Prepared by MERRILL CORPORATION

WJ COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		94-1402710 (I.R.S. Employer Identification No.)
401 River Oaks Parkway, San Jose, California (Address of principal executive offices)		95134 (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

As of May 4, 2001 there were 55,470,855 shares outstanding of the registrant's common stock, $0.01 par value.

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

WJ Communications, Inc.
QUARTERLY REPORT ON Form 10-Q
THREE MONTHS ENDED aPRIL 1, 2001

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the Three Months Ended April 1, 2001 and March 31, 2000	4
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended April 1, 2001 and March 31, 2000	6
	Condensed Consolidated Balance Sheets at April 1, 2001 and December 31, 2000	7
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2001 and March 31, 2000	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosure About Market Risks	22
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 2.	Changes In Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits and Reports on Form 8-K	30

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(In thousands, except per share amounts)
(Unaudited)

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month periods ended April 1, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.

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, 2000, which are included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2001.

The balance sheet at December 31, 2000 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.

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 30 years, the Company developed and manufactured 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 continuing operations design, develop and manufacture innovative, high quality broadband communications products that enable voice, data and image transport over fiber optic, broadband cable and wireless communications networks around the world. The Company's products are comprised of advanced, highly functional components and integrated assemblies which address the radio frequency challenges faced by both current and next generation broadband communications networks. The Company's products are used in the network infrastructure supporting and facilitating mobile communications, broadband high speed data transmission and enhanced voice services. The Company previously operated through other segments and has treated its former Government Electronics, Semiconductor Equipment and Telecommunication segments as discontinued operations. All segments classified as discontinued operations had been divested by March 31, 2000.

On October 25, 1999, an affiliate of Fox Paine agreed to enter into a recapitalization merger transaction with the Company. The recapitalization merger transaction was the culmination of a strategy implemented by the predecessor Board of Directors in February 1999 to seek to maximize shareholder value by pursuing the sale of the Company in its entirety or as separate business groups. The predecessor Board decided to divest the microwave products group in 1997, the semiconductor products group in 1999 and the telecommunications group in early 2000, in some cases along with associated real estate assets. The Company replaced the majority of its senior management and its entire Board of Directors upon the closing of the recapitalization merger on January 31, 2000. Since the recapitalization merger, the Company has been focused exclusively on providing product solutions that enable and facilitate the development of fiber optic, broadband cable and wireless network

infrastructure. In April 2000, the Company changed its name from Watkins-Johnson Company to WJ Communications, Inc. to highlight its focus on the commercial broadband communications markets. The Company reincorporated in Delaware and effected a 3-for-2 stock split on August 15, 2000. The Company completed its initial public offering ("IPO") on August 18, 2000. Net proceeds from the IPO were approximately $88.4 million after deducting underwriters discounts and commissions and expenses.

In the recapitalization merger, FP-WJ Acquisition Corp., a newly-formed corporation wholly-owned by Fox Paine, merged into the Company. All of our pre-recapitalization shareholders except, with respect to a portion of its shares, a family trust of which Dean A. Watkins is a co-trustee and beneficiary, became entitled to receive cash in exchange for their shares of the pre-recapitalization common stock. Dr. Watkins is the Company's co-founder and was the Chairman of its Board of Directors at the time of the recapitalization merger. As a result of the rollover of a portion of the interest in the Company's equity held by Dr. Watkins' trust pursuant to an agreement entered into with the trust at the time the Company entered into the merger agreement, the Company was able to account for the merger as a recapitalization for financial accounting purposes. In addition, the rollover provided the trust with a tax benefit, in that the rollover shares were not retired for cash or otherwise.

The Company's statement of operations includes the costs of the recapitalization merger as an expense. In addition, as a result of the continuing significant ownership interest of the pre-recapitalization stockholders, no adjustments have been made to the historical carrying amounts of our assets and liabilities as a result of the recapitalization merger. Furthermore, the premium paid in cash to stockholders in excess of that historical cost is shown as a reduction of stockholders' equity.

PRINCIPLES OF CONSOLIDATION—The condensed consolidated financial statements include those of the Company and its subsidiaries after elimination of all intercompany balances and transactions. The Company disposed of its Telecommunications segment in January 2000. The condensed consolidated financial statements reflect such dispositions and results of operations of these businesses as discontinued operations. For additional information on discontinued operations, see Note 7.

RECLASSIFICATIONS—Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS—Cash and 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.

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. Provisions, when required, are made to reduce excess inventories to their estimated net realizable values. It is possible that estimates of net realizable values can change in the near term. During the first quarter of 2001, the Company recorded a $6.6 million provision for excess and obsolete inventory largely related to inventory ordered to build base station products for the Company's largest mobile wireless customer. Inventory levels of this product were purchased based on this customer's forecasted demand which has since been dramatically

revised downward. In addition, given the overall slowdown in market demand, the Company made provisions for other product lines where customer forecasts have significantly declined. Inventories, net of reserves for excess and obsolete amounts and loss contracts, at April 1, 2001 and December 31, 2000 consisted of the following (in thousands):

	April 1, 2001		December 31, 2000
Finished goods	$	2,592	$	1,367
Work in progress		2,642		4,413
Raw materials and parts		8,789		8,677
	$	14,023	$	14,457

REVENUE RECOGNITION—Revenues from product sales are recognized when all of the following conditions are met: the product has been shipped, the Company has the right to invoice the customer at a fixed price, the collection of the receivable is probable and there are no significant obligations remaining. Generally, title passes upon shipment of the Company's products. Beginning in March 2000, the Company's contract with a significant customer converted to a consignment arrangement under which title to certain of the Company's products does not pass until this significant customer utilizes the Company's products in its production processes. A second significant customer converted its purchases of certain products to a similar consignment arrangement in October, 2000. As a consequence, revenue is recognized on these contracts only when these customers notify the Company of product consumption. In addition to the Company's own sales efforts, the Company uses distributors to sell semiconductor products. Revenues from distributors are recognized upon shipment based on the following factors: the 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 distributors have separate economic substance, the Company has no obligation with respect to the resale of the distributors' inventory, and the Company believes it can reasonably estimate the potential returns from its distributors based on their history and its visibility in the distributors' success with its products and into the market place in general.

Any anticipated losses on contracts are charged to earnings when identified. The Company provides a warranty on standard products and components and products developed for specific customers or program applications. Such warranty generally ranges from 12 to 24 months. The Company estimates the cost of warranty based on its historical field return rates.

The Company depends on a small number of customers for a majority of our sales. During the three months ended April 1, 2001, we had four customers, Nortel Networks, Lucent Technologies, Richardson Electronics and Marconi, each account for more than 10% of our sales. Together, these four customers comprised approximately 61% of our sales in the first quarter of 2001. For the year ended December 31, 2000, approximately 69% of our sales were to Nortel Networks and Lucent Technologies, which were our only customers that accounted for more than 10% of our sales for that period.

INCOME TAXES—The condensed consolidated financial statements include provisions for deferred income taxes using the liability method for transactions that are reported in one period for financial accounting purposes and in another period for income tax purposes. Deferred tax assets are recognized when management believes realization of future tax benefits of temporary differences is

more likely than not. In estimating future tax consequences, generally all expected future events are considered other than enactment of changes in the tax law or rates.

PER SHARE INFORMATION—Basic earnings per share is computed using the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if stock options were exercised or converted into common stock, however, such adjustments are excluded when they are considered anti-dilutive.

FISCAL YEAR—The Company's fiscal year ends on December 31^st of each year. The three months ended April 1, 2001 and March 31, 2000 each included 13 weeks.

MARKET RISKS—The success of the Company is dependent on a number of factors. These factors include the ability to manage and adequately finance anticipated growth, the need to satisfy changing and increasingly complex customer requirements especially in the fiber optics and wireless markets, dependency on a small number of customers and a limited number of key personnel, and suppliers, and competition from companies with greater resources.

USE OF ESTIMATES—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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."

RECENT ACCOUNTING PRONOUNCEMENTS—The Financial Accounting Standards Board, or FASB, has issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS 133." These Statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains and losses resulting from changes in the fair market values of those derivative instruments would be accounted for depending on the use of the instrument and whether it qualifies for hedge accounting. SFAS 133 became effective January 1, 2001. The Company does not currently utilize any derivative instruments and therefore adoption of SFAS 133 did not have a material impact on its financial statements.

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.

Earnings per share calculation for continuing operations are as follows (in thousands, except per share amounts):

		Three Months Ended
		April 1, 2001			March 31, 2000
Loss from continuing operations		$	(7,085	)	$	(26,191	)

Denominator for basic per share:
	Weighted average shares outstanding		55,298			99,600
Denominator for diluted per share:
	Weighted average shares outstanding		55,298			99,600
	Effect of dilutive stock options		—			—

	Diluted average common shares		55,298			99,600

Basic net loss per share from continuing operations		$	(0.13	)	$	(0.26	)
Diluted net loss per share from continuing operations		$	(0.13	)	$	(0.26	)

For the three months ended April 1, 2001, the incremental shares from the assumed exercise of 7,548,308 stock options were not included in computing the dilutive per share amounts because continuing operations resulted in a loss and the effect of such assumed conversion would be anti-dilutive. For the three months ended March 31, 2000, the stock options granted had an exercise price equal to the fair market value during that time period and thus do not have an effect on dilution.

Four purported shareholder class action lawsuits were filed against the Company and its directors. These lawsuits alleged essentially the same grounds for relief, namely that the individual defendants breached their fiduciary duty to the Company's shareowners in connection with the recapitalization merger, which was completed on January 31, 2000 as discussed in Note 2. On January 14, 2000, all parties to the class action executed a memorandum of understanding to settle the lawsuits. An estimated settlement payment and related legal fees, of approximately $500,000 has been accrued and included in the December 31, 1999 results of operations. Final settlement was reached with no admission of liability and approved by the court during the Company's fourth quarter of 2000. The Company paid the previously accrued settlement in the first quarter of 2001 as full and final payment of the court approved settlement agreement.

In addition to the above matters, the Company is involved in various legal actions which arose in the ordinary course of its business activities. Management believes the final resolution of these matters should not have a material impact on its results of operations, cash flows, or financial position.

In conjunction with the issuance of certain stock options in 2000, 14,277,795 options were granted at an average exercise price of $1.37 per share which was equal to the weighted average fair value of $1.37 per share at the date of grant. This fair value was determined by using the same fair value used in the recapitalization merger transaction which was completed in January, 2000. Additionally, the Company granted 791,000 options where the weighted average exercise price of $5.31 per share was less than the deemed weighted average fair value of $10.08 per share. In addition, the Company sold 81,000 shares of common stock where the weighted average sales price of $3.82 per common share was

less than the deemed weighted average fair value of $9.51 per share. The Company has recorded deferred stock compensation in the aggregate amount of $4,174,000, net of forfeitures, representing the differential between the deemed fair value of the Company's common stock and the exercise price at the date of grant for options or date of sale for stock purchases. The Company is amortizing this amount using the straight line method over the vesting period of the options granted. The Company recorded $186,000 of deferred stock compensation expense for the three months ended April 1, 2001 in the accompanying financial statements. Subsequent to the IPO, the fair market value of the stock for purposes of issuing common stock options is based upon the market price of the Company's stock on the date of grant. The Company has granted 148,400 options at a weighted average fair value of $13.82 per share subsequent to the IPO. The Plans provide that options granted under the Plans will have a term of no more than 10 years. Options granted under the Plans have vesting periods ranging from immediate to 9 years. The provisions of the Plans provide that under certain circumstances, such as a change in control, the achievement of certain performance objectives, or certain liquidity events, the outstanding option may be subject to accelerated vesting.

On January 14, 2000, the Company completed the sale of substantially all of the Telecommunications segment's assets to a unit of Marconi North America, Inc., a subsidiary of the General Electric Company p.l.c. of the United Kingdom. Net proceeds from the sale of approximately $57.8 million and an estimated pre-tax gain of approximately $43.2 million are included in the Company's financial results in the first quarter of 2000. All significant amounts related to discontinued operations have been settled as of December 31, 2000.

In December of 2000, the Company entered into a $25.0 million revolving credit facility ("Revolving Facility") with a bank. The Revolving Facility matures on December 31, 2003 and contains a $15.0 million sub-limit to support letters of credit. Interest rates on outstanding borrowings are periodically adjusted based on certain financial ratios and are initially set, at the Company's option, at LIBOR plus 1.0% or Prime minus 0.5%. The Revolving Facility requires that the Company maintain certain financial ratios and contains limitations on, among other things, the Company's ability to incur indebtedness, pay dividends and make acquisitions without the bank's permission. The Company was in compliance with these covenants as of April 1, 2001. The Revolving Facility is secured by substantially all of the Company's assets. As of April 1, 2001, there were no outstanding borrowings under the Revolving Facility.

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, technological innovation in the wireless and fiber optic communications markets, the availability and the price of raw materials and components used in our products, the demand for wireless and fiber optic systems and products generally as well as those of our customers and changes in our customer's product designs such that our products are no longer required in their products. 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 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. 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.

We design, develop and manufacture innovative, high quality broadband communications products that enable voice, data and image transport over fiber optic, broadband cable and wireless communications networks around the world. Our products are comprised of advanced, highly functional components and integrated assemblies which address the RF challenges of both current and next generation broadband communications networks. These products are used in the network infrastructure supporting and facilitating mobile communications, broadband high-speed data transmission and enhanced voice services. Our core expertise in gallium arsenide semiconductor and thin-film technology, coupled with our exceptional RF design, integration, and manufacturing capabilities, have enabled us to obtain a competitive advantage in these broadband communications markets.

Since we began our operations in the broadband commercial communications market, we have benefited from the significant increases in spending on capital equipment by communications service providers. Recently, several of our major customers have significantly delayed purchases of and reduced their demand for our fiber optic and wireless products. The primary reason for these delays and reductions in their recent and forecasted demand is an overall slowdown in capital spending by communication service providers. We believe that this slow down relates to two primary causes. First, our customers have indicated that there has been a significant build up of their inventory as well as a significant build up of uninstalled equipment at communication service providers. We believe that numerous service providers have reduced their capital expenditures until they have installed their excess inventory of equipment, which they have already purchased, and begin generating revenue from this uninstalled equipment. In addition, based on the slow down in capital expenditures, our customers are attempting to reduce their inventory levels. Secondly, we believe that numerous early stage communication service providers, who have previously been able to access the capital markets, are having difficulties in finding new sources of capital and in certain instances these companies have filed for bankruptcy. In addition, several of the more established service providers financed the build out of

their networks with debt. More recently, some of these service providers have shifted their focus to debt reduction. As a result, we believe that these companies have had to greatly reduce their capital expenditures.

On a long term basis, we believe that the demand for broadband communications equipment and our products will increase. Over the first nine months of this year, we are planning on introducing over twenty new products. These new products will further position us to benefit from the roll-out of four major technologies: fixed broadband wireless for the access market, OC-192 and OC-768 for both the metro and long haul fiber optics markets, and 2.5G and 3G wireless in both Europe and the U.S. During the first quarter of 2001, we introduced several new fiber products including OC-192 modulator drivers and clock amplifiers which began undergoing trial with several potential customers. We have recently received three orders for these products from two customers totaling over $5 million. We will begin shipping product against these orders during the second quarter of 2001. While these new orders are encouraging, there is no assurance that our overall revenues will improve during the second quarter of 2001 or over the remainder of 2001.

Our manufacturing operations are highly automated which has required us to make significant investments in equipment and fixed overhead. As a result, the volume of product we produce and sell has a significant impact on our gross profit margins. Until demand increases, the slow down in spending on broadband communications equipment will negatively impact our gross margins. In addition, we typically generate lower gross margins on new product introductions. Over time, we typically become more efficient through learning and increased volumes as well as through introducing lower cost elements to the product designs. We expect our new product introductions to be a higher percentage of our sales mix, which will have a temporary negative impact on our gross margins. During the first quarter of 2001, we initiated a cost reduction program designed to more closely align our production costs with our customers' current forecasted demand. As part of this effort, we initiated a reduction in our workforce of approximately 20% and our senior management is foregoing salary increases in 2001. During the first quarter of 2001, we incurred severance related costs of approximately $200,000 and will incur additional severance related costs ranging from $200,000 to $700,000 in the second quarter of 2001. In addition to our efforts to reduce personnel costs, we are currently in the process of attempting to sublease excess office space. While our efforts are expected to reduce our expense levels, we have a significant amount of fixed manufacturing cost that these efforts will not impact.

We sell our products predominantly to a few large equipment manufacturers and service providers in the fiber optic, broadband cable and wireless network infrastructure markets. Our major customers provide forecasted demand on at least a monthly basis, which assists us in allocating our manufacturing capacity. These forecasts, however, are subject to changes, including changes as a result of changes in market conditions, and could fluctuate from quarter to quarter.

We depend on a small number of customers for a majority of our sales. During the three months ended April 1, 2001, we had four customers, Nortel Networks, Lucent Technologies, Richardson Electronics and Marconi, each account for more than 10% of our sales. Together, these four customers comprised approximately 61% of our sales in the first quarter of 2001. For the year ended December 31, 2000, approximately 69% of our sales were to Nortel Networks and Lucent Technologies, which were our only customers that accounted for more than 10% of our sales for that period. We have diversified our customer base over the last few years and we have expanded our product offering from wireless mobile infrastructure products to include fiber optic, broadband cable and fixed wireless access products and intend to further diversify our customer base and product offering in the future. However, we anticipate that we will continue to sell a majority of our products to a relatively small group of customers. In addition, most of our sales result from purchase orders or contracts that can be

cancelled on short-term notice. Delays in manufacturing or supply procurement or other factors, including general market slow downs, have and could potentially cause cancellation, reduction or delay in orders by or in shipments to a significant customer. During our fourth quarter of 2000 we began to experience a sequential reduction in demand for our wireless base station and OC-192 fiber optic products which has continued into the first quarter of 2001 and, in some cases, has continued into the second quarter. In addition, during the fourth quarter of 2000 and the first quarter of 2001, our two largest customers in 2000, Lucent and Nortel, issued press releases discussing a recent slow down in telecom spending which has resulted in reduced demand for their products and major reductions in their work forces. Our orders from these major customers have fallen significantly in the first quarter of 2001. We expect this slow down in telecom spending to continue in the near term as these two customers have significantly reduced their forecasts for the purchase of our products. The greater the slowdown in demand becomes the more significant the potential negative impact on our sales, earnings, inventory valuations and cash flow.

Revenues from product sales are recognized when all of the following conditions are met: the product has been shipped, we have the right to invoice the customer at a fixed price, the collection of the receivable is probable and there are no significant obligations remaining. Generally, title passes upon shipment of our products. Beginning in March 2000, our contract with Lucent converted to a consignment arrangement under which title to certain of our products does not pass until Lucent utilizes these products in its production processes. As a consequence, we recognize revenue on this contract only when Lucent notifies us of product consumption. Nortel converted its purchases of certain products to a similar consignment arrangement in October, 2000. As a consequence, we recognize revenue on these contracts only when they notify us of product consumption. In addition to our internal sales efforts, we use distributors to sell semiconductor products. Revenues from distributors 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 distributors have separate economic substance, we have no obligation with respect to the resale of the distributors' inventory, and we believe we can reasonably estimate the potential returns from our distributors based on their history and our visibility in the distributors' success with its products and into the market place in general. We provide a warranty on standard products and components and products developed for specific customer or program applications. Such warranty generally ranges from 12 to 24 months. We estimate the warranty cost based on our historical field return rates. We include warranty expense related to these products in cost of goods sold.

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

We recognize cost of goods sold upon recognition of revenue. We recognize losses on contracts, including purchase order commitments, when identified.

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

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

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

Recapitalization merger and other expense is a non-recurring expenditure comprised of employee retention and severance compensation, legal, professional and other costs associated with our recapitalization merger and the sale of our telecommunications group.

Three Months Ended April 1, 2001 Compared to Three Months Ended March 31, 2000

Sales—Sales for the three months ended April 1, 2001 were $16.0 million, a decrease of $1.0 million or 6% from sales of $17.1 million in the three months ended March 31, 2000. This decline in sales resulted primarily from a decrease in our fiber optic sales of OC-192 oscillators to Nortel for use in their long haul fiber optic system. Fiber optic sales decreased 66% to $2.2 million as our first quarter 2001 sales were impacted by Nortel's reduction of its work in process inventory and the overall weakness in the long haul fiber optic market. Fiber optic sales represented 14% of total sales for the quarter. Wireless product sales during the first quarter of 2001 totaled $6.4 million, representing 40% of total sales for the quarter and an increase of 11% over the first quarter of 2000. Decline in demand for TDMA products from Lucent was offset by increased sales of fixed wireless products to Marconi and Cisco's fixed wireless customers. Semiconductor sales during the three months ended April 1, 2001 totaled $7.4 million, representing 46% of total sales for the quarter and an increase of 52% over the three months ended March 31, 2000. Increased sales in this product category are attributable to continued demand for our highly linear GaAs semiconductors as well as demand for our thin-film products, which are beginning to make a contribution to sales.

Cost of Goods Sold—Cost of goods sold increased 106% to $20.8 million in the three months ended April 1, 2001 from $10.1 million in the three months ended March 31, 2000. As a percentage of sales, our cost of goods sold increased to 130% of sales in the first quarter of 2001 from 59% in the

first quarter of 2000. Both the increase in our cost of goods sold in terms of dollars and as a percentage of sales relates to a $6.6 million provision for excess and obsolete inventory, significant unabsorbed overhead, and high variable cost on new fixed wireless products which are being transitioned into manufacturing. The $6.6 million provision for excess and obsolete inventory largely related to raw material inventory ordered to build base station products for our largest mobile wireless customer. Inventory levels of this product were purchased based on this customer's forecasted demand which has since been dramatically revised downward. In addition, given the overall slowdown in market demand, we made provisions for other product lines where customer forecasts have significantly declined. We are in the process of working with customers and vendors to reduce inventory levels and purchase commitments based upon current demand forecasts. The significant amount of unabsorbed overhead costs relates to the increased manufacturing infrastructure we put in place to support our customers' demand in the second half of 2000. This increased infrastructure includes, among other things, a new manufacturing facility, a larger manufacturing support staff and investments in machinery and equipment. With respect to our new fixed wireless products, we typically experience higher cost of goods sold as a percentage of the selling price during the early stages of a new product life cycle. Over time, we typically become more efficient through learning and increased volumes, as well as through introducing lower cost elements in the product design. Given the current economic slowdown, the added capacity from our new manufacturing facility and equipment may not be fully utilized and the ongoing costs thereof will still be incurred until such time as the market slowdown ends.

Research and Development—Research and development expense increased 17% in the first quarter of 2001 to $4.8 million from $4.1 million in the first quarter of 2000. The increase in research and development was primarily attributed to increased spending on development of wireless broadband access, new semiconductor and new fiber optic products. As a percentage of sales, research and development expenses increased to 30% of sales in the three months ended April 1, 2001 from 24% of sales in the three months ended March 31, 2000. The increase in research and development expense as a percentage of sales relates to our decline in sales. Product research and development is essential to our future success and we expect to continue to make investments in new product development and engineering talent.

Selling and Administrative—Selling and administrative expenses increased 22% to $3.5 million during the three months ended April 1, 2001 from $2.9 million in the three months ended March 31, 2000. The increase is primarily related to higher advertising and promotion expenses as well as rent expense associated with our new facility including excess office space.

Amortization of deferred stock compensation—Amortization of deferred stock compensation expense in the first quarter of 2001 includes approximately $186,000 related to the issuance of stock options during 2000 at prices deemed below fair market value. There were no such costs incurred during the first quarter of 2000.

Recapitalization Merger and Other—We incurred recapitalization merger and other expense of $35.5 million in the three months ended March 31, 2000 related to our recapitalization merger. These expenses include: $16.8 million of compensation expense related to payments to former option holders; $9.8 million of compensation expense related to bonus, retention, and severance amounts for certain employees; $4.7 million of legal, consulting and accounting fees; and $4.2 million of financial services and other expenses related to the recapitalization merger transaction.

Interest Income—Interest income primarily represents interest earned on cash equivalents and short-term available-for-sale investments. Interest income increased 24% to $1.3 million in the first quarter of 2001 from $1.0 million in the first quarter of 2000. This increase primarily resulted from increased average amounts of funds available for investment. To the extent we continue to utilize our cash in the operation of our business, interest income is expected to decrease going forward. Also, our interest income will be impacted by changes in market interest rates.

Interest Expense—Interest expense decreased to $106,000 in the three months ended April 1, 2001 from $872,000 in the three months ended March 31, 2000. Interest expense during the first quarter of 2001 relates to fees associated with our revolving credit facility and outstanding letters of credit. The expense incurred during the first quarter of 2000 resulted primarily from interest expense related to our credit facility with CIBC World Markets Corp. which we entered into as part of the recapitalization merger and repaid with a portion of the net proceeds from our initial public offering.

Other Income (Expense)-Net—Other income (expense)-net, increased by $522,000 from other expense of $519,000 in the first quarter of 2000 to other income of $3,000 in the first quarter of 2001. The other expense incurred during the first quarter of 2000 is primarily related to losses realized when we liquidated short-term investments to fund in part the recapitalization merger.

Gain on Dispositions of Real Property—During the three months ended April 1, 2001 we recorded a gain on disposition of real property related to the release of $500,000 of escrow funds related to our sale of leasehold interests in our Palo Alto site during the fourth quarter of 2000. This gain was partially offset by $174,000 of residual expenses from the sale of the property.

Income Tax Benefit—Our effective tax rate in the first quarter of 2001 is (40%) as compared to (27%) in the first quarter of 2000. Our effective tax benefit rate for the first quarter of 2001 approximates our combined federal and state effective tax rates. The effective tax rate for the first quarter of 2000 reflects the impact of certain nondeductible expenses related to our recapitalization merger.

On April 1, 2001, cash and equivalents and short-term investments totaled $69.6 million, a decrease of $20.2 million from the year-end balance of $89.8 million. The net decrease was primarily attributable to a $9.6 million payment of income taxes, approximately $9.9 million decrease in accounts payable and accrued expenses and $3.4 million of capital expenditures partially offset by a $12.4 million decrease in receivables.

In December of 2000, we entered into a $25.0 million revolving credit facility ("Revolving Facility") with a bank. The Revolving Facility matures on December 31, 2003 and contains a $15.0 million sub-limit to support letters of credit. 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 that we 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. We were in compliance with the covenants as of April 1, 2001. The Revolving Facility is secured by substantially all of our assets. As of April 1, 2001, there were no outstanding borrowings under the Revolving Facility.

Net Cash Provided (Used) by Continuing Operating Activities—Net cash provided (used) by continuing operations was ($17.3) million in the three months ended April 1, 2001 and $9.0 million in the three months ended March 31, 2000. Net income (loss) in the first quarter of 2001 and 2000 was comprised of ($7.1) million and ($26.2) million from continuing operations, respectively, and $27.1 million from discontinued operations during the first quarter of 2000. Significant items impacting the difference between loss from continuing operations and cash flows from continuing operations in the three months ended April 1, 2001 were $16.2 million used by working capital and a $6.6 million increase in our reserve for excess and obsolete inventory. The $16.2 million used in working capital relates to a $19.5 million decrease in accruals and payables, a $6.1 million increase in inventories and the recognition of a $3.2 million income tax refund receivable which were partially offset by a $12.4 million decrease in receivables. The $19.5 million decrease in accruals and payables was primarily related to a $9.6 million income tax payment generated primarily from the approximately $30.1 million

pre-tax gain from the sale of our remaining Palo Alto leasehold interest during our fourth quarter of 2000. Significant items impacting the difference between loss from continuing operations and cash flows from continuing operations in three months ended March 31, 2000 were $613,000 used by working capital and $35.5 million of recapitalization merger cost.

Net Cash Provided By Investing Activities—Net cash provided by investing activities was $7.1 million and $101.1 million in the first quarter of 2001 and the first quarter of 2000, respectively. In the three months ended April 1, 2001, we realized $17.2 million in proceeds from the sale of short-term investments which was partially offset by $3.4 million capital expenditures and $7.2 million of purchases of short-term investments. In the three months ended March 31 2000, our investing activities provided cash of $43.1 million from the sale of short-term investments, and $59.5 million from the sale of our Telecommunications segment and proceeds related to the release of escrow from our previous discontinued operations which was reduced by $1.6 million from the purchase of property plant and equipment. During 2001 we now expect to invest approximately $10.0 to 14.0 million in capital expenditures which we expect to fund from cash, cash equivalents and short-term investments.

Net Cash Provided (Used) by Financing Activities—Net cash provided (used) by financing activities totaled $172,000 in the three months ended April 1, 2001 and ($210.5) million in the three months ended March 31, 2000. In the first quarter of 2001, our net proceeds of $215,000 from the issuance of common stock subject to stock options was partially offset by $43,000 financing costs associated with our revolving credit facility. In the first quarter of 2000, our net cash used in financing activities primarily related to our recapitalization merger where we repurchased $270.1 million of common stock and incurred $35.5 million in recapitalization merger cost which was partially offset by the proceeds from the issuance of common stock of $55.1 million and $40.0 million borrowed from a credit facility to partially fund our recapitalization merger.

We believe that our cash, cash equivalents and short term investments together with our expected cash flows from operations and available borrowings under our line of credit will be sufficient to meet our liquidity and capital spending requirements at least for the next twelve months.

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 Equivalents and Investments—Cash and 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 (in thousands)		Weighted Average Interest Rate
Cash equivalents:
	2001	$	38,331	5.28	%
Short-term investments:
	2001		30,699	5.98	%

Fair value at April 1, 2001		$	69,030

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 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.

Several customers 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 loss of sales.

a relatively small group of customers. The loss of or a reduction in orders from a significant customer for any reason could cause our sales to decrease.

During our fourth quarter of 2000 we began to experience a sequential reduction in demand for our wireless base station and OC-192 optical products. In addition, during the fourth quarter of 2000 and the first quarter of 2001, our two largest customers during 2000, Lucent and Nortel issued press releases discussing a recent slow down in telecom spending which has resulted in reduced demand for their products and major reductions in their work forces. The orders by these major customers have fallen significantly in the first quarter of 2001. We expect this slow down in telecom spending to continue in the near term as these two customers have significantly reduced their forecasts for the purchase of our products. The greater the slowdown in demand becomes the more significant the potential negative impact on our sales, earnings, inventory valuation and cash flow.

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. Fluctuations in our operating results may be due to a number of factors, including the following:

Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on period-to-period comparisons of our operating results as an indication of future performance.

An increasing percentage of our sales are being generated by the sale of fixed wireless products which is an emerging market.

We have had significant growth in our sales of fixed wireless products, which represented 16% of our sales in the first quarter of 2001 versus 3% of sales in the year 2000. Fixed wireless networks are an emerging market and in many cases, the business model of the service providers is unproven as the networks are just beginning to be deployed. In addition, a portion of the equipment we are selling is going into trial networks and the service providers have not yet decided on the actual type of equipment they will deploy. In other cases, we sell to small service providers with limited financial resources. Due to all of these factors, there are significant risks associated with our ability to continue to achieve fixed wireless sales and in our ability to continue to grow fixed wireless sales. In addition, we must purchase inventory to support our forecasted sales and provide 30 to 60 day account receivable terms to our customers. As a result, there is risk that we will not be able to sell the inventory purchased or collect on all of the outstanding receivables, the write-off of which would reduce our profitability.

If we are unable to respond to the rapid technological change taking place in our industry, our existing products could become obsolete and we could face difficulties making future sales.

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. Our future success will depend on factors including our ability to:

We must continue to make significant investments in research and development to seek to develop product enhancements, new designs and technologies. If we are unable to develop and introduce new products or enhancements in a timely manner in response to changing market conditions or customer requirements, or if our new products do not achieve market acceptance, our sales could decline.

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, communications equipment companies and service providers, face an extremely competitive environment. Most of the fiber optic and wireless 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. Moreover, our customers' success is affected by a number of factors, many of which are out of our control, including:

In addition, we have limited ability to foresee the competitive success of our customers and to plan accordingly.

If the fiber optic, 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 fiber optic, 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:

If the markets for our products in fiber optic, broadband cable or wireless communications fail to grow, or grow more slowly than we anticipate, the use of our products may decline and our sales could suffer.

If we fail to accurately forecast component and material requirements for our manufacturing facilities, we could incur additional costs or experience manufacturing 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 components and materials. Lead times for components and materials that we order 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. For substantial increases in production levels, 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 and material 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 and material requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our sales and profitability.

We depend on single or limited source suppliers for some of the key components and materials in our products, which makes us susceptible to supply 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 the manufacture of our products from single or limited source suppliers. One of our sole source suppliers is Coors Ceramics, which supplies a substantial portion of the raw material used to manufacture our thin-film products and there exists very limited alternative sources for this material. Coors Ceramics is our most significant sole source supplier. We also depend on limited or sole source suppliers for substrates, gallium arsenide wafers, packaging, electronic components and antennas. Recently, we faced difficulties obtaining electronic components that are used

in the manufacture of some of our products as a result of a global shortfall of availability of these components. These difficulties resulted in delays in the fulfillment of a number of customer orders. We may fail to obtain required 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. We would experience delays if we were required to test and evaluate products of potential alternative suppliers. Furthermore, financial or other difficulties faced by our suppliers or significant changes in demand for the components or materials they supply to us could limit the availability of those components or materials to us. In addition, the majority of our semiconductor products are packaged in The Philippines and Hong Kong. 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 package our products. Any interruption or delay in the supply of our required components, materials or services, or our inability to obtain these components, materials 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 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. Competition for such personnel is intense, especially in the San Francisco Bay area, and we cannot assure you that we will be able to successfully attract, integrate or retain sufficiently qualified 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 convenants not to compete with employees which could be a factor in our future ability to retain key management and employees in a competitive environment.

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 in the communications industry, 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.

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.

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

Sales of substantial amounts of common stock by our officers, directors and other stockholders in the public, 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.

We have also identified the following additional risks which are described in detail in our Form 10-K for the year ended December 31, 2000:

In 1999, four shareholder class action lawsuits were filed against us and our former directors in the California Superior Court for the County of Santa Clara: Rosenzweig v. Watkins-Johnson Company, et al., Case No. CV885528; Soshtain v. Watkins-Johnson Co., et al., Case No. CV785560; Leong v. Watkins-Johnson Co., et al., Case No. CV785683; Fong v. Watkins-Johnson Co., et al., Case No. CV785683. These lawsuits alleged essentially the same grounds for relief, namely that the individual defendants breached their fiduciary duty to our company's shareowners in connection with the recapitalization merger, which was completed on January 31, 2000 as discussed in Note 2 to our financial statements. On January 14, 2000, all parties to the class action executed a memorandum of understanding to settle the lawsuits. An estimated settlement payment and related legal fees, of approximately $500,000 has been accrued and included in the December 31, 1999 results of operations. Final settlement was reached with no admission of liability and approved by the court during our fourth quarter of 2000. We paid the previously accrued settlement in the first quarter of 2001 as full and final payment of the court approved settlement agreement.

We currently are involved in litigation and regulatory proceedings incidental to the conduct of our business and expect that we will be involved in other litigation and regulatory proceedings from time to time. We believe that the outcome of such pending matters will not materially affect our business or financial condition.

On February 13, 2001, the Board of Directors adopted, subject to stockholder approval at the Company's Annual Meeting of Stockholders to be held on May 23, 2001, the Company's 2001 Employee Stock Purchase Plan to be effective as of May 1, 2001. Up to 1,500,000 shares of Common Stock may be issued under the 2001 Purchase Plan. The details of the Company's 2001 Employee Stock Purchase Plan can be found in the Company's Schedule 14A "Information Required in Proxy Statement" filed with the Securities and Exchange Commission on April 27, 2001.

There were no matters submitted to a vote of security holders in the first quarter of 2001.

On February 12, 2001 the Company filed a report on Form 8-K with the Securities and Exchange Commission related to the expiration of the underwriters' lock-up restrictions imposed in connection with the WJ Communications initial public offering on approximately 52 million common shares, including shares issuable on the exercise of vested stock options on that date.

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 10th day of May 2001.

			Three Months Ended
			April 1, 2001			March 31, 2000
Sales
	Fiber optics		$	2,187		$	6,370
	Wireless			6,430			5,809
	Semiconductor			7,407			4,872

Total sales				16,024			17,051
Cost of goods sold				20,793			10,075

Gross profit (loss)				(4,769	)		6,976
Operating expenses:
	Research and development			4,830			4,145
	Selling and administrative			3,516			2,891
	Amortization of deferred stock compensation (*)			186			—
	Recapitalization merger and other			—			35,453

		Total operating expenses		8,532			42,489

Loss from operations				(13,301	)		(35,513	)
Interest income				1,269			1,026
Interest expense				(106	)		(872	)
Other income (expense) — net				3			(519	)
Gain on dispositions of real property				326			—

Loss from continuing operations before income taxes				(11,809	)		(35,878	)
Income tax benefit				(4,724	)		(9,687	)

Loss from continuing operations				(7,085	)		(26,191	)
Discontinued operations (Note 7):
	Income from discontinued operations, net of income taxes of $91			—			212
	Gain on disposition, net of income taxes of $17,931			—			26,897

Net income (loss)			$	(7,085	)	$	918

			Three Months Ended
			April 1, 2001			March 31, 2000
Net income (loss)			$	(7,085	)	$	918
Other comprehensive income:
	Unrealized holding losses on securities arising during period			(1	)		(6	)
		Less: reclassification adjustment for losses included in net income		—			(209	)

	Net unrealized holding gains (losses) on securities			(1	)		203

Comprehensive income (loss)			$	(7,086	)	$	1,121

		April 1, 2001			December 31, 2000
		(Unaudited)			(See Note 1)
ASSETS
CURRENT ASSETS:
	Cash and equivalents	$	38,944		$	48,970
	Short-term investments		30,699			40,815
	Receivables, net		10,276			22,549
	Inventories, net		14,023			14,457
	Deferred income taxes		6,185			5,314
	Income taxes receivable		3,225			—
	Other		3,884			4,042

	Total current assets		107,236			136,147

PROPERTY, PLANT AND EQUIPMENT, net			31,381			29,260
OTHER ASSETS			2,814			2,091

		$	141,431		$	167,498

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Accounts payable	$	10,410		$	18,424
	Accrued liabilities		5,041			6,921
	Income taxes		2,325			11,925

	Total current liabilities		17,776			37,270

OTHER LONG-TERM OBLIGATIONS			10,952			10,840

STOCKHOLDERS' EQUITY:
	Common stock		554			552
	Additional paid-in capital		178,878			178,736
	Retained deficit		(63,787	)		(56,702	)
	Deferred stock compensation		(2,946	)		(3,202	)
	Other comprehensive income (loss)		4			4

Total stockholders' equity			112,703			119,388

		$	141,431		$	167,498

				Three Months Ended
				April 1, 2001			March 31, 2000
OPERATING ACTIVITIES:
	Net income (loss)			$	(7,085	)	$	918
	Adjustments to reconcile net income (loss) to net cash used by operating activities:
		Recapitalization merger costs			—			35,453
		Depreciation and amortization			1,283			711
		Amortization of deferred financing costs			5			—
		Net gain on disposals of property, plant and equipment			(398	)		(52	)
		Deferred income taxes			(1,499	)		100
		Amortization of deferred stock compensation			186			—
		Provision for doubtful accounts			(159	)		—
		Provision for excess and obsolete inventory			6,567			(363	)
		Net results of discontinued operations and gain on disposal			—			(27,109	)
		Net changes in:
			Receivables		12,432			(889	)
			Inventories		(6,133	)		(3,199	)
			Income taxes receivable		(3,225	)		—
			Other assets		177			8,854
			Accruals and payables		(19,482	)		(5,379	)

	Net cash provided (used) by continuing operating activities				(17,331	)		9,045
	Net cash used by discontinued operations				—			(15,119	)

	Net cash used by operating activities				(17,331	)		(6,074	)

INVESTING ACTIVITIES:
	Purchases of property, plant and equipment				(3,393	)		(1,562	)
	Purchase of short-term investments				(7,207	)		—
	Proceeds from sale of short-term investments				17,233			43,080
	Proceeds from sale of discontinued operations				—			59,456
	Proceeds on real property sales and asset retirements				500			132

	Net cash provided by investing activities				7,133			101,106

FINANCING ACTIVITIES:
	Proceeds from issuance of long-term debt				—			40,000
	Payments on long-term borrowings and financing costs				(43	)		(79	)
	Net proceeds from issuances of common stock				215			55,090
	Repurchase of common stock				—			(270,103	)
	Recapitalization merger costs				—			(35,453	)

	Net cash provided (used) by financing activities				172			(210,545	)

Net decrease in cash and equivalents					(10,026	)		(115,513	)
Cash and equivalents at beginning of year					48,970			131,065

Cash and equivalents at end of year				$	38,944		$	15,552

Other cash flow information:
	Income taxes paid			$	9,600		$	(40	)
	Interest paid				134			309

		WJ COMMUNICATIONS, INC. (Registrant)
Date	May 10, 2001	By:	/s/ MALCOLM J. CARABALLO Malcolm J. Caraballo President and Chief Executive Officer (principal executive officer)
Date	May 10, 2001	By:	/s/ WILLIAM T. FREEMAN William T. Freeman Executive Vice President and Chief Financial Officer (principal financial and accounting officer)

			Three Months Ended
			April 1, 2001			March 31, 2000
Basic per share amounts:
	Loss from continuing operations		$	(0.13	)	$	(0.26	)
	Discontinued operations:
		Income from operations, net of taxes		—			—
		Gain on disposition, net of taxes		—			0.27

Net income (loss)			$	(0.13	)	$	0.01

Basic average shares				55,298			99,600
Diluted per share amounts:
	Loss from continuing operations		$	(0.13	)	$	(0.26	)
	Discontinued operations:
		Income from operations, net of taxes		—			—
		Gain on disposition, net of taxes		—			0.27

Net income (loss)			$	(0.13	)	$	0.01

Diluted average shares				55,298			99,600
(*) Amortization of deferred stock compensation excluded from the following expenses
	Cost of goods sold		$	10
	Research and development			36
	Selling and administrative			140

			$	186