related to manufacturing costs and yields;

· their unfamiliarity with our design and manufacturing processes; and

· uncertainties about the relative cost effectiveness of our products compared to high-performance silicon components.

Systems manufacturers may not use GaAs components because the production of GaAs integrated circuits has been, and continues to be, more costly than the production of silicon devices. Systems manufacturers may also be reluctant to rely on a jointly produced product because future supplies may depend on our continued good relationships with those vendors. As a result, we must offer devices that provide superior performance to that of traditional silicon-based devices.

In addition, customers may be reluctant to rely on a smaller company like us for critical components. We cannot be certain that additional systems manufacturers will design our products into their systems or that the companies that have utilized our products will continue to do so in the future. If our products fail to achieve market acceptance, our results of operations would suffer.

New competitive products and technologies have been announced which could reduce demand for our SAW filter products and our receiver products for wireless phones.

New products have been introduced in the marketplace that use a direct conversion architecture in wireless phones. A direct conversion architecture reduces the number of components needed in the receiver portion of wireless phones. Sales of our SAW IF filter products along with some of our receiver products would be negatively impacted by wireless phone manufacturers’ use of a direct conversion chipset as new phone models are developed. Direct conversion architecture has been available since the mid-1990’s for GSM phones and wireless phone manufacturers are increasing the use of this process in new phones. For the second quarter of 2004, sales of SAW IF filters and receiver products for GSM phones accounted for less than 1% of our total sales. Several companies have introduced a direct conversion chipset for CDMA phones which would impact our future revenues from SAW IF filters and receiver products for CDMA phones. Our revenues from SAW IF filters for CDMA phones were approximately 6% of our total revenues and sales of receiver and related products for CDMA phones were approximately 7% of our total revenues for the second quarter of 2004. In addition, we continue to sell products for TDMA wireless phones, which are increasingly migrating to the GSM standard. Our sales of products for TDMA phones were under 1% of our total sales for the second quarter of 2004.

Other competitive filtering technologies, including film bulk resonator (“FBAR”) and bulk acoustic wave (“BAW”), have been introduced and have gained market acceptance in certain applications. This could have a negative impact on our SAW filter sales in certain applications.

We are actively pursuing new products such as RF filters, duplexers, power amplifiers, and modules to offset the decline in sales of products affected by direct conversion architecture and the loss of revenues from products for TDMA phones. If we are not successful in introducing competitive or alternative products, our business, financial condition and results of operation will suffer.

A decline in the growth of wireless communications or in the continued acceptance of CDMA technology, particularly in emerging markets, would have an adverse impact on us.

Our products for CDMA-based systems, including filters for base stations and receivers and power amplifiers for wireless phones comprise a significant part of our business. CDMA technology is relatively expensive and there can be no assurance that emerging markets, such as China and India, will continue to adopt this technology. Our business and financial results would be adversely impacted if CDMA technology does not continue to gain acceptance or if demand does not strengthen.

Our business may be adversely impacted if we fail to successfully introduce new products or to gain our customers’ acceptance of those new products.

The markets for electronic communications applications in which we participate are subject to intense competition, rapid technological change, and short product life cycles. It is critical for companies such as ours to continually and quickly develop new products to meet the changing needs of these markets. If we fail to develop new products to meet our customers’ needs on a timely basis, we will not be able to effectively compete in these markets.

For example, we announced our intention to develop and market RF front-end modules for wireless phones at cost-effective prices. We will also need to continue to expand our wireless applications into CDMA and GSM applications. If we fail to design and produce these products in a manner acceptable to our customers or have incorrectly anticipated our customers’ demand for these types of products, our operating results could be harmed.

Our business will be adversely impacted if we do not continue to gain market acceptance of our wireless phone module products or develop effective manufacturing processes to produce them.

Our strategy for wireless phone products depends in large part upon the success of our design and marketing of wireless phone modules. Wireless phone modules represent the incorporation of some or all of the components of the wireless phone radio into a single product. If we are unable to design these modules in a manner acceptable to our customers or have incorrectly anticipated our customers’ demand for these products, our operating results will be adversely affected.

Manufacturing module products represents a departure from our traditional component manufacturing business. Production of module products entails different processes, costs, yields, and lead times. If we fail to successfully transition manufacturing resources to produce these products or are unable to do so cost-effectively, our operating results will be adversely affected. Our current experience is that increased module sales are having a negative impact on gross margins. If we are unable to reduce the costs of producing modules, total gross margin will decrease as the proportion of module sales increase.

If we fail to sell a high volume of products, our operating results will be harmed.

Because large portions of our manufacturing costs are relatively fixed, our manufacturing volumes are critical to our operating results. If we fail to achieve acceptable manufacturing volumes or experience product shipment delays, our results of operations could be harmed. During periods of decreased demand, our high fixed manufacturing costs negatively effect our results of operations. We base our expense levels in part on our expectations of future orders and these expense levels are predominantly fixed in the short-term. However, if the rate of growth of demand decreases, we will not be able to grow our revenue. If we receive fewer customer orders than expected or if our customers delay or cancel orders, we may not be able to reduce our manufacturing costs in the short-term and our operating results would be harmed. In addition, we are selling products to an increasing number of our customers on a consignment basis, which can limit our ability to forecast revenues.

If we do not sell our customer-specific products in large volumes, our operating results may be harmed.

We manufacture a substantial portion of our products to address the needs of individual customers. Frequent product introductions by systems manufacturers make our future success dependent on our ability to select development projects, which will result in sufficient volumes to enable us to achieve manufacturing efficiencies. Because customer-specific products are developed for unique applications, we expect that some of our current and future customer-specific products may never be produced in sufficient volume and may impair our ability to cover our fixed manufacturing costs. Furthermore, if customers cancel or delay orders for these customer-specific products, our inventory of these products may become unmarketable or obsolete, which would negatively affect our operating results.

In addition, if we experience delays in completing designs, fail to obtain development contracts from customers whose products are successful, or fail to have our product designed into the next generation product of existing volume production customers, our revenues could be harmed.

Our excess manufacturing capacity may adversely affect our operating results if currently strengthening demand is not sustained and if we are unable to sell our assets held for sale.

We have converted our Hillsboro facility from four-inch wafer production to six-inch wafer production and have expanded the capacity of our Texas operation with the acquisition of the Richardson facility. In addition, we have acquired additional manufacturing facilities and personnel in connection with our acquisition of businesses from Infineon and Agere.

These increases in capacity directly relate to significant increases in fixed costs and operating expenses. These increased costs could have an adverse effect on our results of operations during economic downturns. If the current economic improvement does not continue and if we are unable to successfully sell the land and buildings associated with our optoelectronics operation in Pennsylvania and excess equipment associated with our semiconductor manufacturing operations in Texas and Oregon, decreased levels of demand and production in conjunction with these increased expense levels will have an adverse effect on our business, financial condition and results of operations.

We face challenges and risks associated with our acquisition of the optoelectronics business of Agere and, as a result, may not realize the expected benefit of this acquisition.

In January 2003, we completed the acquisition of a substantial portion of the optoelectronics business of Agere for $40 million in cash plus acquisition costs and certain assumed liabilities. The transaction included the products, technology and some facilities related to Agere’s optoelectronics business, which includes active and passive components, transceivers, transponders and other optical products.

We face risks associated with this acquisition such as:

· our ability to conduct business successfully selling products which we have not previously sold and to support these markets with a substantially smaller sales force than that of Agere;

· our ability to successfully reduce manufacturing costs;

· our ability to manage a facility in Mexico and our ability to absorb the incremental costs and regulatory compliance required for an additional foreign subsidiary;

· our ability to integrate and continue manufacturing processes substantially different from our current processes;

· our ability to generate sufficient revenues to offset the operating costs of this business due to a continued depressed market for optoelectronics products;

· our ability to reduce the fixed costs of the business to a level supportable by the lower revenue expectations compared to past levels;

· our ability to identify and attract partners to share or acquire some or all of the assets to help utilize the available capacity;

· the costs we may face from warranty claims associated with products shipped by Agere prior to our acquisition of the business;

· our ability to retain existing partners and customers of this business;

· our ability to retain the employees and to integrate them into our corporate culture;

· our ability to develop new products and generate new design wins;

· our ability to dedicate significant management attention and financial resources needed to assimilate these businesses without harming our existing business; and

· increased complexity of our corporate structure requiring additional resources for such responsibilities as tax planning, foreign currency management, financial reporting and risk management.

If investors or financial or industry analysts do not think the integration of our acquisitions is proceeding as anticipated or that the benefits of the acquisitions may not be realized, the market price of our common stock may decline.

The market price of our common stock may decline if:

· the integration of our acquisitions is not completed in a timely and efficient manner;

· our assumptions about the business models and operations of the acquired businesses were incorrect or their role in our business does not develop as we planned;

· we are unable to introduce new products incorporating acquired technology;

· the effect of the acquisitions on our financial results is not consistent with the expectations of financial or industry analysts; or

· following the acquisitions, our stockholders that hold relatively larger interests in our company may decide to dispose of their shares because the results of the acquisitions are not consistent with their expectations.

We face risks from failures in our manufacturing processes, the maintenance of our fabrication facilities and the processes of our vendors.

The fabrication of integrated circuits, particularly those made of GaAs, is a highly complex and precise process. Our integrated circuits are currently manufactured on wafers made of GaAs, InP, and LiNbO3. Our SAW filters are currently manufactured primarily on LiNbO3, LiTaO3 and quartz wafers. During manufacturing, each wafer is processed to contain numerous integrated circuits or SAW filters. We may reject or be unable to sell a substantial percentage of wafers or the components on a given wafer because of:

· minute impurities;

· difficulties in the fabrication process, such as failure of special equipment, operator error or power outages;

· defects in the masks used to print circuits on a wafer;

· electrical and/or optical performance;

· wafer breakage; or

· other factors.

We refer to the proportion of final components that have been processed, assembled and tested relative to the gross number of components that could be constructed from the raw materials as our manufacturing yield. Compared to the manufacture of silicon integrated circuits, GaAs technology is less mature and more difficult to design and manufacture within specifications in large volume. In addition, the more brittle nature of GaAs wafers can result in lower manufacturing yields than with silicon wafers. We have in the past experienced lower than expected manufacturing yields, which have delayed product shipments and negatively impacted our results of operations. We may experience difficulty maintaining acceptable manufacturing yields in the future.

In addition, the maintenance of our fabrication facilities and our assembly facilities is subject to risks, including:

· the demands of managing and coordinating workflow between geographically separate production facilities;

· disruption of production in one of our facilities as a result of a slowdown or shutdown in our other facility; and

· higher operating costs from managing geographically separate manufacturing facilities.

We depend on certain vendors for components, equipment and services. We maintain stringent policies regarding qualification of these vendors. However, if these vendors’ processes vary in reliability or quality, they could negatively affect our products, and thereby, our results of operations.

We face risks from an increasing proportion of our operations and employees being located outside of the United States.

As we continue to expand our operations, an increasing number of our employees and operations are located in countries other than the United States. The laws and governance of these countries may differ substantially from that of the United States and may expose us to increased risks of adverse impacts on our operations and results of operations. These risks could include: loss of protection of proprietary technology, disruption of production processes, interruption of freight channels and delivery schedules, currency exposure, financial institution failure, government expropriation, labor shortages, political unrest, and fraud.

Some of our manufacturing facilities are located in areas prone to natural disasters.

We have a SAW manufacturing and assembly facility located in Apopka, Florida. We also have assembly facilities for SAW products in San Jose, Costa Rica and for optoelectronics products in Matamoros, Mexico. Hurricanes, tropical storms, flooding, tornadoes, and other natural disasters are common events for the southeastern and Gulf of Mexico regions of the United States and in Central America. Additionally, mud slides, earthquakes and volcanic eruptions could also affect our Costa Rican and Oregon facilities. Any disruptions from these or other events would have a material adverse impact on our operations and financial results.

Although we have manufacturing and assembly capabilities for our Sawtek products in both Apopka, Florida and San Jose, Costa Rica, we are only capable of fabricating wafers for those products in our Apopka facility and rely on our San Jose facility for the majority of our assembly operations. As a result, any disruption to either facility would have a material adverse impact on our operations and financial results.

A disruption in our Costa Rican or Mexican operations would have an adverse impact on our operating results.

Operating facilities in Costa Rica and Mexico presents risks of disruption such as government intervention, currency fluctuations, labor disputes, limited supplies of labor, power interruption, civil unrest, or war. Any such disruptions could have a material adverse effect on our business, results of operations and financial condition.

Our Costa Rican operation has been a significant contributor to our operating results in the past. We expect our Costa Rican operations to continue to account for a significant proportion of our SAW operations in the future and our Mexican operation to be an important part of our optoelectronics component business. Any disruption in these operations would have a significant negative impact on our operating results.

We face risks from changes in tax regulations and a change in our Costa Rican subsidiary’s favorable tax status would have an adverse impact on our operating results.

We are subject to taxation in many different countries and localities worldwide. In some jurisdictions, we have employed specific business strategies to minimize our tax exposure. To the extent the tax laws and regulations in these various countries and localities could change, our tax liability in general could increase or our tax saving strategies could be threatened. Such changes could have a material adverse effect on our operations and financial results.

For example, our subsidiary in Costa Rica operates in a free trade zone. We expect to receive a 75% exemption from Costa Rican income taxes through 2007. The Costa Rican government continues to review its policy on granting tax exemptions to companies located in free trade zones and it may change our tax status or minimize our benefit at any time. Any adverse change in the tax structure for our Costa Rican subsidiary made by the Costa Rican government would have a negative impact on our net income.

In addition, the U.S. Internal Revenue Service could assert additional taxes associated with our subsidiary due to differing interpretations of transfer pricing and other intercompany transactions.

Our business may be adversely affected by acts of terrorism or war.

Acts of terrorism or war could interrupt or restrict our business in several ways. We rely extensively on the use of air transportation to move our inventory to and from our vendors and to ship finished products to our customers. If war or terrorist acts cause air transportation to be grounded or severely interrupted, our business would be similarly adversely impacted.

In addition, war or acts of terrorism could cause existing export regulations to be changed, which could limit the extent to which we are allowed to export our products. To the extent that war or acts of terrorism also reduce customer confidence and create general economic weakness, our business would also be adversely affected.

A widespread outbreak of an infectious disease or illness could negatively affect our marketing, assembly and test, design, or other operations, making it more difficult and expensive to meet our obligations to our customers and could result in reduced demand from our customers.

A widespread outbreak of an infectious disease or illness could adversely affect our operations as well as demand from our customers. A number of countries in the Asia/Pacific region have experienced outbreaks of different infectious diseases and illnesses. As a result of these outbreaks, businesses can be shut down temporarily and individuals can become ill or quarantined.

We have engineering and marketing operations in Korea, Japan, China, and Taiwan. In addition, we have subcontract assembly and test operations in Malaysia and Singapore. We also have customers in these and other countries in the Asia/Pacific region where recent health concerns have occurred. For the three and six months ended June 30, 2004, 37% and 35%, respectively, of our sales were to customers in countries in the Asia/Pacific region. If our operations or our subcontractors’ operations are curtailed because of these health issues, it may interrupt our shipments to our customers, which would adversely affect our results of operations. If our customers’ businesses are affected by these health issues, it might delay or reduce their purchases from us, which would also adversely affect our results of operations.

Our operating results could be harmed if we lose access to sole or limited sources of materials, equipment or services.

We currently obtain some components, equipment and services for our products from limited or single sources, such as certain ceramic packages and chemicals. We purchase these components, equipment, supplies and services on a purchase order basis, do not carry significant inventories and

generally do not have long-term supply contracts with these vendors. Our requirements are relatively small compared to silicon semiconductor manufacturers. Because we often do not account for a significant part of our vendors’ business, we may not have access to sufficient capacity from these vendors in periods of high demand. If we were to change any of our sole or limited source vendors, we would be required to requalify each new vendor. Requalification could prevent or delay product shipments, which could negatively affect our results of operations.

Our reliance on a limited number of suppliers for certain raw materials and parts may impair our ability to produce our products on time and in acceptable yields. For example, at times in the past, we have experienced difficulties in obtaining ceramic packages and lids used in the production of bandpass filters. At other times, the acquisition of relatively simple devices, such as capacitors, has been problematic because of the large demand swings that can occur in the cellular handset market for such components. Our newly acquired optical components group is dependent upon a large number of suppliers, some of which are very small companies, for components that make up their integrated product offerings such as transceivers and transponders. The success of these products is critical to the overall success of our business. The primary risk to our source of supply to manufacture these products is the currently depressed state of the optical network market and its potential impact on smaller vendors in terms of possible bankruptcy or inability to meet delivery schedules. In addition, our reliance on these vendors may negatively affect our production if the components, equipment or services vary in reliability or quality. If we are unable to obtain timely deliveries of sufficient quantities of acceptable quality or if the prices increase, our results of operations could be harmed.

Our operating results could be harmed if our subcontractors and partners are unable to fulfill our requirements.

We currently utilize subcontractors for the majority of our integrated circuit and module assemblies. There are certain risks associated with dependence on third party providers, such as minimal control over delivery scheduling, adequate capacity during demand peaks, warranty issues and protection of intellectual property. Additionally, if these subcontractors are unable to meet our needs, it could prevent or delay production shipments that could negatively affect our results of operations. If we were to change any of our subcontractors, we would be required to requalify each new subcontractor, which could also prevent or delay product shipments that could negatively affect our results of operations. In addition, our reliance on these subcontractors may negatively affect our production if the services vary in reliability or quality. If we are unable to obtain timely service of acceptable quality or if the prices increase, our results of operations could be harmed.

If our products fail to perform or meet customer requirements, we could incur significant additional costs.

The fabrication of integrated circuits and SAW filters from substrate materials such as GaAs, InP, LiNbO3, LiTaO3 and quartz and the modules containing these components is a highly complex and precise process. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to rework or replace the products. Our products may contain undetected defects or failures that only become evident after we commence volume shipments. We have experienced product quality, performance or reliability problems from time to time. We are currently experiencing field failures and returns on some components and are collecting data for analysis and evaluation as to the extent of the problem. Other defects or failures may also occur in the future. If failures or defects occur, we could:

· lose revenues;

· incur increased costs such as warranty expense and costs associated with customer support;

· experience delays, cancellations or rescheduling of orders for our products; or

· experience increased product returns or discounts.

We may face fines or our facilities could be closed if we fail to comply with environmental regulations.

Federal, state and local regulations impose various environmental controls on the storage, handling, discharge and disposal of chemicals and gases used in our manufacturing process. For our manufacturing facilities, we generally provide our own manufacturing waste treatment and contract for disposal of some materials. We are required to report usage of environmentally hazardous materials.

The failure to comply with present or future regulations could result in fines being imposed on us and we could be required to suspend production or cease our operations. These regulations could require us to acquire significant equipment or to incur substantial other expenses to comply with environmental regulations. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to future liabilities and harm our results of operations.

We have substantial indebtedness.

We have $223.8 million of indebtedness remaining in the form of our convertible subordinated notes due in 2007. We may incur substantial additional indebtedness in the future. The level of our indebtedness, among other things, could:

· make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

· require us to dedicate a substantial portion of our expected cash flow from operations to service our indebtedness, which would reduce the amount of our expected cash flow available for other purposes, including working capital and capital expenditures;

· limit our flexibility in planning for or reacting to, changes in our business; and

· make us more vulnerable in the event of a downturn in our business.

There can be no assurance that we will be able to meet our debt service obligations, including our obligation under the notes.

We may not be able to pay our debt and other obligations.

If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the notes or our other obligations, we would be in default under the terms thereof. Default under the indenture would permit the holders of the notes to accelerate the maturity of the notes and could cause defaults under future indebtedness we may incur. Any such default could have a material adverse effect on our business, prospects, financial condition and operating results. In addition, we can not assure you that we would be able to repay amounts due in respect of the notes if payment of the notes were to be accelerated following the occurrence of an event of default as defined in the indenture.

Customers may delay or cancel orders due to regulatory delays.

The increasing significance of electronic communications products has increased pressure on regulatory bodies worldwide to adopt new standards for electronic communications, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in the regulatory approval process may in the future cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers. These delays have in the past had, and may in the future have, a negative effect on our sales and our results of operations.

We must improve our products and processes to remain competitive.

If technologies or standards supported by our or our customers’ products become obsolete or fail to gain widespread commercial acceptance, our results of operations may be materially impacted. Because of continual improvements in semiconductor technology, including those in high-performance silicon technologies such as CMOS, where substantially more resources are invested than in other technologies such as GaAs or SAW products, we believe that our future success will depend, in part, on our ability to continue to improve our product and process technologies. We must also develop new technologies in a timely manner. In addition, we must adapt our products and processes to technological changes and to support emerging and established industry standards. We have and must continue to perform significant research and development into advanced material development such as InP, gallium nitride (GaN), and silicon carbide (SiC) to compete with future technologies of our competitors. These research and development efforts may not be accepted by our customers, and therefore may not achieve sustained production in the future. We may not be able to improve our existing products and process technologies, develop new technologies in a timely manner or effectively support industry standards. If we fail to do so, our customers may select another GaAs or SAW product or move to an alternative technology.

Our results of operations may suffer if we do not compete successfully.

The markets for our products are characterized by price competition, rapid technological change, short product life cycles, and heightened global competition. Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources. Due to the increasing requirements for high-speed, high-frequency components, we expect intensified competition from existing integrated circuit and SAW device suppliers, as well as from the entry of new competitors to our target markets and from the internal operations of some companies producing products similar to ours for their internal requirements. Several key customers in our newly acquired optoelectronics business have either captive internal suppliers or long-term contractual relationships with suppliers based on factors other than cost and quality.

For products in depressed markets, such as for optical components and modules, competition can be even more intense as companies attempt to maximize their revenue to cover as much of their fixed cost base as possible, even if it means selling products at a loss. There is no guarantee that pricing will stay at a level where we can sell our products on a profitable basis.

For our integrated circuit devices, we compete primarily with both manufacturers of high-performance silicon integrated circuits as well as manufacturers of GaAs integrated circuits. Our silicon-based competitors include companies such as Applied Micro Circuits Corporation, Maxim Integrated Products Inc., Motorola, Philips, STMicroelectronics N.V and others. Our GaAs-based competitors include companies such as Anadigics Inc., Fujitsu Microelectronics, Inc., Raytheon, RF Micro Devices, Skyworks Solutions, Inc., and others. For our SAW devices our competitors include companies such as CTS Wireless Components, Micro Networks, Phonon, RF Monolithics, Vectron, EPCOS AG, Temex, Fujitsu, Murata, Toyocom and others. For our optoelectronics business, competitors include companies such as JDS Uniphase, Bookham, Eudyna, OCP, Excelight, Agilent, Finisar, and Avanex, and others. Competition could also come from companies ahead of us in developing alternative technologies such as InP integrated circuits and digital filtering and direct conversion devices.

Competition from existing or potential competitors may increase due to a number of factors including, but not limited to, the following:

· offering of new or emerging technologies in integrated circuit or optical component design using alternative materials such as InP;

· offering of new or emerging technologies such as digital filtering or direct conversion as alternatives to SAW filters;

· transition to arrays of optical sources and detectors in place of discrete lasers in systems and subsystems;

· mergers and acquisitions of our customers by our competitors or other entities;

· longer operating histories and presence in key markets;

· development of strategic relationships between our competitors;

· ability to obtain raw materials at lower costs due to larger purchasing volumes or other advantageous supply relationships;

· access to a wider customer base; and

· access to greater financial, technical, manufacturing and marketing resources.

Additionally, manufacturers of high-performance silicon integrated circuits have achieved greater market acceptance of their existing products and technologies in some applications.

We compete with both GaAs and silicon suppliers in all of our target markets. In microwave and millimeter wave applications, our competition is primarily from a limited number of GaAs suppliers, which are in the process of expanding their product offerings to address commercial applications other than aerospace.

Competition is primarily based on performance elements such as speed, complexity and power dissipation, as well as price, product quality and ability to deliver products in a timely fashion. Due to the proprietary nature of our products, competition occurs almost exclusively at the system design stage. As a result, a design win by our competitors or by us typically limits further competition with respect to manufacturing a given design.

If we fail to integrate any future acquisitions or successfully invest in privately held companies, our business will be harmed.

We face risks from any future acquisitions, including the following:

· we may fail to merge and coordinate the operations and personnel of newly acquired companies with our existing business;

· we may fail to retain the key employees required to make the operation successful;

· additional complexity may affect our flexibility and ability to respond quickly to market and management issues;

· we may experience difficulties integrating our financial and operating systems;

· we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, financial reporting and risk management;

· our ongoing business may be disrupted or receive insufficient management attention;

· we may not cost-effectively and rapidly incorporate the technologies we acquire;

· we may not be able to recognize the cost savings or other financial benefits we anticipated;

· we may not be able to retain the existing customers of newly acquired operations;

· existing customers of the acquired operations may demand significant price reductions or other detrimental term changes as a result of the change in ownership;

· our corporate culture may clash with that of the acquired businesses;

· we may incur unknown liabilities associated with acquired businesses; and

· our increasing international presence resulting from acquisitions increases our exposure to foreign political, currency, and tax risks.

We face risks from equity investments in privately held companies, such as:

· we may not realize the expected benefits associated with the investment;

· we may need to provide additional funding to support the privately held company; or

· if their value decreases, we may realize losses on our holdings.

We may not successfully address these risks or any other problems that arise in connection with future acquisitions or equity investments in privately held companies.

We will continue to evaluate strategic opportunities available to us and we may pursue product, technology or business acquisitions or investments in strategic partners. In addition, in connection with any future acquisitions, we may issue equity securities that could dilute the percentage ownership of our existing stockholders, we may incur additional debt and we may be required to amortize expenses related to other intangible assets or record impairment of goodwill that may negatively affect our results of operations.

If we do not hire and retain key employees, our business will suffer.

Our future success depends in large part on the continued service of our key technical, marketing and management personnel. We also depend on our ability to continue to identify, attract and retain qualified technical employees, particularly highly skilled design, process and test engineers involved in the manufacture and development of our products and processes. We must also recruit and train employees to manufacture our products without a substantial reduction in manufacturing yields. There are many other semiconductor companies located in the communities near our facilities and, as the economy improves, it may become increasingly difficult for us to attract and retain those employees. The competition for key employees is intense, and the loss of key employees could negatively affect us.

Our business may be harmed if we fail to protect our proprietary technology.

We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have patents granted and pending in the United States and elsewhere and intend to seek further international and United States patents on our technology. In addition to our own inventions, we have acquired a substantial portfolio of U.S. and foreign patent applications in the optoelectronics area of technology. These applications are just starting to issue as patents, and will have lives that will extend 20 years from their respective filing dates. We cannot be certain that patents will be issued from any of our pending applications or that patents will be issued in all countries where our products can be sold or that any claims allowed from pending applications or will be of sufficient scope or strength to provide meaningful protection or any commercial advantage. Our competitors may also be able to design around our patents. The laws of some countries in which our products are or may be developed, manufactured or sold, may not protect our products or intellectual property rights to the same extent as do the laws of the United States, increasing the possibility of piracy of our technology and products. Although we intend to vigorously defend our intellectual property rights, we may not be able to prevent misappropriation of our technology. Our competitors may also independently develop technologies that are substantially equivalent or superior to our technology.

Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could have a material adverse effect on our business. Adverse determinations in any

litigation could subject us to significant liabilities to third parties, require us to seek licenses from third parties and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business.

Our ability to produce our products may suffer if someone claims we infringe on their intellectual property.

The integrated circuit and SAW device industries are characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. If it is necessary or desirable, we may seek licenses under such patents or other intellectual property rights. However, we cannot be certain that licenses will be offered or that we would find the terms of licenses that are offered acceptable or commercially reasonable. Our failure to obtain a license from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture of products. Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation by or against us could result in significant expense and divert the efforts of our technical personnel and management, whether or not the litigation results in a favorable determination. In the event of an adverse result in any litigation, we could be required to:

· pay substantial damages;

· indemnify our customers;

· stop the manufacture, use and sale of the infringing products;

· expend significant resources to develop non-infringing technology;

· discontinue the use of certain processes; or

· obtain licenses to the technology.

We may be unsuccessful in developing non-infringing products or negotiating licenses upon reasonable terms, or at all. These problems might not be resolved in time to avoid harming our results of operations. If any third party makes a successful claim against our customers or us and a license is not made available to us on commercially reasonable terms, our business could be harmed.

Our business may suffer due to risks associated with international sales.

Our sales outside of the United States were 60% and 58% of revenues for the three and six months ended June 30, 2004, respectively, and 60% and 58% of revenues for the three and six months ended June 30, 2003, respectively. We face inherent risks from these sales, including:

· imposition of government controls;

· currency exchange fluctuations;

· longer payment cycles and difficulties related to the collection of receivables from international customers;

· reduced protection for intellectual property rights in some countries;

· unfavorable tax consequences;

· difficulty obtaining distribution and support;

· political instability; and

· tariffs and other trade barriers.

In addition, due to the technological advantages provided by GaAs integrated circuits in many military applications, the Office of Export Administration of the U.S. Department of Commerce must license all of our sales outside of North America. We are also required to obtain licenses from that agency for sales of our SAW products to customers in certain countries. If we fail to obtain these licenses or experience delays in obtaining these licenses in the future, our results of operations could be harmed. Also, because a majority of our foreign sales are denominated in U.S. dollars, increases in the value of the dollar would increase the price in local currencies of our products and make our products less price competitive.

We may be subject to a securities class action suit if our stock price falls.

Following periods of volatility in the market price of a company’s stock, some stockholders may file securities class action litigation. For example, in 1994, a stockholder class action lawsuit was filed against us, our underwriters and some of our officers, directors and investors, which alleged that we, our underwriters and certain of our officers, directors and investors intentionally misled the investing public regarding our financial prospects. We settled the action and recorded a special charge of $1.4 million associated with the settlement of this lawsuit and related legal expenses, net of accruals, in 1998.

In February 2003, several nearly identical putative civil class action lawsuits were filed in the United States District Court for the Middle District of Florida against Sawtek, Inc., our wholly owned subsidiary since July 2001. The lawsuits also named as defendants current and former officers of Sawtek and our company. The cases were consolidated into one action, and an amended complaint was filed in this action on July 21, 2003. The amended class action complaint is purportedly filed on behalf of purchasers of Sawtek’s stock between January 2000 and May 24, 2001, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act, as well as Securities and Exchange Commission Rule 10b-5, by making false and misleading statements and/or omissions to inflate Sawtek’s stock price and conceal the downward trend in revenues disclosed in Sawtek’s May 23, 2001 press release. The complaint does not specify the amount of monetary damages sought. Sawtek and the individual defendants filed their motion to dismiss on September 3, 2003, and briefing on the motion was completed on November 19, 2003. The court heard oral argument on November 21, 2003, and issued an order partially denying the motion to dismiss on December 19, 2003. Specifically, the court found that the complaint was not barred by the statute of limitations, but reserved ruling on the other aspects of the motion to dismiss. Because the statute of limitations issue is a novel question of law, the court stayed the proceedings in this case to allow the defendants to file an interlocutory appeal to the Eleventh Circuit Court of Appeals. Defendants duly filed for interlocutory appeal on January 22, 2004. Because the Court of Appeals is considering the identical issue in another matter, the appeal process has been stayed, pending the Court of Appeals’ decision in the other matter. We deny the allegations contained in the complaint and intend to continue our vigorous defense against these claims. This litigation may, however, require us to spend a substantial amount of time and money and could distract management from our day to day operations. In addition, there can be no assurance as to our success in defending ourselves against these charges. This and any future securities class action litigation could be expensive and divert our management’s attention and harm our business, regardless of its merits.

Our stock will likely be subject to substantial price and volume fluctuations due to a number of factors, many of which are beyond our control and may prevent our stockholders from reselling our common stock at a profit.

The securities markets have experienced significant price and volume fluctuations and the market prices of the securities of semiconductor companies have been especially volatile. The market price of our common stock may experience significant fluctuations in the future. For example, our common stock price has fluctuated from a high of approximately $9.93 to a low of approximately $3.96 during the 52 weeks ended June 30, 2004. This market volatility, as well as general economic, market or political conditions

could reduce the market price of our common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our common stock could decrease significantly.

Our certificate of incorporation and bylaws include anti-takeover provisions, which may deter or prevent a takeover attempt.

Some provisions of our certificate of incorporation and bylaws and provisions of Delaware law may deter or prevent a takeover attempt, including a takeover that might result in a premium over the market price for our common stock. These provisions include:

Cumulative voting. Our stockholders are entitled to cumulate their votes for directors.

Stockholder proposals and nominations. Our stockholders must give advance notice, generally 120 days prior to the relevant meeting, to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action.

Stockholder rights plan. We may trigger our stockholder rights plan in the event our board of directors does not agree to an acquisition proposal. The rights plan may make it more difficult and costly to acquire our company.

Preferred stock. Our certificate of incorporation authorizes our board of directors to issue up to five million shares of preferred stock and to determine what rights, preferences and privileges such shares have. No action by our stockholders is necessary before our board of directors can issue the preferred stock. Our board of directors could use the preferred stock to make it more difficult and costly to acquire our company.

Delaware anti-takeover statute. The Delaware anti-takeover law restricts business combinations with some stockholders once the stockholder acquires 15% or more of our common stock. The Delaware statute makes it harder for our company to be acquired without the consent of our board of directors and management.

ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Cash Equivalents, Short-term and Long-term Investments

Our investments in cash equivalents, short-term investments and long-term investments are classified as available-for-sale securities and are comprised of highly rated, short and medium-term investments, such as U.S. government agencies, corporate debt securities and other such low risk investments, in accordance with an investment policy approved by our board of directors. All of these investments are held at fair value. Although we manage investments under an investment policy, economic, market and other events may occur which we cannot control. Although the risks are minimal, fixed rate securities may have their fair value adversely impacted because of changes in interest rates and credit ratings. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates or we may suffer principal losses if we were to sell securities that have declined in value because of changes in interest rates or issuer credit ratings. We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading or speculative purposes. We do not believe that our results of operations would be materially impacted by an immediate 10% change in interest rates. The impact of wider fluctuations would be greater, but would depend on the length of time of the change in rates.

Debt

Our convertible subordinated notes due 2007 have a fixed interest rate of 4%. Consequently, we do not have significant interest rate cash flow exposure on our long-term debt. However, the fair value of the convertible subordinated notes is subject to significant fluctuations due to their convertibility into shares of our stock and other market conditions. The fair value of these convertible subordinated notes is also sensitive to fluctuations in the general level of the U.S. interest rates. We would be exposed to interest rate risk, if we used additional financing to fund capital expenditures. The interest rate that we may be able to obtain on financings will depend on market conditions at that time and may differ from the rates we have secured in the past.

The following table shows the fair values of our investments and convertible subordinated notes as of June 30, 2004 (in thousands):

	Cost		Fair Value
Cash and cash equivalents	$	91,537	$	91,537
Available-for-sale investments (including unrealized losses of $1,892)	$	270,976	$	269,084
Convertible subordinated notes	$	223,755	$	217,846

Foreign Currency Risk

We are exposed to currency exchange fluctuations, as we sell our products internationally and have operations in Costa Rica, Germany and Mexico. We manage the sensitivity of our international sales, purchases of raw materials and equipment and our Costa Rican operations by denominating most transactions in U.S. dollars. We do engage in limited foreign currency hedging transactions, principally to lock in the cost of purchase commitments and to hedge material cash flows that are not denominated in U.S. dollars, in accordance with a foreign exchange risk management policy approved by our Board of Directors. We primarily use currency forward contracts for this purpose. This hedging activity will reduce, but may not always entirely eliminate, the impact of currency exchange movements. As of June 30, 2004, we had $15.3 million open commitments to purchase foreign currency and $13.0 million open commitments to sell foreign currency.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

In February 2003, several nearly identical putative civil class action lawsuits were filed in the United States District Court for the Middle District of Florida against Sawtek, Inc., our wholly owned subsidiary since July 2001. The lawsuits also named as defendants current and former officers of Sawtek and our company. The cases were consolidated into one action, and an amended complaint was filed in this action on July 21, 2003. The amended class action complaint is purportedly filed on behalf of purchasers of Sawtek’s stock between January 2000 and May 24, 2001, and alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act, as well as Securities and Exchange Commission Rule 10b-5, by making false and misleading statements and/or omissions to inflate Sawtek’s stock price and conceal the downward trend in revenues disclosed in Sawtek’s May 23, 2001 press release. The complaint does not specify the amount of monetary damages sought. Sawtek and the individual defendants filed their motion to dismiss on September 3, 2003, and briefing on the motion was completed on November 19, 2003. The court heard oral argument on November 21, 2003, and issued an order partially denying the motion to dismiss on December 19, 2003. Specifically, the court found that the complaint was not barred by the statute of limitations, but reserved ruling on the other aspects of the motion to dismiss. Because the statute of limitations issue is a novel question of law, the court stayed the proceedings in this case to allow the defendants to file an interlocutory appeal to the Eleventh Circuit Court of Appeals. The defendants duly filed for interlocutory appeal on January 22, 2004. Because the Court of Appeals is considering the identical issue in another matter, the appeal process has been stayed, pending the Court of Appeals’ decision in the other matter. We deny the allegations contained in the complaint and intend to continue our vigorous defense against these claims.

In addition, from time to time we are involved in judicial and administrative proceedings incidental to our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 14, 2004, we held our Annual Meeting of Stockholders in Hillsboro, Oregon. We solicited votes by proxy pursuant to proxy solicitation materials first distributed to our stockholders on or about April 5, 2004. The following is a brief description of the matters voted on at the meeting and a statement of the number of votes cast for and against and the number of abstentions:

1. The election of Francisco Alvarez, Dr. Paul A. Gary, Charles Scott Gibson, Nicolas Kauser, Ralph G. Quinsey, Dr. Walden C. Rhines, Steven J. Sharp, Edward F. Tuck and Willis C. Young as directors of the Company until the next Annual Meeting of Stockholders or until their successors are elected.

NOMINEE	For	Withheld
Francisco Alvarez	118,486,847	1,142,502
Dr. Paul A. Gary	117,919,511	1,709,838
Charles Scott Gibson	114,970,374	4,658,975
Nicolas Kauser	116,480,380	3,148,969
Ralph G. Quinsey	118,553,808	1,075,541
Dr. Walden C. Rhines	116,597,599	3,031,750
Steven J. Sharp	117,537,673	2,091,676
Edward F. Tuck	117,570,874	2,058,502
Willis C. Young	118,005,276	1,624,073

2. The amendment of the 1996 Stock Incentive Program to increase the aggregate number of shares of our common stock that may be issued thereunder by 5,000,000 to a total of 36,050,000 shares:

For		Against		Abstain
48,832,982		20,545,048		1,459,413

3. The ratification of the appointment of KPMG LLP as independent accountants of the Company for the fiscal year ending December 31, 2004:

For		Against		Abstain
118,379,039		1,075,541		174,769

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31	Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a—14(a)
32	Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a—14(b)

(b) Reports on Form 8-K

On April 22, 2004, we furnished a Current Report on Form 8-K reporting under Item 12 of Form 8-K that on April 22, 2004, we were issuing a press release and holding a conference call regarding our financial results for the three months ended March 31, 2004.

Delaware		95-3654013
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Condensed Consolidated Statements of Operations—Three and six months ended June 30, 2004 and 2003		3
	Condensed Consolidated Balance Sheets—June 30, 2004 and December 31, 2003		4
	Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2004 and 2003		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Qualitative and Quantitative Disclosures about Market and Interest Rate Risk		42
Item 4.	Controls and Procedures		43
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		44
Item 4.	Submission of Matters to a Vote of Security Holders		44
Item 6.	Exhibits and Reports on Form 8-K		45
SIGNATURES			46

	TriQuint Semiconductor, Inc.
Dated: August 6, 2004	/s/ Ralph G. Quinsey
	Ralph G. Quinsey
	President and Chief Executive Officer
	(Principal Executive Officer)
Dated: August 6, 2004	/s/ Raymond A. Link
	Raymond A. Link
	Vice President, Finance and Administration,
	Chief Financial Officer and Secretary
	(Principal Financial and Accounting Officer)

Exhibit No.		Description
31	Certification of Chief Executive Officer and Chief Financial Officer under Rule 13a-14(a)
32	Certification of Chief Executive Officer and Chief Financial officer under Rule 13a-14(b)