PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	Sept. 26,			Sept. 28			Sept. 26,			Sept. 28
	2004			2003			2004			2003
Sales:
Semiconductor	$	8,379		$	5,223		$	22,122		$	14,236
Other (1)	550			1,680			2,293			5,842
Total sales	8,929			6,903			24,415			20,078

Cost of goods sold	4,536			3,928			11,039			12,297
Gross profit	4,393			2,975			13,376			7,781
Operating expenses:
Research and development	4,308			4,200			12,450			12,949
Selling and administrative	3,512			2,198			9,286			7,597
Acquired in-process research and development	—			—			8,500			—
Amortization of deferred stock compensation (2)	57			19			178			73
Recapitalization merger	—			2			—			773
Restructuring reversals	(3,416		)	—			(3,845		)	(21		)
Total operating expenses	4,461			6,419			26,569			21,371
Loss from operations	(68		)	(3,444		)	(13,193		)	(13,590		)
Interest income	167			167			486			581
Interest expense	(20		)	(23		)	(72		)	(74		)
Other income (expense)—net	—			(4		)	—			1,090
Income (loss) before income taxes	79			(3,304		)	(12,779		)	(11,993		)
Income tax benefit	(1,133		)	—			(7,674		)	(647		)
Net income (loss)	$	1,212		$	(3,304	)	$	(5,105	)	$	(11,346	)

Basic net income (loss) per share	$	0.02		$	(0.06	)	$	(0.08	)	$	(0.20	)
Basic average shares	60,908			56,698			60,195			56,526

Diluted net income (loss) per share	$	0.02		$	(0.06	)	$	(0.08	)	$	(0.20	)
Diluted average shares	65,913			56,698			60,195			56,526

(1) Other sales includes sales of the Company’s wireless and fiber optics products.

(2) Amortization of deferred stock compensation is excluded from the following expenses:

Research and development	$	46	$	10	$	138	$	41
Selling and administrative	11		9		40		32
	$	57	$	19	$	178	$	73

See notes to condensed consolidated financial statements.

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

	Three Months Ended					Nine Months Ended
	Sept. 26,		Sept. 28,			Sept. 26,			Sept. 28,
	2004		2003			2004			2003

Net income (loss)	$	1,212	$	(3,304	)	$	(5,105	)	$	(11,346	)
Other comprehensive gain:
Unrealized holding gains on securities arising during the period net of reclassification adjustments	17		1			7			19

Comprehensive income (loss)	$	1,229	$	(3,303	)	$	(5,098	)	$	(11,327	)

See notes to condensed consolidated financial statements.

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	September 26,			December 31,
	2004			2003

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	27,516		$	10,900
Short-term investments	22,271			49,232
Receivables, net	5,690			4,559
Inventories	4,797			2,420
Other	2,123			1,983
Total current assets	62,397			69,094

PROPERTY, PLANT AND EQUIPMENT, net	9,886			10,504

Goodwill	1,811			—
Other assets	400			222
	$	74,494		$	79,820

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	2,768		$	3,125
Accrued liabilities	3,471			3,556
Income taxes payable	815			—
Restructuring accrual	3,249			3,665
Total current liabilities	10,303			10,346

Restructuring accrual	16,816			21,961
Income tax accrual	1,565			10,490
Other long-term obligations	763			784

Total liabilities	29,447			43,581

STOCKHOLDERS’ EQUITY:
Common stock	607			577
Additional paid-in capital	194,005			180,163
Accumulated deficit	(149,223		)	(144,118		)
Deferred stock compensation	(341		)	(375		)
Other comprehensive loss	(1		)	(8		)
Total stockholders’ equity	45,047			36,239
	$	74,494		$	79,820

See notes to condensed consolidated financial statements.

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 26,			September 28,
	2004			2003
OPERATING ACTIVITIES:
Net loss	$	(5,105	)	$	(11,346	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	2,064			3,559
Acquired in-process research and development	8,500			—
Amortization of deferred financing costs	31			21
Net loss on disposal of property, plant and equipment	—			91
Gain on sale of product line	—			(1,071		)
Deferred income taxes	—			6,036
Restructuring reversal	(3,845		)	(21		)
Amortization of deferred stock compensation	222			97
Stock based compensation	594			109
Provision for (reduction in) allowance for doubtful accounts	63			(298		)
Recoveries (write-offs) of uncollectible accounts to allowance	5			(5		)
Amortization of net premiums on short-term investments	311			18
Net changes in:
Receivables	(1,199		)	(1,383		)
Inventories	(339		)	1,675
Other assets	—			356
Restructuring liabilities	(1,716		)	(1,576		)
Income taxes payable	(8,111		)	—
Accruals and accounts payable	(409		)	(1,751		)
Net cash used in operating activities	(8,934		)	(5,489		)

INVESTING ACTIVITIES:
Purchase of short-term investments	(45,711		)	(53,677		)
Proceeds from sale and maturities of short-term investments	72,246			42,147
Purchases of property, plant and equipment	(320		)	(589		)
Acquisition of EiC and related costs	(11,190		)	—
Proceeds on disposal of property, plant and equipment	—			7
Proceeds from sale of product line	—			1,565
Net cash provided by (used in) investing activities	15,025			(10,547		)

FINANCING ACTIVITIES:
Payments on long-term borrowings	(82		)	(32		)
Repurchase of common stock	(267		)	(1,236		)
Net proceeds from issuances of common stock	10,874			2,745
Net cash provided by financing activities	10,525			1,477

Net increase (decrease) in cash and cash equivalents	16,616			(14,559		)
Cash and cash equivalents at beginning of period	10,900			43,524
Cash and cash equivalents at end of period	$	27,516		$	28,965

Other cash flow information:
Income taxes paid (refunded), net	$	436		$	(6,678	)
Interest paid	41			53
Issuance of common stock for EiC acquisition	2,484			—

See notes to condensed consolidated financial statements.

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended September 26, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of WJ Communications, Inc. (the “Company”) for the fiscal year ended December 31, 2003, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2004.

The balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

STOCK-BASED COMPENSATION — The Company accounts for stock-based compensation granted to employees and directors under the intrinsic value method as defined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

During the quarter ended September 26, 2004, the Company modified two option agreements (extension of the option exercise period) resulting in $594,000 of severance expense which was recorded as selling and administrative expense in the accompanying unaudited condensed consolidated statements of operations for the three months and nine months ended September 26, 2004.

As required under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” the pro forma effects of stock-based compensation on net income (loss) and net income (loss) per common share have been estimated at the date of grant as if the Company had accounted for such awards under the fair value method of SFAS No. 123 using the Black-Scholes option-pricing model.

The following table illustrates the effect on net income (loss) and net income (loss) per share had compensation cost for all of the Company’s stock option plans been determined based upon the fair value at the grant date for awards under these plans, and amortized to expense over the vesting period of the awards consistent with the methodology prescribed under SFAS No. 123 (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	Sept. 26,			Sept. 28,			Sept. 26,			Sept. 28,
	2004			2003			2004			2003

Reported net income (loss)	$	1,212		$	(3,304	)	$	(5,105	)	$	(11,346	)
Add: Total stock-based employee compensation expense included in reported net income (loss).	670			86			816			206
Deduct: Total stock-based employee compensation expense under fair value based method for all awards	(1,440		)	(579		)	(3,616		)	(1,745		)
Pro forma net income (loss)	$	442		$	(3,797	)	$	(7,905	)	$	(12,885	)

Net income (loss) per basic share
As reported	$	0.02		$	(0.06	)	$	(0.08	)	$	(0.20	)
Pro forma	$	0.01		$	(0.07	)	$	(0.13	)	$	(0.23	)

Net income (loss) per diluted share
As reported	$	0.02		$	(0.06	)	$	(0.08	)	$	(0.20	)
Pro forma	$	0.01		$	(0.07	)	$	(0.13	)	$	(0.23	)

2. ORGANIZATION AND OPERATIONS OF THE COMPANY

WJ Communications, Inc. (formerly Watkins-Johnson Company, the “Company”) was founded in 1957 in Palo Alto, California. The Company was originally incorporated in California and reincorporated in Delaware in August 2000. For more than 45 years, the Company developed and manufactured radio frequency (“RF”) microwave devices for government electronics and space communications systems used for intelligence gathering and communication. In 1996, the Company began to develop commercial applications for its military technologies. The Company’s current operations design, develop and market innovative, high-performance products for both current and next generation wireless and broadband cable networks, defense and homeland security systems and radio frequency identification (“RFID”) systems worldwide. The Company’s products are comprised of advanced, highly functional RF semiconductors, components and integrated assemblies which address the RF challenges of these various systems.

In June 2004, the Company completed its acquisition of the wireless infrastructure business and associated assets from EiC Corporation, a California corporation and EiC Enterprises Limited (together “EiC”). EiC designs, develops, manufactures and sells proprietary radio frequency integrated circuits (“RFICs”) primarily for wireless communications products. The Company believes that the addition of EiC’s technical expertise further enhances its strategy of offering customers a leading infrastructure RFIC product portfolio.

3. ACQUISITION

On June 18, 2004, the Company completed its acquisition of the wireless infrastructure business and associated assets from EiC. The aggregate purchase price was $13.7 million which included payments of cash of $10.0 million, the issuance of 737,000 shares of the Company’s common stock valued at $2.5 million and acquisition costs of $1.2 million (including $700,000 paid to a related party for investment banking services in connection with the acquisition). In connection with the acquisition, $1.5 million in cash and 294,118 shares of common stock have been held in escrow as security against certain financial contingencies. The outstanding balance of the escrow account less any properly noticed unpaid or contested amounts will be distributed within five days after March 31, 2005. The Company has agreed to file a registration statement no later than six months after the closing registering for resale by the seller of up to 442,882 shares of the Company’s common stock issued in the acquisition. In addition to the closing consideration, EiC may be entitled to further consideration of up to $14.0 million in cash and shares of the Company’s common stock if certain revenue and gross margin targets are achieved by March 31, 2005 and March 31, 2006. The fair value of the Company’s common stock was determined based on the average closing price per share of the Company’s common stock over a 5-day period beginning two trading days before and ending two trading days after the amended terms of the acquisition were agreed to and announced (June 21, 2004). The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”), and accordingly the Company’s consolidated financial statements from June 18, 2004 include the impact of the acquisition. The allocation of the purchase price for this acquisition, as of the date of the acquisition, is as follows (in thousands):

Property and equipment	$	1,124
Inventory	2,038
In-process research and development	8,500
Developed technology	200
Goodwill	1,811
Total purchase price	$	13,673

In the third quarter of fiscal 2004 the amounts contained in the purchase price allocation were adjusted when final data on preliminary estimates was received. Subsequent to the acquisition date, the Company recorded a non-cash adjustment of $6,000, relating to the reversal of excess accruals for acquisition related expenses. This adjustment resulted in a reduction of goodwill which is included in the table above.

The acquisition was accounted for as a purchase transaction, and accordingly, the assets of EiC were recorded at their estimated fair values at the date of the acquisition. With the exception of the goodwill and acquired in-process research and development (“IPRD”), the identified intangible assets will be amortized on a straight-line basis over their estimated useful lives, with a weighted average life of approximately five years.

A portion of the purchase price, $8.7 million, was allocated to developed and core technology and in-process research and development (“IPRD”). Developed and core technology and IPRD were identified and valued through extensive interviews, analysis of data provided by EiC Corporation concerning developmental products, their stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. The income approach method was the primary technique utilized in valuing the developed and core technology and IPRD. Under the income approach, fair value reflects the present value of the projected cash flows that are expected to be generated by the products incorporating the current technologies.

Developmental projects that reached technological feasibility were classified as developed and core technology, and the $200,000 value assigned to developed technology was capitalized to be amortized using the straight-line method over a weighted-average period of five years. Developmental projects that had not reached technological feasibility, and had no future alternative uses were classified as IPRD. The $8.5 million value allocated to projects that were identified as IPRD was charged to acquired in-process research and development in the accompanying unaudited condensed consolidated statements of operations for the nine months ended September 26, 2004. The value assigned to IPRD comprises the following projects: 12V heterojunction bipolar transistor (“HBT”) power amplifiers ($1.5 million) and 28V HBT high power amplifiers ($7.0 million).

The nature of the efforts required to develop the acquired IPRD into commercially viable products principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technical performance requirements.

In valuing the IPRD, the Company considered, among other factors, the importance of each project to the overall development plan, the projected incremental cash flows from the projects when completed and any associated risks. The projected incremental cash flows were discounted back to their present value using an after-tax discount rate of 25%. This discount rate was determined after consideration of the Company’s weighted average cost of capital and the weighted average return on assets. Associated risks include the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets.

As part of the acquisition, the Company entered into a sublease with EiC Corporation for 28,160 square feet of space at their facility in Fremont, California. This sublease expires in December 2004 and then converts into a month to month lease thereafter. The minimum future sublease payments are $118,000.

4. GOODWILL AND INTANGIBLE ASSETS

In connection with the acquisition of the wireless infrastructure business and associated assets from EiC, the Company recorded $1.8 million of goodwill. This goodwill was based upon the values assigned to the transactions at the time they were announced in June 2004 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The changes in the carrying value of goodwill for the nine months ended September 26, 2004 are as follows (in thousands):

Fiscal year:
Balance as of December 31, 2003	$	0
Purchased goodwill	1,817
Adjustments	(6		)
Balance as of September 26, 2004	$	1,811

Adjustments to goodwill during the nine months ended September 26, 2004 resulted primarily from the reversal of excess accruals for acquisition related expenses.

Intangible assets are recorded at cost, less accumulated amortization. Intangible assets as of September 26, 2004 consist of purchased technology of $200,000 less accumulated amortization of $10,000. Amortization is computed using the straight-line method over a weighted-average period of five years for purchased technology. The Company expects that annual amortization of acquired intangible assets to be as follows (in thousands):

Fiscal year:
2004 (remaining three months)	$	10
2005	40
2006	40
2007	40
2008	40
2009	20
Total amortization	$	190

5. UNAUDITED PRO FORMA RESULTS OF OPERATIONS

The following unaudited pro forma consolidated financial data represents the combined results of operations as if EiC’s wireless infrastructure business had been combined with the Company at the beginning of the respective period. This pro forma financial data includes the straight line amortization of intangibles over their respective estimated useful lives and excludes the write-off of IPRD of $8.5 million (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	Sept. 26,			Sept. 28,			Sept. 26,			Sept. 28,
	2004			2003			2004			2003

Net sales	$	8,929		$	7,473		$	26,196		$	21,872
Loss from operations	$	(68	)	$	(4,870	)	$	(7,951	)	$	(18,562	)
Net income (loss)	$	1,212		$	(4,717	)	$	85		$	(16,332	)

Basic net income (loss) per share	$	0.02		$	(0.08	)	$	0.00		$	(0.29	)
Basic average shares	60,908			56,698			60,195			56,526

Diluted net income (loss) per share	$	0.02		$	(0.08	)	$	0.00		$	(0.29	)
Diluted average shares	65,913			56,698			66,600			56,526

The unaudited pro forma results of operations is presented for illustrative purposes only and is not intended to represent what the Company’s results of operations would have been if the acquisition had occurred on those dates or to project the Company’s results of operations for any future period. Since the Company and EiC were not under common control or management for any period presented prior to the acquisition, the unaudited pro forma results of operations may not be comparable to, or indicative of, future performance. These results do not reflect any additional costs or cost savings resulting from the acquisition.

6. RECLASSIFICATIONS

Certain amounts for 2003 have been reclassified to conform with the 2004 presentation. Such reclassifications did not have any impact on net income (loss) or stockholders’ equity.

7. INVENTORIES

Inventories are stated at the lower of cost, using average-cost basis, or market. Cost of inventory items is based on purchase and production cost including labor and overhead. Write-downs, when required, are made to reduce excess inventories to their estimated net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required. Inventories at September 26, 2004 and December 31, 2003 consisted of the following (in thousands):

	September 26,		December 31,
	2004		2003
Finished goods	$	1,757	$	1,257
Work in progress	2,276		647
Raw materials and parts	764		516
	$	4,797	$	2,420

8. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and trade receivables. The Company maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company invests in a variety of financial instruments such as money market funds, commercial paper and high quality corporate bonds, and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. At September 26, 2004, Richardson Electronics represented 43% of the total accounts receivable balance. At December 31, 2003, Richardson Electronics, Lucent Technologies and Celestica represented 61%, 10% and 10% of total accounts receivable balance, respectively. The accounts receivable percentage attributable to Lucent Technologies includes the accounts receivable from their manufacturing subcontractors. The Company performs ongoing credit evaluations and maintains an allowance for doubtful accounts based upon the expected collectibility of receivables.

9. STOCKHOLDERS’ EQUITY

On January 28, 2004, the Company completed a secondary underwritten public offering of 2,000,000 shares of common stock at $5.75 per share, resulting in net proceeds of $10.1 million.

In March 2003, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to $2.0 million of the Company’s common stock. In October 2003, the Board approved an additional $2.0 million to expand its existing share repurchase program increasing the total amount authorized to $4.0 million. Purchases under the stock repurchase program may be made in the open market, through block trades or otherwise. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time-to-time without prior notice. During the year ended December 31, 2003, $2.8 million was utilized to purchase 1,340,719 shares of the Company’s common stock at a weighted average purchase price of $2.08 per share. All of the purchases were made on the Nasdaq National Market at prevailing open market prices using general corporate funds. The repurchases reduced the Company’s cash and interest income during the period and correspondingly reduced the number of the Company’s outstanding shares of common stock. This stock repurchase program ended as of the annual shareholder meeting on July 22, 2004. On July 27, 2004 the Company announced that its Board of Directors has authorized a new repurchase program of up to $2.0 million of the Company’s common stock. This new program was effective July 27, 2004 and replaces all previous repurchase programs. Under the new program, for the three months ended September 26, 2004, $267,000 was utilized to purchase 113,756 shares of the Company’s common stock at a weighted average purchase price of $2.32 per share.

10. NET INCOME (LOSS) PER SHARE CALCULATION

Per share amounts are computed based on the weighted average number of basic and diluted (dilutive stock options) common and common equivalent shares outstanding during the respective periods. The net income (loss) per share calculation is as follows (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	Sept. 26,			Sept. 28,			Sept. 26,			Sept. 28,
	2004			2003			2004			2003

Net income (loss)	$	1,212		$	(3,304	)	$	(5,105	)	$	(11,346	)

Denominator for basic net income (loss) per share:
Weighted average shares outstanding	60,910			56,748			60,208			56,589
Less weighted average shares subject to repurchase	(2		)	(50		)	(13		)	(63		)
Weighted average shares outstanding	60,908			56,698			60,195			56,526

Denominator for diluted net income (loss) per share:
Weighted average shares outstanding	60,908			56,698			60,195			56,526
Effect of dilutive stock options	5,005			—			—			—
Diluted weighted average common shares	65,913			56,698			60,195			56,526

Basic income (loss) per share	$	0.02		$	(0.06	)	$	(0.08	)	$	(0.20	)

Diluted income (loss) per share	$	0.02		$	(0.06	)	$	(0.08	)	$	(0.20	)

For the three months ended September 26, 2004, the incremental shares from the assumed exercise of 4,738,550 of the Company’s stock options outstanding were excluded from the calculation of diluted earnings per share because the exercise prices of the stock options were greater than or equal to the average share price for the quarter, and therefore their inclusion would have been anti-dilutive. The incremental shares from the assumed exercise of 13,708,113 stock options for the nine months ended September 26, 2004 and 12,275,829 stock options for the three months and nine months ended September 28, 2003 were not included in computing the diluted per share amounts because the effect of such assumed conversion and issuance would be anti-dilutive as the Company recorded a net loss for those periods.

11. RESTRUCTURING CHARGES

During fiscal 2002 and 2001, the Company recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses and the costs of downsizing its business. Such charges were established in accordance with EITF 94-3 and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges.” These charges include workforce reductions, consolidation of excess facilities and asset impairments as detailed in Note 10 of the Company’s Annual Report on Form 10-K as of December 31, 2003.

During the quarter ended September 26, 2004, the Company decided to not close its internal wafer fabrication facility (“fab”) as the Company believes that integrating the newly acquired fab from EiC with its pre-existing fab will offer the Company certain benefits over outsourcing the pre-existing fab. As such, the Company reversed approximately $3.6 million of its lease loss accrual which was recorded in the three and nine months ended September 26, 2004. Also during the quarter ended September 26, 2004, the Company revised its lease loss assumptions for its other facilities based on reductions in sublease occupancy rates and current facility costs. As such the Company accrued approximately $161,000 of additional lease loss which was recorded in the three and nine months ended September 26, 2004. In addition, during the three months ended June 27, 2004, the Company delayed the closure of its internal wafer fabrication facility for a minimum of three months to assess the integration of the acquisition (see Note 3 to the unaudited condensed consolidated financial statements) into its existing operations which resulted in an approximate $430,000 reduction in its lease loss accrual which is recorded in the nine months ended September 26, 2004.

The following table summarizes restructuring accrual activity recorded during the years 2003, 2002 and 2001 and the nine months ended September 26, 2004, respectively (in thousands):

	Workforce			Lease			Asset
	Reduction			Loss			Impairment			Total

Total charge	$	786		$	34,880		$	8,364		$	44,030
Additional charge (reversals)	(21		)	(184		)	151			(54		)
Non-cash charges	—			(5,470		)	(8,515		)	(13,985		)
Cash payments	(512		)	(3,853		)	—			(4,365		)
Balance at December 31, 2003	253			25,373			—			25,626

Reversals	(85		)	(3,922		)	—			(4,007		)
Non-cash charges	—			177			—			177
Cash payments	(168		)	(1,563		)	—			(1,731		)
Balance at September 26, 2004	$	—		$	20,065		$	—		$	20,065

Of the accrued restructuring charge at September 26, 2004, the Company expects $3.3 million of the lease loss to be paid out over the next twelve months. As such, this amount is recorded as a current liability and the remaining $16.8 million to be paid out over the remaining life of the lease of approximately seven years is recorded as a long-term liability.

12. BUSINESS SEGMENT REPORTING

As an integrated telecommunications products provider, the Company currently has one reportable segment. The Company’s Chief Operating Decision Maker (“CODM”) is the CEO. While the CODM monitors the sales of various products, the Company’s operations are managed and financial performance evaluated based upon the sales and production of multiple products employing common manufacturing and research and development resources; sales and administrative support; and facilities. This allows the Company to leverage its costs in an effort to maximize return. Management believes that any allocation of such shared expenses to various products would be impractical, and currently does not make such allocations internally.

During the year ended December 31, 2001, the Company’s larger customers began to outsource a greater percentage of their manufacturing. As such, the Company believes it is more meaningful in terms of concentration of risk and historic comparisons to combine the sales to manufacturing subcontractors with the end customer who ultimately controls product demand. Sales to individual customers representing greater than 10% of the Company’s consolidated sales during at least one of the periods presented (in thousands):

	Three Months Ended				Nine Months Ended
	Sept. 26,		Sept. 28,		Sept. 26,		Sept. 28,
	2004		2003		2004		2003

Richardson Electronics Ltd (1)	$	4,561	$	3,566	$	12,335	$	8,430
Lucent Technologies, Inc. (2)	280		1,649		2,002		5,643
Celestica	701		227		2,829		491

(1) Richardson Electronics Ltd. is the sole worldwide distributor of the Company’s complete line of RF semiconductor products.

(2) Includes sales to Lucent Technologies, Inc. and sales to its manufacturing subcontractors.

Sales to unaffiliated customers by geographic area are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	Sept. 26,		Sept. 28,		Sept. 26,		Sept. 28,
	2004		2003		2004		2003

United States	$	6,044	$	4,668	$	16,128	$	13,646
Export sales from United States:
Europe	684		501		2,042		1,954
Canada	343		435		962		881
China	733		536		2,297		1,230
Other	1,125		763		2,986		2,367
Total	$	8,929	$	6,903	$	24,415	$	20,078

Long-lived assets located outside of the United States are insignificant.

13. INCOME TAXES

The Company in accordance with SFAS No. 5 “Accounting for Contingencies” has established certain reserves for income tax contingencies. These reserves relate to various tax years subject to audit by tax authorities including the Company’s tax filings for 1996 to 2000.

During the three months ended September 26, 2004, we recorded an additional tax benefit of $1.1 million resulting from a revision of our estimated tax liability due to our receipt of the final assessment from the Internal Revenue Service related to the audit of the Company’s 1996 through 2000 tax returns. The tax benefit for the nine months ended September 26, 2004 of $7.7 million also included a tax benefit of $6.5 million resulting from the first quarter 2004 revision of our estimated tax liability based on the audit of the Company’s 1996 through 2000 tax returns.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS

Special Notice Regarding Forward-Looking Statements. The following discussion and analysis contains forward-looking statements including financial projections, statements as to the plans and objectives of management for future operations, and statements as to our future economic performance, financial condition or results of operations. These forward-looking statements are not historical facts but rather are based on current expectations, estimates, projections about our industry, our beliefs and our assumptions. Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from those projected in these forward-looking statements as a result of a number of factors, including, but not limited to, the continuation or worsening of poor economic and market conditions in our industry and in general, technological innovation in the wireless communications markets, the availability and the price of raw materials and components used in our products, the demand for wireless systems and products generally as well as those of our customers and changes in our customer’s product designs. Readers of this report are cautioned not to place undue reliance on these forward-looking statements.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other disclosures included elsewhere in this Form 10-Q and our Annual Report filed on Form 10-K for the year ended December 31, 2003. Except for historic actual results reported, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties. See “Special Notice Regarding Forward-looking Statements” above and “Risk Factors That May Affect Future Results” below for a discussion of certain factors that could cause future actual results to differ from those described in the following discussion.

OVERVIEW

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

On June 18, 2004, we completed our acquisition of the wireless infrastructure business and associated assets from EiC Corporation, a California corporation and EiC Enterprises Limited (together “EiC”). The aggregate purchase price was $13.7 million which included payments of cash of $10.0 million, the issuance of 737,000 shares of our common stock valued at $2.5 million and acquisition costs of $1.2 million. In connection with the acquisition, $1.5 million in cash and 294,118 shares of common stock have been held in escrow as security against certain financial contingencies. The outstanding balance of the escrow account less any properly noticed unpaid or contested amounts will be distributed within five days after March 31, 2005. We have agreed to file a registration statement no later than six months after the closing registering for resale by the seller of up to 442,882 shares of our common stock issued in the acquisition. In addition to the closing consideration, EiC may be entitled to further consideration of up to $14.0 million in cash and shares of our common stock if certain revenue and gross margin targets are achieved by March 31, 2005 and March 31, 2006. The fair value of our common stock was determined based on the average closing price per share of our common stock over a 5-day period beginning two trading days before and ending two trading days after the amended terms of the acquisition were agreed to and announced (June 21, 2004). The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”). We believe that the addition of EiC’s technical expertise further enhances WJ’s strategy of offering customers what we believe is the leading infrastructure RFIC product portfolio in the industry.

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

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

Critical Accounting Policies and Estimates

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

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Business Combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and in-process research and development based on their estimated fair values. Such valuations require management to make significant estimations and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include but are not limited to: future expected cash flows from customer contracts, customer lists, distribution agreements, acquired developed technologies and patents; expected costs to develop the in-process research and development into commercially viable products and estimating cash flows from the projects when completed; also the brand awareness and the market position of the acquired products and assumptions about the period of time the brand will continue to be used in the combined company’s product portfolio. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.” SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. Revenues from our distributor are recognized upon shipment based on the following factors: our sales price is fixed and determinable by contract at the time of shipment, payment terms are fixed at shipment and are consistent with terms granted to other customers, the distributor

has full risk of physical loss, the distributor has separate economic substance, we have no obligation with respect to the resale of the distributor’s inventory, and we believe we can reasonably estimate the potential returns from our distributor based on their history and our visibility in the distributor’s success with its products and into the market place in general. We accrue for distributor right of return and price protection based on known events and historical trends. Through September 26, 2004 the amount of those reserves has not been material. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Write-down of Excess and Obsolete Inventory

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

Valuation of Intangible Assets and Goodwill

We periodically evaluate our intangible assets and goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets include goodwill and purchased technology. Factors we consider important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. If these criteria indicate that the value of the intangible asset may be impaired, an evaluation of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this evaluation indicates that the intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value, and the remaining amortization period may be adjusted. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements if and when an impairment charge is recorded. If an impairment charge is recognized, the amortization related to intangible assets would decrease during the remainder of the fiscal year.

Income Taxes

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5 “Accounting for Contingencies” we have established reserves for income tax contingencies. These reserves relate to various tax years subject to audit by tax authorities including our tax filings for 1996 to 2000. The reserves represent our best estimate of our liability of income taxes, interest and penalties. The actual liability could differ significantly from the amount of the reserve, which could have a material effect on our results of operations. During the three months ended September 26, 2004, we recorded an additional tax benefit of $1.1 million resulting from a revision of our estimated tax liability due to our receipt of the final assessment from the Internal Revenue Service related to the audit of the Company’s 1996 through 2000 tax returns. The tax benefit for the nine months ended September 26, 2004 of $7.7 million also included a tax benefit of $6.5 million resulting from the first quarter 2004 revision of our estimated tax liability based on the audit of the Company’s 1996 through 2000 tax returns.

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

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the

need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Restructuring

During fiscal 2002 and 2001, we recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses and the costs of downsizing our business. Such charges were established in accordance with Emerging Issues Task Force Issue 94-3 (“EITF 94-3”) “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges.” These charges include abandoned leased properties comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and asset impairment charges on tenant improvements deemed no longer realizable. In determining these estimates, we make certain assumptions with regards to our ability to sublease the space and reflect offsetting assumed sublease income in line with our best estimate of current market conditions. Should there be a further significant change in market conditions, the ultimate losses on these could be higher and such amount could be material. During 2002, we recorded restructuring charges of $27.9 million related to restructuring activities initiated in 2002 and also recorded additional charges of $6.3 million related to restructuring activities initiated in 2001, primarily due to changes in estimated sublease income. During 2003, we revised our lease loss accrual downward for an estimated four months of additional operation of our wafer fab and reduced facility costs at our other two abandoned facilities. This credit was largely offset by an additional lease loss accrual for reductions in estimated sublease occupancy and market rates. During the nine months ended September 26, 2004, we recorded a credit of $4.0 million related to our assessment and subsequent decision to not close our internal wafer fabrication facility (“fab”) as we believe that integrating the newly acquired fab from EiC with our pre-existing fab will offer the Company certain benefits over outsourcing the pre-existing fab. As such, we reversed approximately $3.9 million of our lease loss accrual and $85,000 of our severance accrual. This credit was partially offset by an additional $161,000 lease loss accrual as we revised our lease loss assumptions for our facilities based on reductions in sublease occupancy rates and current facility costs.

Impairment of Long-Lived Assets

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

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

CURRENT OPERATIONS

For The Period Ended September 26, 2004 Compared to September 28, 2003

Sales – We recognized $8.9 million and $6.9 million in sales for the three months ended and $24.4 million and $20.1 million in sales for the nine months ended September 26, 2004 and September 28, 2003, respectively. The increase in sales for both respective periods primarily reflects the increase in our semiconductor sales which more than offset the decline in our wireless assembly sales.

Semiconductor sales in the third quarter of 2004 totaled $8.4 million, an increase of $3.2 million or 60% over the third quarter sales of 2003 of $5.2 million. Semiconductor sales represent 94% and 76% of total sales in the relative three month periods. Semiconductor sales for the first nine months of 2004 totaled $22.1 million, representing 91% of total sales which was a $7.9 million or 55% increase in comparison to first nine months of September 28, 2003 sales of $14.2 million, or 71% of total sales. Our 2003 semiconductor sales includes sales of RF semiconductor products as well as sales of our Thin-Film products which represents $855,000 for the nine months ended September 28, 2003. In May 2003 we sold our Thin-Film product line to M/A COM (a unit of Tyco Electronics). Excluding Thin-Film, our RF semiconductor sales increased $8.7 million or 65% to $22.1 million in the first nine months of 2004 from $13.4 million in the same relative period in 2003. This increase in our RF semiconductor sales related to an increase in the volume of our RF semiconductor products sold due, in part, to our introduction of over 60 new products, our expanded product offering due to our acquisition of the wireless infrastructure business from EiC Corporation (representing $1.8 million and $2.0 million of our RF semiconductor revenue in the respective 2004 periods) and our increasing sales in the United States (29% increase in the three month period and 26% increase in the nine month period) and Asia (particularly China, which increased 37% in the three month period and 87% in the nine month period).

Our other sales includes our wireless integrated assembly sales and our fiber optic sales. As these products have reached the end of their respective product life cycles, they will not be a significant factor in our long term business and they have not contributed appreciably to our sales in 2004. Other sales represents only 6% and 9% in the three and nine month periods ended September 26, 2004. Other sales represented 24% and 29% in the three and nine months ended September 28, 2003. This decline in our other sales contributed to the decline in our sales to Lucent Technologies who was the major customer for the wireless integrated assembly products. Aside from potential and infrequent “life time buys,” our focus will predominantly be repair and maintenance of the existing product base. The majority of the other sales recorded during the first nine months of 2004 represented one such “life time buy.”

Cost of Goods Sold – Our cost of goods sold for the three months ended September 26, 2004 was $4.5 million, an increase of $608,000 or 15% as compared with cost of goods sold of $3.9 million in the three months ended September 28, 2003. For the nine months ended September 26, 2004 our cost of goods sold was $11.0 million a decrease of $1.3 million or 10% as compared with cost of goods sold of $12.3 million in the nine months ended September 28, 2003. During the three months and nine months ended September 26, 2004, cost of goods sold were 51% and 45% as a percentage of sales which compares to 57% and 61% in the corresponding prior year periods. This decrease in our cost of goods sold as a percentage of sales for both relative periods in 2004 reflects the change in our product sales mix to a greater percentage of higher margin semiconductor products from relatively lower margin wireless assembly products.

We continue to experience unabsorbed overhead costs related to underutilization of our existing wafer fabrication facilities, including the facility and related equipment acquired from EiC. While prior restructuring programs have mitigated some of our unabsorbed overhead through the write down of excess facilities and equipment, we will still have fixed manufacturing costs that these efforts will not impact until we can further reduce excess capacity. We typically generate a lower gross margin on new product introductions which we expect to be a higher percentage of our sales mix going forward. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through improved yields. New product lines also contain a greater degree of inventory risk due to uncertainty regarding a lack of visibility and predictability of customer demand and potential competition.

Research and Development – Our research and development expense for the three months ended September 26, 2004 was $4.3 million, an increase of $108,000 or 3% as compared with research and development expense of $4.2 million in the

three months ended September 28, 2003. The increase in absolute dollars in the three months ended September 26, 2004 is primarily related to the increased engineering staff and new product development efforts related to the products and processes we acquired from EiC which was largely offset by a decrease in overall overhead. For the nine months ended September 26, 2004 our research and development expense was $12.4 million, a decrease of $500,000 or 4% as compared with research and development expense of $12.9 million over the same period last year. The decrease in absolute dollars in the nine months ended September 26, 2004 is primarily related to a decrease in overall overhead which was partially offset by the increased engineering staff and new product development efforts related to the products and processes we acquired from EiC and an increased spending on design consulting services. Research and development efforts in all periods were primarily attributable to spending on the development of RF semiconductor products. During the three months and nine months ended September 26, 2004, research and development expenses were 48% and 51% as a percentage of sales which compares to 61% and 64% in the corresponding prior year periods. The decrease in research and development expense as a percentage of sales in 2004 relates to the factors noted above as well as the increase in our sales in the same relative periods. Product research and development is essential to our future success and we expect to continue to make investments in new product development and engineering talent. For the remainder of 2004 we will focus our research efforts and resources on RF semiconductor development which target multiple growth markets such as RFID and defense and homeland security and while expanding our addressable market opportunities in wireless communications and broadband cable. We will also explore process capabilities of third party foundries and develop products under new process technologies such as SiGe and CMOS.

Selling and Administrative – Selling and administrative expense for the three months ended September 26, 2004 was $3.5 million or 39% of sales, an increase of $1.3 million or 60% as compared with selling and administrative expense of $2.2 million or 32% of sales in the three months ended September 28, 2003. For the nine months ended September 26, 2004 selling and administrative expenses were $9.3 million or 38% of sales, an increase of $1.7 million or 22% as compared with selling and administrative expense of $7.6 million or 38% of sales in the nine months ended September 28, 2003. The increase in absolute dollars during the three month period ended September 26, 2004 is primarily related to a $558,000 increase in severance due to a stock compensation charge resulting from the modification of two option agreements (extension of the option exercise period), a $187,000 increase in salaries and wages due to an increase in the number of sales and marketing personnel, a $176,000 increase in accounting fees resulting from additional corporate governance requirements and an increase of $129,000 in advertising and promotion costs associated with our attendance at two RFID trade shows. Additionally, during the three months ending September 28, 2003, we benefited from a reduction in our Board of Directors’ compensation plan which was approved at our Annual Meeting of Stockholders held on July 15, 2003 and resulted in a reduction in accrued expenses of $238,000. The increase in absolute dollars during the nine month period ended September 26, 2004 is primarily related to a $319,000 increase in salaries and wages due to an increase in the number of sales and marketing personnel, a $305,000 increase in bonus expense, a $178,000 increase in accounting fees resulting from additional corporate governance requirements, a $173,000 increase in commission costs due to increased sales of our RF semiconductor products and the aforementioned effects of the third quarter 2004 severance charge and the third quarter 2003 change in our Board of Directors’ compensation plan. The first nine months of 2003 had benefited from the collection of $298,000 of receivables which had been reserved in a prior period. During the first nine months of 2004, we reserved $63,000 of receivables whose collection is doubtful. These increased costs were partially offset by a $363,000 reduction in our Directors and Officers insurance and a $112,000 decrease in advertising and promotion costs. As a percentage of sales, the increase in selling and administrative expense during 2004 reflects the factors noted above.

Acquired in-process research and development expenses – During the nine months ended September 26, 2004, $8.5 million of the purchase price for the acquisition of the wireless infrastructure business and associated assets from EiC was allocated to acquired in-process research and development expense (“IPRD”). Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and have no future alternative use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is no remaining risk relating to the development. The IPRD charge related to the EiC acquisition which was made up of two projects: 12V heterojunction bipolar transistor (“HBT”) power amplifiers and 28V HBT high power amplifiers which had an assigned value of $1.5 million and $7.0 million, respectively. As of September 26, 2004, the estimated aggregate cost to complete these projects was $223,000 and $53,000, respectively which is expected to occur within six months. The cost to complete represents the cost to complete development of the underlying process and does not include the cost to develop individual

products under these processes. The value of these projects was determined by estimating the discounted net cash flows from the sale of the products resulting from the completion of the projects, reduced by the portion of the revenue attributable to developed technology and the percentage of completion of the project.

The nature of the efforts to develop the acquired in-process research and development into commercially viable products principally relates to the completion of all prototyping and testing activities that are necessary to establish that the product can meet its design specification including function, features and technical performance requirements. Therefore, the amount allocated to in-process research and development has been charged to operations.

Recapitalization Merger – We incurred recapitalization merger expense of $773,000 in the nine months ended September 28, 2003 related to our consideration of the proposed Fox Paine transaction. On September 19, 2002, we announced the receipt of a proposal from an affiliate, Fox Paine & Company LLC (“Fox Paine”) to acquire all of the shares of our common stock held by unaffiliated stockholders (the “Acquisition Proposal”). At that time, Fox Paine and its affiliates owned approximately 66% of our outstanding shares or approximately 37.0 million shares of a total of approximately 55.9 million shares outstanding. Our Board of Directors formed a special committee composed of two independent directors not affiliated with Fox Paine (the “Special Committee”) to review the Acquisition Proposal. These expenses include legal and financial consulting fees as well as compensation to the members of the Special Committee. On March 27, 2003, Fox Paine withdrew its Acquisition Proposal.

Restructuring charges – For the three months ended September 26, 2004 we recorded a credit of $3.4 million related to our decision to not close our internal wafer fabrication facility (“fab”) as we believe that integrating the newly acquired fab from EiC with our pre-existing fab will offer the Company certain benefits over outsourcing the pre-existing fab. As such, we reversed approximately $3.5 million of our lease loss accrual and $85,000 of our severance accrual which was recorded in the three months and nine months ended September 26, 2004. Also during the quarter ended September 26, 2004, we revised our lease loss assumptions for our facilities based on reductions in sublease occupancy rates and current facility costs. As such we accrued approximately $161,000 of additional lease loss which was recorded in the three and nine months ended September 26, 2004. During the three months ended June 27, 2004 we delayed the closure of our internal wafer fabrication facility for a minimum of three months to assess the integration of the acquisition into our existing operations which resulted in an approximate $430,000 reduction in our lease loss accrual which is recorded in the nine months ended September 26, 2004. During the nine months ended September 28, 2003, it was determined that one of the employees slated to be terminated would instead be retained for another position. As such, $21,000 of the third quarter 2002 restructuring charge was reversed. For further discussion, see Note 11 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

Interest Income – Interest income primarily represents interest earned on cash equivalents and short-term available-for-sale investments. Our interest income in the three months ended September 26, 2004 was $167,000, which virtually unchanged as compared with interest income in the three months ended September 28, 2003. For the nine months ended September 26, 2004 our interest income was $486,000, a decrease of $95,000 or 16% as compared with interest income of $581,000 in the nine months ended September 28, 2003. This relative decrease for the nine months ended September 26, 2004 primarily resulted from a decrease in our cash and cash equivalents due to our acquisition as discussed in Note 3 to the unaudited condensed consolidated financial statements. To the extent we continue to utilize our cash in the operation of our business, interest income is expected to decrease going forward. Additionally, our interest income will be impacted by changes in the market interest rates of our investments.

Interest Expense – Our interest expense for the three months ended September 26, 2004 was $20,000, a decrease of $3,000 or 13% as compared with interest expense of $23,000 for the three months ended September 28, 2003. For the nine months ended September 26, 2004 our interest expense was $72,000, a slight decrease of $2,000 as compared with interest expense of $74,000 for the nine months ended September 28, 2003. Interest expense for all periods relates to maintenance fees associated with our revolving credit facility and outstanding letters of credit.

Other Income-Net – In the nine months ended September 28, 2003 other income-net primarily related to the gain of $1.1 million we recorded related to the sale of our Thin-Film product line to M/A-COM, a unit of Tyco Electronics previously announced in December, 2002. The sale includes equipment, inventory, intellectual property, training and services for which we received total proceeds of $1.8 million.

Income Tax Benefit – During the three months ended September 26, 2004, we recorded an additional tax benefit of $1.1 million resulting from a revision of our estimated tax liability due to our receipt of the final assessment from the Internal Revenue Service related to the audit of the Company’s 1996 through 2000 tax returns. The tax benefit for the nine months ended September 26, 2004 of $7.7 million also included a tax benefit of $6.5 million resulting from the first quarter 2004 revision of our estimated tax liability based on the audit of the Company’s 1996 through 2000 tax returns. In the nine months ended September 28, 2003 we recorded a one-time tax benefit of $647,000 related to an income tax refund of $480,000 from the State of Maryland as the result of amending our 1999 state tax return and an adjustment to our deferred tax asset of $167,000 for additional federal income tax refund determined after finalizing our 2002 carryback claim filed in the first quarter of 2003. Beginning in 2002, it was determined that it was not more likely than not that any additional deferred tax assets would be realized through the application of carryforward claims.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments at September 26, 2004 totaled $49.8 million, a decrease of $10.3 million or 17% compared to the balance of $60.1 million at December 31, 2003.

In December of 2000, we entered into a revolving credit facility (“Revolving Facility”) with a bank, the terms of which were amended and restated in September 2003. Under the new terms, the Revolving Facility provides for a maximum credit extension of $20.0 million with a $15.0 million sub-limit to support letters of credit and matures on September 22, 2005. Interest rates on outstanding borrowings are periodically adjusted based on certain financial ratios and are initially set, at our option, at LIBOR plus 1.0% or Prime minus 0.5%. The Revolving Facility requires us to maintain certain financial ratios and contains limitations on, among other things, our ability to incur indebtedness, pay dividends and make acquisitions without the bank’s permission. The Revolving Facility is secured by substantially all of our assets. We were in compliance with the covenants as of September 26, 2004. As of December 31, 2003 and September 26, 2004, there were no outstanding borrowings under the Revolving Facility. The Company has letters of credit of $3.4 million outstanding as of September 26, 2004 against which no amounts have been drawn.

Net Cash Used in Operating Activities – Net cash used in operations was $8.9 million and $5.5 million in the nine months ended September 26, 2004 and September 28, 2003, respectively. Net loss in the nine months ended September 26, 2004 and September 28, 2003 was $5.1 million and $11.3 million, respectively.

Significant items impacting the difference between net loss and cash flows used in operations in the first nine months of 2004 were $4.1 million used in working capital and $7.7 million related to a decrease in our income tax liability. The $4.1 million used in working capital primarily relates to a $1.2 million increase in receivables, a $1.7 million decrease in restructuring liabilities, and a decrease of $436,000 in income taxes payable. Our receivables increased $1.2 million due to increased shipments during the third quarter of 2004. The $1.6 million decrease in restructuring liabilities primarily relates to payments against the remaining lease loss accrual. The decrease of $436,000 in income taxes payable relates to payments resulting from an audit of our 1996 through 2000 returns. The $7.7 million decrease in our income tax liability resulted from a revised estimate related to the audit of our 1996 through 2000 tax returns.

Items impacting the difference between net loss and cash flows used in operations in the first nine months of 2003 were $2.7 million used in working capital and $6.0 million provided by a decrease in our deferred tax assets. The $2.7 million used in working capital primarily relates to an $1.4 million increase in accounts receivable, $1.6 million decrease in restructuring liabilities and a $1.9 million decrease in accruals and accounts payable partially offset by a $1.7 million decrease in inventories. Starting in the second quarter of 2003, we were required to offer more favorable payment terms to significant customers in order to remain competitive in the current business environment. Our average payment terms increased from 30 days to 60 days which resulted in our $1.4 million increase in accounts receivable. The $1.6 million decrease in restructuring liabilities primarily relates to payments against the remaining lease loss accrual. The decrease in accruals and accounts payable, as well as the decrease in inventories, relate to reduced purchases and production as a response to a decrease in customer demand during 2003. The $6.0 million decrease in deferred tax assets relates to the realization of a refund claim generated by the carryback of our 2002 net operating loss.

In our fourth fiscal quarter ending December 31, 2004 we will be making a federal tax payment of $414,000.

Net Cash Provided by (Used in) Investing Activities – Net cash provided by (used in) investing activities was $15.0 million and ($10.5) million in the nine months ended September 26, 2004 and September 28, 2003, respectively. In the first nine months of 2004, we realized $72.2 million in proceeds from the sale and maturities of our short-term investments which was partially offset by $45.7 million used to purchase short-term investments and $11.2 million to acquire the wireless infrastructure business and associated assets from EiC including associated acquisition costs. In addition to the closing consideration, EiC may be entitled to further consideration of up to $14.0 million in cash and shares of our common stock if we achieve certain revenue and gross margin targets by March 31, 2005 and March 31, 2006. During 2004, we expect to invest approximately $500,000 to $1.0 million in capital expenditures of which $320,000 was purchased in the first nine months. We have funded our capital expenditures from cash, cash equivalents and short-term investments and expect to continue to do so throughout 2004. In the first nine months of 2003, we purchased $53.7 million of short-term investments which was partially offset by receipt of $42.1 million in proceeds from the sale of short-term investments and $1.6 million proceeds form the sale of a product line. During the first nine months of 2003, we completed the sale of our Thin-Film product line to M/A-COM, a unit of Tyco Electronics including equipment, inventory, intellectual property, training and services.

Net Cash Provided by Financing Activities – Net cash provided by financing activities totaled $10.5 million and $1.5 million in the nine months ended September 26, 2004 and September 28, 2003, respectively. In the first nine months of 2004, we received net proceeds of $10.2 million related to our secondary public offering of 2.0 million newly issued shares of our common stock and $712,000 from the sale of our common stock to employees through our employee stock purchase and option plans which was partially offset by $267,000 of cash used to repurchase our common stock under our current stock repurchase program. In our fourth fiscal quarter ending December 31, 2004 we expect to pay an additional $600,000 to $1.8 million to repurchase our common stock pursuant to the program announced July 27, 2004. For further discussion, see Note 9 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. Net cash provided by financing activities totaled $1.5 million in the nine months ended September 28, 2003. In the first nine months of 2003, we received net cash of $2.7 million from the sale of our common stock to employees through our option plans which as partially offset by $1.2 million of cash used to the repurchase of our common stock under our stock repurchase program and $32,000 of financing costs associated with our revolving credit facility.

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

Contractual Obligations and Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet financing arrangements except for certain operating leases. Our contractual obligations are set forth in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” of our annual report on Form 10-K for the year ended December 31, 2003. There have been no material changes to the disclosures therein in the nine months ended September 26, 2004 except for a reduction in our reserves for income tax contingencies by $7.7 million based on the audit of our 1996 through 2000 tax returns. Of the remaining $2.4 million, we expect that $815,000 will be paid within the next twelve months.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

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

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

Expected Maturity Dates	Expected Maturity Amounts		Weighted Average Interest Rate
	(in thousands)
Cash equivalents:
2004	$	25,084	1.48	%
Short-term investments:
2004	16,720		1.43	%
2005	5,551		1.91	%
Fair value at September 26, 2004	$	47,355

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. Based on the Evaluation, our CEO and CFO concluded that our Disclosure Controls were not effective as of the end of the period covered by this report, due solely to the material weakness discussed below.

Changes in Internal Controls

Our audit committee was advised by Deloitte & Touche LLP, our independent registered public accounting firm, that during their performance of review procedures related to our unaudited interim financial statements for the quarter ended September 26, 2004 they identified a “material weakness” in our internal controls over financial reporting, as defined in Public Company Accounting Oversight Board (“PCAOB”), Auditing Standard No. 2. As defined by the PCAOB, a material weakness is “a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.” The material weakness related to a failure to record an accounting entry for a material severance charge resulting from the modification of two option agreements (extension of the option exercise period). The entry was subsequently recorded and is included in our unaudited interim financial statements for the quarter ended September 26, 2004.

We have subsequently remediated this material weakness by strengthening our disclosure control procedures to ensure that all information relevant to our financial reporting resulting from any decisions made or resolutions enacted by our Board of Directors is communicated to our Principal Accounting Officer (Corporate Controller) or other financial personnel with a sufficient understanding of accounting principles generally accepted in the United States of America to ascertain any potential effect on our financial statements in the appropriate reporting period.

We have evaluated our internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), and there have been no changes in our internal control over financial reporting during the most recent fiscal quarter, other than as described above, that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

CEO and CFO Certifications

In Exhibits 31.1 and 31.2 of this report there are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

You should carefully consider the risks described below and all other information contained in this report and in our other filings with the SEC, including but not limited to information under the heading “Risk Factors That May Affect Future Results” in our most recently filed Form 10-K in evaluating us and our business before making an investment decision. If any of the following risks, or other risks and uncertainties that we have not yet identified or that we currently think are immaterial, actually occur and are material, our business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline and you may lose part or all of your investment.

We have a history of losses, we may incur future losses, and if we are unable to achieve profitability our business will suffer and our stock price may decline.

We have not recorded operating income since 1999 and we may not be able to achieve revenue or earnings growth or obtain sufficient revenue to sustain profitability. In the nine months ended September 26, 2004 our sales were $24.4 million and we incurred an operating loss of $13.2 million. In addition, our sales for the year ended December 31, 2003 were $26.6 million compared to $40.2 million for 2002. We incurred an operating loss of $16.7 million for the year ended December 31, 2003.

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

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

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

• any loss of a key customer;

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

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

We may incur losses for the foreseeable future, particularly if our revenues do not increase substantially or if our expenses increase faster than our revenues. In order to return to profitability, we must achieve substantial revenue growth and we currently face an environment of uncertain demand in the markets our products address. Our ability to increase revenues and achieve and sustain profitability will also be affected by other risks and uncertainties described in this quarterly report. We cannot assure you as to whether or when we will return to profitability or whether we will be able to sustain such profitability, if achieved.

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

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

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

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

Richardson Electronics, Ltd. is the sole worldwide distributor of our complete line of RF semiconductor products. This sole distributor is our largest semiconductor customer and our sales to Richardson Electronics, Ltd. represent 56% and 59% of our semiconductor sales for nine months ended September 26, 2004 and September 28, 2003, respectively. We cannot assure you that this exclusive relationship will improve sales of our semiconductor products or that it is the most effective method of distribution. If this sole distributor fails to successfully market and sell our products, our semiconductor sales could materially decline. Our agreement with this distributor does not require it to purchase our products and is terminable at any time. If this distribution relationship is discontinued, our RF semiconductor sales could materially decline.

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

We depend on a small number of customers for a majority of our sales. We currently have two customers, Richardson Electronics, Ltd. and Celestica, which each accounted for more than 10% of our sales and in aggregate accounted for 62% of our sales for the nine months ended September 26, 2004. We had two customers, Richardson Electronics, Ltd. and Lucent Technologies, which each accounted for more than 10% of our sales and in aggregate accounted for 70% of our sales for the nine months ended September 28, 2003. Sales to Richardson Electronics accounted for 51% and 42% of our sales for the nine months ended September 26, 2004 and September 28, 2003, respectively. Sales to Celestica accounted for 12% of our sales for the nine months ended September 26, 2004. Sales to Lucent Technologies accounted for 28% of our sales for the nine months ended September 28, 2003, including sales to their manufacturing subcontractors. In addition, most of our sales result from purchase orders or from contracts that can be cancelled on short-term notice. Moreover, it is possible that our customers may develop their own products internally or purchase products from our competitors. Also, events that impact our customers, for example wireless carrier consolidation, can adversely affect our sales. We expect that our key customers will continue to account for a substantial portion of our revenue in 2004. The loss of or a reduction in orders from a significant customer for any reason could cause our sales to decrease.

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

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

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

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

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

Third party intellectual property claims could harm our business.

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

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

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

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

Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet our publicly stated guidance or the expectations of securities analysts or investors, our stock price may decline. For example, in early 2003 and as recently as during our third quarter ended September 26, 2004, we publicly announced revised lowered expectations of financial results for certain periods. Subsequent to such announcements, the trading price of our common stock declined significantly. Factors that can contribute to fluctuations in our operating results include:

• the rescheduling, reduction or cancellation of significant customer orders;

• the ability of our customers to manage their inventories;

• our gain or loss of a key customer;

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

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

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

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

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

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

• changes in manufacturing capacity and the utilization of this capacity;

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

• changes in our product mix or customer mix;

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

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

• the quality of our products and any remediation costs;

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

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

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

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

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

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

As we continue to develop new products utilizing new process technologies , we will increase our utilization of third parties for the manufacture of our products.

As we continue to develop new products utilizing new process technologies, we will obtain an increasing portion of our wafer requirements from outside wafer fabrication facilities, known as foundries. There are significant risks associated with our reliance on third-party foundries, including:

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

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

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

We have no long-term contracts with any foundry and we do not have a guaranteed level of production capacity at any foundry. The ability of each foundry to provide wafers to us is limited by its available capacity and our foundry suppliers could provide that limited capacity to its other customers. In addition, our foundry suppliers could reduce or even eliminate the capacity allocated to us on short notice. Moreover, such a reduction or elimination is possible even after we have

submitted a purchase order. If we choose to use a new foundry, it typically takes several months to complete the qualification process before we can begin shipping products from the new foundry.

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

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

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

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

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

• accurately predict market requirements and evolving industry standards;

• accurately define new products;

• timely complete and introduce new product designs;

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

• obtain sufficient foundry capacity;

• achieve high manufacturing yields;

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

• gain market acceptance of our products and our customers’ products.

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

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

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

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

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

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

After we have developed and delivered a semiconductor product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customer may need three to six months or longer to test, evaluate and adopt our semiconductors and an additional three to nine months or more to begin volume production of equipment that incorporates our semiconductors. Moreover, in light of the significant economic slow down in the telecommunications sector, it may take significantly longer than three to nine months before customers commence volume production of equipment incorporating some of our semiconductors. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our expenses for research and development and sales and marketing efforts and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our semiconductors to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. In addition, our business, financial condition and results of operations could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We use rolling forecasts based on anticipated product orders to determine our component requirements. It is very important that we accurately predict both the demand for our products and the lead times required to obtain the necessary products and/or components and materials. Lead times for components and materials that we, or our outsourced manufacturers, order can vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. To the extent that we rely on outsourced manufacturers, many of these factors will be outside of our direct managerial control. For substantial increases in production levels, our outsourced manufacturers and some suppliers may need six months or more lead time. As a result, we may be required to make financial commitments in the form of purchase commitments. We lack visibility into the finished goods inventories of our customers and the end-users. This lack of visibility impacts our ability to accurately forecast our requirements. If we overestimate our component, material and outsourced manufactured requirements, we may have excess inventory, which would increase our costs. An additional risk for potential excess inventory results from our volume purchase commitments with certain material suppliers, which can only be reduced in certain circumstances. Additionally, if we underestimate our component, material, and outsourced manufactured requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our sales and profitability. We have incurred, and may in the future incur, charges related to excess and obsolete inventory. These charges amounted to $528,000 in the nine months ended September 26, 2004 and $251,000 in 2003, respectively. While these charges may be partially offset by subsequent sales of previously written-down inventory, there can be no assurance that any such sales will be significant. As we broaden our product lines we must outsource the manufacturing of or purchase a wider variety of components. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility of customer acceptance and potential competition. Both of these factors will contribute a higher level of inventory risk in our near future.

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

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

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

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

Our future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, marketing and customer service personnel. If we fail to attract, integrate and retain the necessary personnel,

our ability to maintain and build our business could suffer significantly. Additionally, California State law can create unique difficulties for a California based company attempting to enforce covenants not to compete with employees which could be a factor in our future ability to retain key management and employees in a competitive environment.

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

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

Our purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provision contained in these agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. Although we maintain $22.0 million of insurance to protect against claims associated with the use of our products, our insurance coverage may not adequately cover all claims asserted against us. In addition, even ultimately unsuccessful claims could result in costly litigation, divert our management’s time and resources and damage our customer relationships.

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

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

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

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

We must gain access to improved process technologies.

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

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

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

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

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

• compliance with a wide variety of foreign laws and regulations:

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

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

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

• reduced protection for intellectual property rights in some countries; and

• fluctuations in freight rates and transportation disruptions.

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

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

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

• rapidly changing technology;

• swift product obsolescence;

• manufacturing yield problems;

• price erosion; and

• limited supplies of components and materials.

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

We may not be able to successfully integrate those businesses we have acquired or may acquire in the future which could harm our business, financial condition and results of operations.

We recently acquired the wireless infrastructure business and associated assets of EiC which we believe complements and expands our product portfolio and we may continue to acquire businesses in the future as part of our growth strategy. Integrating completed acquisitions into our existing operations involves numerous risks including the:

• diversion of management’s attention;

• potential loss of key personnel;

• ability of acquired business to maintain its pre-acquisition revenues and growth rates;

• ability of acquired business to be financially successful or provide desired results; and

• ability to develop and introduce new products.

We may not be able to successfully integrate our acquisitions which could harm our business, financial condition and results of operations.

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

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

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

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

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud which could subject us to regulatory sanctions, harm our business and operating results and cause the trading price of our stock to decline.

Effective internal controls required under Section 404 of the Sarbanes-Oxley Act of 2002 are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business, reputation and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. For example, our external auditors recently identified a “material weakness” in the course of their review of this quarterly report which means that they believed that there was “a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.” Although we believe we have strengthened our internal controls to address the matter that gave rise to the “material weakness,” we are continuing to work to improve our internal controls. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could subject us to regulatory sanctions, harm our business and operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also harm our reputation and cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.

If we are required to treat employee stock option and employee stock purchase plans as a compensation expense, it could significantly reduce our net income and earnings per share and could adversely affect our ability to attract and retain key personnel.

There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. For example in fiscal year 2003, had we accounted for stock-based compensation plans as a compensation expense, annual diluted earnings per share would have been reduced by $0.04 per share. Although we are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value method.

We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain with our company. Several regulatory agencies and entities are considering regulatory changes that could make it more difficult or expensive for us to grant stock options to employees. For example, the Financial Accounting Standards Board has proposed changes to the U.S. generally accepted accounting principles that, if implemented, would require us to record a charge to earnings for employee stock option grants. In addition, new regulations implemented by the Nasdaq National Market generally requiring stockholder approval for all stock option plans could make it more difficult for us to grant options to employees in the future. To the

extent that new regulations make it more difficult or expensive to grant stock options to employees, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

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

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

• ownership of the intellectual property we have sold;

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

• the regulatory compliance of our sold defense business;

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

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

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

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

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

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

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

We cannot assure you that this insurance will be sufficient to cover all liabilities related to these two sites. In addition, we are subject to a variety of federal, state and local governmental regulations relating to the storage, discharge, handling, emission,

generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. In the past, we have been subject to periodic environmental reviews and audits, which have resulted in minor fines. If we fail to comply with these regulations, substantial fines could be imposed on us, and we could be required to suspend production, alter manufacturing processes or cease operations any of which could have a material negative effect on our sales, income and business operations.

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

Recent news reports have asserted that some radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices, including hearing aids and pacemakers. If it were determined or perceived that RF emissions from wireless communications equipment create a health risk, the market for our wireless customers’ products and, consequently, the demand for our products could decline significantly.

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

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

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

• whether we operate on a positive cash flow basis;

• the market acceptance of our products;

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

• volume price discounts;

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

• the levels of inventory and accounts receivable that we maintain;

• capital improvements to new and existing facilities;

• technological advances;

• our competitors’ response to our products; and

• our relationships with suppliers and customers.

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

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

We sell a significant portion of our product to customers outside of the United States. Sales to customers outside of the United States accounted for approximately 34% and 32% of our sales in nine months ended September 26, 2004 and September 28, 2003, respectively. We expect that sales to customers outside of the United States will continue to account for a significant portion of our sales. Although all of our foreign sales are denominated in U.S. dollars, such sales are subject to certain risks, including, among others, changes in regulatory requirements, the imposition of tariffs and other trade barriers, the existence of political, legal and economic instability in foreign markets, language and cultural barriers, seasonal reductions in business activities, our ability to receive timely payment and collect our accounts receivable, currency fluctuations, and potentially adverse tax consequences, which could adversely affect our business and financial results.

Our facilities are concentrated in an area susceptible to earthquakes.

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

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

Our Annual Report on Form 10-K as of December 31, 2003, which includes the report of Arthur Andersen on our consolidated statements of operations, shareholders’ investment and cash flows for the year ended December 31, 2001 is incorporated by reference into our previously filed Registration Statements, File Nos. 333-52408, 333-66244 on Form S-8 and 333-110111 on Form S-3 (collectively, the “Registration Statements”). After reasonable efforts, we were unable to obtain Arthur Andersen’s consent to incorporate by reference into the Registration Statements its audit report with respect to the financial statements of the Company as of December 31, 2001 and the year then ended. Under these circumstances, Rule 437(a) under the Securities Act of 1933, as amended, permits us to file our Form 10-K as of December 31, 2003 without such consent from Arthur Andersen. However, as a result, the absence of such consent may limit recovery by investors on certain claims, including the inability of investors to assert claims against Arthur Andersen under Section 11 of the Securities Act of 1933, as amended, for any untrue statements of a material fact contained, or any omissions to state a material fact required to be stated, in those audited financial statements. In addition, the ability of Arthur Andersen to satisfy any claims (including claims arising from Arthur Andersen’s provision of auditing and other services to us) may be limited as a practical matter due to recent events regarding Arthur Andersen.

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

As of September 26, 2004, Fox Paine was the beneficial owner of 41.9% of our common stock which represents 25.5 million of our approximately 61.0 million outstanding shares of common stock. Sales of substantial amounts of our common stock into the public market by Fox Paine, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock.

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

In addition, Fox Paine currently has the right, subject to various conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or for other stockholders. If Fox Paine exercises their registration rights in the future it could cause the price of our common stock to fall or preclude our common stock from rising.

We have recently issued shares of our common stock for an acquisition and may continue to do so in future acquisitions. The resale of significant number of such shares could adversely affect the trading price of our common stock.

Furthermore, future sales of substantial amounts of common stock by our officers, directors and other stockholders, including any sales under a Rule 10b5-1 sales plan, in the public market or otherwise or the awareness that a large number of shares is available for sale, could adversely affect the market price of our common stock. In addition to the adverse effect a price decline would have on holders of our common stock, that decline would impede our ability to raise capital through the issuance of additional shares of common stock or other equity or convertible debt securities.

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

Our common stock is listed on the Nasdaq National Market and the bid price for our common stock has been below $1.00 per share for thirty consecutive trading days during certain periods as recently as April, 2003. The Nasdaq National Market rules for continued listing require, among other things, that the bid price for our common stock not fall below $1.00 per share for a period of 30 consecutive trading days. Although we have been able to regain compliance in the past, because of the volatility in our common stock price, there can be no assurance that we will be able to maintain compliance in the future. While there are steps we can take to address this situation in the future, including a reverse stock split or share repurchase, we cannot assure you that our stock will maintain such minimum bid price requirement or that we will be able to meet or maintain all of the Nasdaq National Market continued listing requirements in the future. If, in the future, our minimum bid price is again below $1.00 for 30 consecutive trading days, under the current Nasdaq National Market rules we will have a period of 180 days to attain compliance by meeting the minimum bid price requirement for 10 consecutive days during the compliance period.

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

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

As of September 26, 2004, Fox Paine & Company, LLC (“Fox Paine”) is the indirect beneficial owner of 41.9% of our outstanding share capital. As a result, Fox Paine has and will continue to have significant influence over the outcome of matters requiring stockholder approval, including:

• election all of our directors and the directors of our subsidiaries;

• amending our charter or by-laws; and

• agreeing to or preventing mergers, consolidations or the sale of all or substantially all our assets or our subsidiaries’ assets.

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

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

In addition, Fox Paine receives management fees from us which could influence their decisions regarding us. Under our management agreement with Fox Paine, we are obligated to pay Fox Paine a fee in the amount of 1% of the prior year’s income before interest expense, interest income, income taxes, depreciation and amortization and equity in earnings (losses) of minority investments, calculated without regard to the fee. Due to our losses incurred, we have not been required to pay management fees to Fox Paine since 2001.

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

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

Our stock price is highly volatile.

The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. Since our initial public offering in August, 2000, through September 26, 2004, our common stock has traded at prices as low as $0.560 and as high as $59.875 per share. These fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:

• shares sold by the selling stockholders;

• quarter-to-quarter variations in our operating results;

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

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

• changes in earnings estimates or investment recommendations by analysts;

• changes in investor perceptions; or

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

In addition, the market prices of securities on the NASDAQ National Market and that of our customers and competitors have been especially volatile. This volatility has significantly affected the market prices of securities for reasons frequently

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(e) Issuer Purchases of Equity Securities

In March 2003, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to $2.0 million of the Company’s common stock. In October 2003, the Board approved an additional $2.0 million to expand its existing share repurchase program increasing the total amount authorized to $4.0 million. Purchases under the stock repurchase program may be made in the open market, through block trades or otherwise. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time-to-time without prior notice. During the year ended December 31, 2003, $2.8 million was utilized to purchase 1,340,719 shares of the Company’s common stock at a weighted average purchase price of $2.08 per share. All of the purchases were made on the Nasdaq National Market at prevailing open market prices using general corporate funds. The repurchases reduced the Company’s cash and interest income during the period and correspondingly reduced the number of the Company’s outstanding shares of common stock. $1.2 million remained available under this stock repurchase plan as of its expiration on July 22, 2004.

On July 27, 2004 the Board authorized a new share repurchase program of up to $2.0 million of our common stock. The following table sets forth certain information regarding our repurchases under this program, for the three months ended September 26, 2004:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

June 28, 2004 - August 1, 2004	60,000	$	2.3357	60,000	$	1,858,059.12

August 2, 2004 - August 29, 2004	53,756	$	2.3018	113,756	$	1,732,708.39

August 30, 2004 - September 26, 2004	—	—		113,756	$	1,732,708.39

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

At our Annual Meeting of Stockholders held on July 22, 2004 our stockholders:

(a) Elected each of the following nine nominees as directors, each to serve for a one-year term and to hold office until their successors are duly elected and qualified. The vote for each director was as follows:

Nominee	For	Withheld
Michael R. Farese, Ph.D.	50,545,717	3,809,238
W. Dexter Paine, III	49,481,941	4,873,014
Wray T. Thorn	49,311,914	5,043,041
Liane J. Pelletier	53,301,632	1,053,323
Bruce W. Diamond	53,311,176	1,043,779
Stavro E. Prodromou, Ph.D.	53,137,927	1,217,028
Dag F. Wittusen	53,137,627	1,217,328
Jack G. Levin	50,935,577	3,419,378
Michael E. Holmstrom	53,312,103	1,042,852

(b) Ratified the appointment of Deloitte & Touche, LLP as the Company’s independent auditors for the fiscal year 2004 by the votes indicated:

For		Against		Abstain
54,228,723		123,532		2,700

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The exhibits listed on the following index to exhibits are filed as part of this Form 10-Q.

Exhibit
Number		Exhibit Description

31.1		Certification of Michael R. Farese, Chief Executive Officer, pursuant to Rule 13a-14)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of Rainer N. Growitz, Chief Financial Officer, pursuant to Rule 13a-14/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certification of Michael R. Farese, Ph.D., Principal Executive Officer, Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

32.2		Certification of Rainer N. Growitz, Principal Financial Officer, Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

(b) Reports on Form 8-K during the quarter ended September 26, 2004.

On June 18, 2004 (the “Closing Date”), WJ Communications, Inc., a Delaware corporation (the “Company”) completed its acquisition of assets from EiC Corporation, a California corporation (“EiC”) and EiC Enterprises Limited (“EiC Enterprises” and together with EiC, the “Seller”). Pursuant to an Asset Purchase Agreement, dated June 3, 2004, as amended June 18, 2004, by and between the Company and the Seller (the “Purchase Agreement”), the Company

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 9th day of November 2004.

		WJ COMMUNICATIONS, INC.
		(Registrant)


Date	November 9, 2004	By:	/s/ MICHAEL R. FARESE, Ph.D.
			Michael R. Farese, Ph.D.
			President and Chief Executive Officer
			(principal executive officer)


Date	November 9, 2004	By:	/s/ RAINER N. GROWITZ
			Rainer N. Growitz
			Interim Chief Financial Officer
			Vice President of Finance and Corporate Secretary
			(principal financial officer)

DELAWARE		94-1402710
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

401 River Oaks Parkway, San Jose, California		95134
(Address of principal executive offices)		(Zip Code)

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 26, 2004 and September 28, 2003

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 26, 2004 and September 28, 2003

	Condensed Consolidated Balance Sheets at September 26, 2004 and December 31, 2003

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2004 and September 28, 2003

	Notes to Condensed Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosure About Market Risks

Item 4.	Controls and Procedures

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Changes In Securities and Use of Proceeds

Item 3.	Defaults Upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8-K

	Signatures

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Item 4. CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Item 3. DEFAULTS UPON SENIOR SECURITIES

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

Item 5. OTHER INFORMATION

Item 6. EXHIBITS AND REPORTS ON FORM 8-K