10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 28, 2003

OR

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

For the transition period from                  to                  

Commission file number 000-31337

WJ COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

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)
(408) 577-6200
(Registrant’s telephone number, including area 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 ý.  No  o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o.  No  ý.

As of October 24, 2003 there were 57,423,820 shares outstanding of the registrant’s common stock, $0.01 par value.

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q, the Annual Report on Form 10-K, the shareholders’ 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 include, 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.

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WJ COMMUNICATIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 28, 2003

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2003 and September 29, 2002
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 28, 2003 and September 29, 2002
	Condensed Consolidated Balance Sheets at September 28, 2003 and December 31, 2002
	Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 28, 2003 and September 29, 2002
	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

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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. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002
Sales:
Semiconductor	$	5,223		$	5,157		$	14,236		$	12,965
Wireless	1,669			3,553			5,830			12,126
Fiber optics	11			540			12			5,944
Total sales	6,903			9,250			20,078			31,035
Cost of goods sold	3,928			6,680			12,297			23,643
Gross profit	2,975			2,570			7,781			7,392
Operating expenses:
Research and development	4,200			4,411			12,949			13,508
Selling and administrative	2,198			2,460			7,597			8,500
Amortization of deferred stock compensation (*)	19			161			73			390
Recapitalization merger	2			—			773			—
Restructuring charges (credit) (Note 10)	—			22,886			(21		)	22,886
Total operating expenses	6,419			29,918			21,371			45,284
Loss from operations	(3,444		)	(27,348		)	(13,590		)	(37,892		)
Interest income	167			311			581			946
Interest expense	(23		)	(27		)	(74		)	(109		)
Other income—net	(4		)	16			1,090			16
Loss before income taxes	(3,304		)	(27,048		)	(11,993		)	(37,039		)
Income tax benefit	—			—			(647		)	—
Net loss	$	(3,304	)	$	(27,048	)	$	(11,346	)	$	(37,039	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.48	)	$	(0.20	)	$	(0.66	)
Basic and diluted average shares	56,698			56,437			56,526			56,262
(*) Amortization of deferred stock compensation is excluded  from the following expenses:
Research and development	$	9		$	21		$	32		$	54
Selling and administrative	10			140			41			336
	$	19		$	161		$	73		$	390

See notes to condensed consolidated financial statements.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	Sept. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002
Net loss	$	(3,304	)	$	(27,048	)	$	(11,346	)	$	(37,039	)
Other comprehensive loss:
Unrealized holding gains on securities arising during period net of reclassification adjustments.	1			16			19			8
Comprehensive loss	$	(3,303	)	$	(27,032	)	$	(11,327	)	$	(37,031	)

See notes to condensed consolidated financial statements.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	September 28, 2003			December 31, 2002
				(See Note 1)
ASSETS
CURRENT ASSETS:
Cash and equivalents	$	28,965		$	43,524
Short-term investments	32,633			21,221
Receivables, net	5,665			3,978
Inventories	2,208			3,957
Deferred income taxes	—			6,048
Other	1,881			2,105
Total current assets	71,352			80,833
PROPERTY, PLANT AND EQUIPMENT, net	10,971			14,409
OTHER ASSETS	213			306
	$	82,536		$	95,548
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,545		$	2,555
Accrued liabilities	3,289			4,198
Restructuring accrual	3,011			2,649
Total current liabilities	7,845			9,402
Restructuring accrual	23,411			25,370
Other long-term obligations	11,274			11,158
Total liabilities	42,530			45,930
STOCKHOLDERS’ EQUITY:
Common stock	584			564
Treasury stock	(10		)	—
Additional paid-in capital	180,724			179,172
Accumulated deficit	(141,154		)	(129,808		)
Deferred stock compensation	(139		)	(292		)
Other comprehensive gain (loss)	1			(18		)
Total stockholders’ equity	40,006			49,618
	$	82,536		$	95,548

See notes to condensed consolidated financial statements.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	September 28, 2003			September 29, 2002
OPERATING ACTIVITIES:
Net loss	$	(11,346	)	$	(37,039	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	3,559			4,382
Amortization of deferred financing costs	21			15
Net loss on disposal of property, plant and equipment	91			369
Gain on sale of product line	(1,071		)	—
Deferred income taxes	6,036			8,158
Restructuring charges (credit)	(21		)	22,886
Amortization of deferred stock compensation	97			412
Stock based compensation	109			252
Reduction in allowance for doubtful accounts	(298		)	(440		)
Write-off of uncollectible accounts to allowance	(5		)	(285		)
Amortization of discounts	18			812
Net changes in:
Receivables	(1,383		)	9,159
Inventories	1,675			5,737
Other assets	356			145
Restructuring liabilities	(1,576		)	(1,259		)
Accruals, payables and income taxes	(1,751		)	(1,488		)
Net cash provided by (used in) by operating activities	(5,489		)	11,816
INVESTING ACTIVITIES:
Purchase of short-term investments	(53,677		)	(34,145		)
Proceeds from sale of short-term investments	42,147			45,824
Purchases of property, plant and equipment	(589		)	(1,777		)
Proceeds on disposal of property, plant and equipment	7			152
Proceeds from sale of product line (Note 11)	1,565			—
Net cash provided by (used in) by investing activities	(10,547		)	10,054
FINANCING ACTIVITIES:
Payments on long-term borrowings and financing costs	(32		)	(12		)
Repurchase of common stock	(1,236		)	—
Net proceeds from issuances of common stock	2,745			471
Net cash provided by financing activities	1,477			459
Net increase (decrease) in cash and equivalents	(14,559		)	22,329
Cash and equivalents at beginning of period	43,524			25,216
Cash and equivalents at end of period	$	28,965		$	47,545
Other cash flow information:
Income taxes refunded, net	$	(6,678	)	$	(8,154	)
Interest paid	53			94

See notes to condensed consolidated financial statements.

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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 28, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

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, 2002, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003.

The balance sheet at December 31, 2002 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.”

As required under Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” the pro forma effects of stock-based compensation on net income (loss) and net earnings (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 123 using the Black-Scholes option-pricing model.

The following table illustrates the effect on net loss and net 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 123 (in thousands):

	Three Months Ended						Nine Months Ended
	Sept. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002
Reported net loss	$	(3,304	)	$	(27,048	)	$	(11,346	)	$	(37,039	)
Add:  Total stock-based employee compensation expense included in reported net loss	27			169			97			412
Deduct:  Total stock-based employee compensation expense under fair value based method for all awards	(579		)	(787		)	(1,745		)	(2,165		)
Pro forma net loss	$	(3,856	)	$	(27,666	)	$	(12,994	)	$	(38,792	)
Pro forma net loss per basic and diluted share	$	(0.07	)	$	(0.49	)	$	(0.23	)	$	(0.69	)

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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 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 current operations design, develop and manufacture innovative, high quality products for both current and next generation wireless and broadband cable networks, defense and homeland security systems and radio frequency (“RF”) 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. The Company’s commercial communications products are used by telecommunication and broadband cable equipment manufacturers supporting and facilitating mobile communications, enhanced voice services, data and image transport.  Consistent with its strategy to become a pure RF semiconductor company, the Company announced at the end of 2002 that it had entered into an agreement to sell its Thin-Film product line to M/A-COM, a unit of Tyco Electronics. The sale includes equipment, inventory, intellectual property, training and services. The sale of this product line was completed and title passed to M/A-COM in the second quarter of 2003. The Company also exited its fiber optics business at the end of 2002 due to the prolonged downturn in that market.

Over the course of 2002, the Company began to design and manufacture semiconductors utilizing other manufacturing technologies. The Company believes that this approach is required in order to continue to offer competitive products and expects that a greater number of its future products would be developed in this fashion. The Company also believes that this business strategy offers considerable other advantages such as allowing it to focus its resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing it to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of the Company’s products to new process technologies, which reduce costs and optimize performance. On December 17, 2002, the Company’s Board of Directors approved a plan which would completely outsource the Company’s internal wafer fabrication within approximately one year.

3.RECLASSIFICATIONS

Certain amounts for 2002 have been reclassified to conform with the 2003 presentation. Such reclassifications did not have any impact on net loss or stockholders’ equity.

4.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. Provisions, when required, are made to write-down 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, net of provisions for excess and obsolete amounts, at September 28, 2003 and December 31, 2002 consisted of the following (in thousands):

	September 28, 2003		December 31, 2002
Finished goods	$	1,276	$	1,870
Work in progress	558		1,013
Raw materials and parts	374		1,074
	$	2,208	$	3,957

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5.CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments and receivables. 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. During the three months ended September 28, 2003, the Company had two customers which each accounted for more than 10% of its sales and in aggregate accounted 76% of its total sales. One customer accounted for 52% of the Company’s sales for the three months ended September 28, 2003 and accounted for 53% of the Company’s accounts receivable at September 28, 2003.  The second customer, including sales to its manufacturing subcontractors, accounted for 24% of the Company’s sales for the three months ended September 28, 2003 and accounted for 31% of the Company’s accounts receivable at September 28, 2003. The Company performs ongoing credit evaluations and maintains an allowance for doubtful accounts based upon the expected collectibility of receivables.

6.RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 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)”. The Company has adopted the provisions of SFAS 146 for restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of the Company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts to be recognized.

In November 2002, the EITF reached a consensus on Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables.” The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company’s operating results or financial condition.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45).  FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The Company adopted the disclosure requirements of FIN 45 in the fourth quarter of fiscal 2002 (see Note 11 in the Company’s 2002 Form 10K concerning the allowance for warranty costs). The recognition and measurement provisions will be applied to guarantees issued or modified after December 31, 2002.  The adoption of FIN 45 did not have a material impact on the Company’s operating results or financial condition.

In April 2003, the FASB issued SFAS 149, “Amendment of Statement on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company did not have any derivative instruments or hedging activities during the nine months ended September 28, 2003. The adoption of SFAS No. 149 did not have a material effect on the Company’s operating results or financial condition.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments

10

entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of FASB 150 had no impact on the Company’s operating results or financial condition.

7.LONG-TERM DEBT

In December of 2000, the Company 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 the Company’s option, at LIBOR plus 1.0% or Prime minus 0.5%. The Revolving Facility requires the Company to 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 the covenants as of September 28, 2003. The Revolving Facility is secured by substantially all of the Company’s assets. As of December 31, 2002 and September 28, 2003, there were no outstanding borrowings under the Revolving Facility. The Company has letters of credit of $3.2 million outstanding as of September 28, 2003 against which no amounts have been drawn.

8.STOCKHOLDERS’ EQUITY

On March 31, 2003, the Company’s Board of Directors (the “Board”) authorized the repurchase of up to $2.0 million of the Company’s common stock. The new program was immediately effective. 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 nine months ended September 28, 2003, approximately $1.2 million has been utilized to purchase 1,013,215 shares of the Company’s common stock at a weighted average purchase price of $1.22 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 but correspondingly reduced the number of the Company’s outstanding shares of common stock. As of September 28, 2003 approximately $764,000 remains available under the stock repurchase plan.  On October 21, 2003, the Company announced that its Board of Directors approved an additional $2.0 million to expand its existing share repurchase program increasing the total amount authorized to $4 million. These funds are available for immediate use and shares will be purchased from time to time in the open market or in private transactions at management’s discretion subject to market conditions.

On May 29, 2003, the Board unanimously adopted a resolution seeking stockholder approval to amend the Company’s Certificate of Incorporation to effect a reverse stock split of the Company’s common stock.  The primary reason the Company’s Board believes that a reverse stock split may be desirable is that it may help the Company’s common stock maintain its listing on the Nasdaq National Market. The Company’s stockholders approved this amendment to the Company’s Certificate of Incorporation on July 15, 2003 at the Company’s Annual Meeting of Stockholders.

Under the amendment, the Board would have authority to implement a reverse stock split at any time prior to the date of the Company’s next annual meeting of stockholders in 2004.  In addition, the Board may, in its sole discretion, determine not to effect, and abandon, the reverse stock split without further action by its stockholders.  The Board, may subsequently effect, in its sole discretion, the reverse stock split based upon a ratio of one-for-two, one-for-three, one-for-four, one-for-five, one-for-six, one-for-seven, one-for-eight, one-for-nine or one-for-ten.  If the Board elects to effect a reverse stock split, the number of issued and outstanding shares of common stock would be reduced in accordance with an exchange ratio determined by our Board within the limits set forth by this amendment. Except for adjustments that may result from the treatment of fractional shares, each stockholder will hold the same percentage of the Company’s outstanding common stock immediately following the reverse stock split as such stockholder held immediately prior to the reverse stock split.  The par value of the Company’s common stock would remain unchanged at $0.01 per share.  The amendment does not change the number of the authorized shares of the Company’s common stock. At September 28, 2003, the proposed reverse stock split has not been effected.

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STOCK OPTION PLANS—During 2000, the Company’s “2000 Stock Incentive Plan” and “2000 Non-Employee Director Stock Compensation Plan” (collectively the “Plans”) were adopted and approved by the Board and the Company’s stockholders. The Plans may grant incentive awards in the form of options to purchase shares of the Company’s common stock, restricted shares, common stock and stock appreciation rights to participants, which include non-employee directors, officers and employees of and consultants to the Company and its affiliates. On May 22, 2002, the  Board approved the adoption of an amendment to the Company’s “2000 Stock Incentive Plan” to increase the number of shares of common stock authorized for issuance pursuant to the “2000 Stock Incentive Plan” from 16,500,000 to 19,000,000 shares.  This plan amendment did not affect any other terms of the “2000 Stock Incentive Plan”. On May 29, 2003, the Board approved the adoption of an amendment to the Company’s “2000 Non-Employee Director Compensation Plan” to increase the number shares of Common Stock authorized for issuance pursuant to the “2000 Non-Employee Director Compensation Plan” from 570,000 to 800,000 which was approved by the Company’s stockholders on July 15, 2003 at the Company’s Annual Meeting of Stockholders. Also on May 29, 2003, the Board approved the adoption of a second amendment to the Company’s “2000 Stock Incentive Plan” so that options granted to employees under the “2000 Stock Incentive Plan” will qualify as performance-based compensation under Internal Revenue Code Section 162(m) and thereby not be subject to a deduction limitation. Particularly, the amendment to the “2000 Stock Incentive Plan” provides that no employee or prospective employee shall be granted one or more options within any fiscal year which in the aggregate are for the purchase of more than 3,000,000 shares. The total number of shares of common stock authorized for issuance pursuant to the Plans is 19,800,000 shares. As of September 28, 2003 the amount of shares reserved for future grants was 5,362,044. Stock options may include incentive stock options, nonqualified stock options or both, in each case, with or without stock appreciation rights.

On May 23, 2001, the Company’s Board of Directors approved the adoption of the Company’s 2001 Employee Stock Incentive Plan (the “Plan”). The Plan may grant incentive awards in the form of options to purchase shares of the Company’s common stock, restricted shares, common stock and stock appreciation rights to participants, which include employees which are not officers and directors of the Company and its affiliates and consultants to the Company and its affiliates. The total number of shares of common stock reserved and available for grant under the Plan is 2,000,000 shares. Shares subject to award under the Plan may be authorized and unissued shares or may be treasury shares. Stock options may include incentive stock options, nonqualified stock options or both, in each case, with or without stock appreciation rights.

9.NET LOSS PER SHARE

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

	Three Months Ended						Nine Months Ended
	Sept. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002
Net loss	$	(3,304	)	$	(27,048	)	$	(11,346	)	$	(37,039	)
Denominator for basic net loss per share:
Weighted average shares outstanding	56,748			56,727			56,589			56,485
Less weighted average shares subject to repurchase	(50		)	(290		)	(63		)	(223		)
Weighted average shares outstanding	56,698			56,437			56,526			56,262
Denominator for diluted net loss per share:
Weighted average shares outstanding	56,698			56,437			56,526			56,262
Effect of dilutive stock options	—			—			—			—
Diluted weighted average common shares	56,698			56,437			56,526			56,262
Basic and diluted loss per share	$	(0.06	)	$	(0.48	)	$	(0.20	)	$	(0.66	)

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For the three months and nine months ended September 28, 2003, the incremental shares from the assumed exercise of 4,240,568 and 1,622,510 stock options, respectively, were not included in computing the diluted per share amounts because the effect of such assumed conversion would be anti-dilutive. The Employee Stock Purchase Plan was suspended in November 2002 due to the Fox Paine Acquisition Proposal and therefore there were no shares related to contributions under the Employee Stock Purchase Plan as of September 28, 2003. For the three months and nine months ended September 29, 2002, the incremental shares from the assumed exercise of 67,992 and 4,317,157 stock options, respectively, and 14,376 shares related to contributions under the Employee Stock Purchase Plan for pending purchases, were not included in computing the diluted per share amounts because the effect of such assumed conversion and issuance would be anti-dilutive.

10.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, 2002.

 During the quarter ended March 30, 2003, it was determined that one of the employees slated to be terminated would instead be retained for another position.  As such, approximately $21,000 of the third quarter 2002 restructuring charge was reversed.

The following table summarizes restructuring accrual activity recorded during the years 2002 and 2001 and the nine months ended September 28, 2003, respectively (in thousands):

	Workforce Reduction			Lease Loss			Asset Impairment			Total
Total charge	$	786		$	34,880		$	8,364		$	44,030
Non-cash charges	—			(5,455		)	(8,364		)	(13,819		)
Cash payments	(437		)	(1,755		)	—			(2,192		)
Balance at December 31, 2002	349			27,670			—			28,019
Non-cash charges	(21		)	16			—			(5		)
Cash payments	(49		)	(1,543		)	—			(1,592		)
Balance at September 28, 2003	$	279		$	26,143		$	—		$	26,422

During the quarter ended September 28, 2003, approximately $564,000 of remaining lease loss was paid. Of the accrued restructuring charge at September 28, 2003, the Company expects approximately $2.7 million of the lease loss and the remaining severance of approximately $279,000 to be paid out over the next twelve months. As such, these amounts are recorded as current liabilities and the remaining $23.4 million to be paid out over the remaining life of the lease of approximately nine years is recorded as a long-term liability.

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11.SALE OF PRODUCT LINE

On May 14, 2003, the Company completed the sale of its 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.  The Company received total proceeds of approximately $1.8 million. The net gain of approximately $1.1 million is recorded as other income in the accompanying financial statements for the nine months ended September 28, 2003. The Company had initially received two advance payments on this agreement of approximately $272,000 in the quarter ended December 31, 2002 and approximately $181,000 in the quarter ended March 30, 2003, both of which were included as accrued liabilities in the Company’s consolidated balance sheets for those periods.  The remaining payment of approximately $1.4 million was received in the quarter ended September 28, 2003.

12.BUSINESS SEGMENT REPORTING

In 1997, the Company adopted SFAS 131, “Disclosures about Segments of an Enterprise and Related Information.” 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 Company’s CODM monitors the sales of various products, 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 Company consolidated sales during at least one of the periods presented (in thousands):

	Three Months Ended				Nine Months Ended
	Sept. 28, 2003		Sept. 29, 2002		Sept. 28, 2003		Sept. 29, 2002
Customer A	$	1,649	$	3,232	$	5,643	$	8,198
Customer B	—		100		—		5,098
Customer E	3,566		2,755		8,430		6,175

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

	Three Months Ended				Nine Months Ended
	Sept. 28, 2003		Sept. 29, 2002		Sept. 28, 2003		Sept. 29, 2002
United States	$	4,668	$	6,714	$	13,646	$	19,691
Export Sales from United States:
Canada	435		160		881		3,801
Europe	501		1,136		1,954		4,883
Other	1,299		1,240		3,597		2,660
Total	$	6,903	$	9,250	$	20,078	$	31,035

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

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13.OTHER MATTERS

In September 2002 the Company announced the receipt of a proposal from an affiliate, Fox Paine & Company LLC (“Fox Paine”) to acquire all of the shares of the Company’s common stock held by unaffiliated stockholders (the “Acquisition Proposal”). Fox Paine and its affiliates currently own approximately 65% of the Company’s outstanding shares or approximately 37.0 million shares of a total of approximately 57.4 million shares outstanding. The Company’s 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. On March 27, 2003, Fox Paine withdrew its Acquisition Proposal. During the nine months ended September 28, 2003, the Company incurred approximately $773,000 of costs and expenses related to the Acquisition Proposal.  The Company expects these expenses to continue through the remainder of 2003.

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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, 2002. 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 manufacture innovative, high quality products for both current and next generation wireless and broadband cable networks, defense and homeland security systems and radio frequency (“RF”) identification (“RFID”) systems worldwide. Our products are comprised of advanced, highly functional RF semiconductors, components and integrated assemblies which address the Radio Frequency challenges of these various systems. Our commercial communications products are used by telecommunication and broadband cable equipment manufacturers supporting and facilitating mobile communications, enhanced voice services, data and image transport. We believe our core expertise in semiconductor technology, coupled with our exceptional RF design, integration, and manufacturing capabilities, are critical to our long-term success.

When we began our operations in the commercial communications market, we initially benefited from significant increases in spending on capital equipment by communications service providers, which resulted in increased demand for our products. However, the demand for telecommunications equipment has been very weak for the last two years and the first nine months of 2003. We project this weakness in demand to continue throughout the remainder of 2003 and potentially beyond based on customer forecasts for the purchase of our products. The primary reason for this weakness in demand for these products is an overall decline in capital spending by communication service providers. A significant contributing factor to the decline in capital expenditures has been the numerous early stage communication service providers, who have previously been able to access the capital markets, that are having difficulties in finding new sources of capital and, in certain instances, have filed for bankruptcy. In addition, several of the more established service providers financed the build out of their networks with debt. Many of these service providers have shifted their focus to debt reduction and profitability enhancement. As a result, we believe that these companies have had to greatly reduce their capital expenditures. This reduction in capital expenditures has been accentuated by the general economic slowdown, which has had a negative impact on communication service providers’ revenues and profitability.

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On a long-term basis, we believe that the demand for commercial communications equipment and our products will rebound. Since 2001, we have introduced many new products which will further position us to benefit from the roll-out of 2.5G and 3G wireless and Cable Access Television (“CATV”). In the first nine months of 2003, we introduced sixteen new RF semiconductor products primarily targeted at wireless infrastructure applications.  During 2002, we introduced forty new RF semiconductor products.  In the first nine months of 2003 we had 114 new design wins compared to 74 for the same period in 2002. During 2003, we are continuing to concentrate our resources on the development of RF semiconductors and expect to maintain our accelerated pace of new product introductions and design wins. While customer interest, new product introductions, accelerating pace of design wins and new orders are encouraging, there is no assurance that they will have a positive impact on our overall sales.

Our current 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 margin. Until demand increases, the slow down in spending on commercial communications equipment will negatively impact our gross margin. In addition, we typically generate lower gross margin on new product introductions. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through introducing lower cost elements to the product designs. We expect our new product introductions to continue to be a higher percentage of our sales mix, which will continue to have a negative impact on our gross margin. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility and predictability of customer demand and potential competition which will contribute to a higher level of inventory risk in our near future.

Since the beginning of 2001, we have been taking aggressive steps designed to more closely align our production costs with our customers’ current forecasted demand for our products. As part of this effort, we reduced our workforce by approximately 48% during 2001 and reduced non-employee costs including sales and marketing, general and administrative, and overhead expenses. Our cost reduction initiatives have also included temporary shutdowns of our manufacturing facilities and significant reductions in capital spending. We took further action in the third quarter of 2002, primarily directed at production costs, by reducing our workforce by an additional 22%, initiating a plan to sell excess manufacturing equipment and by consolidating our manufacturing operations and abandoning our excess leased space under our second restructuring plan (see Note 10 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q).

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

We expect that reduced end-customer demand, underutilization of our manufacturing capacity until we transition to a fully outsourced business model and other factors will continue to adversely affect our operating results in the near term and we anticipate incurring additional losses throughout 2003. In order to return to profitability, we must achieve substantial revenue growth and we currently face an environment of uncertain demand in the markets our products address.  We cannot assure you as to whether or when we will return to profitability or whether we will be able to sustain such profitability, if achieved.

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Critical Accounting Policies

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.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”, as amended. SAB 101 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 28, 2003 the amount of those reserves has not been material. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historic bad debts, changes in customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Material differences may result in the amount and timing of expenses for any period if management made different judgments or utilized different estimates. For example, in the nine months ended September 28, 2003 we recovered approximately $302,000 of accounts receivable which was previously reserved in our allowance for doubtful accounts. Our allowance for doubtful accounts was approximately $126,000 as of September 28, 2003. Approximately 84% of our accounts receivable as of September 28, 2003 was concentrated with our top two customers, each, including their respective manufacturing subcontractors, accounting for more than 10% of our sales, and in aggregate accounting for 76% of our sales in the third quarter of 2003.

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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 demand forecasts, current economic trends and historical write-offs when evaluating the valuation of our inventory. Due to rapidly changing customer forecasts and orders, additional write-downs of excess or obsolete inventory, while not currently expected, could be required in the future. In addition, the sale of previously written down inventory could result from significant unforeseen increases in customer demand. Material differences in estimates of excess and obsolete inventory may result in the amount and timing of cost of sales for any period if management made different judgments or utilized different estimates.

Income Taxes

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).” These charges include abandoned leased properties comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and asset impairment charges on tenant improvements deemed no longer realizable. In determining these estimates, we make certain assumptions with regards to our ability to sublease the space and reflected offsetting assumed sublease income in line with our best estimate of current market conditions. Should there be a further significant change in market conditions, the ultimate losses on these could be higher and such amount could be material. During 2002, we recorded restructuring charges of $27.9 million related to restructuring activities initiated in 2002 and also recorded additional charges of $6.3 million related to restructuring activities initiated in 2001, primarily due to changes in estimated sublease income.

Impairment of Long-Lived Assets

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

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amount of the assets exceeds the fair value of the assets. During 2002, we recognized an asset impairment of $4.4 million for assets held and used and $3.9 million for assets held for sale.

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

Recent Developments

On October 21, 2003, we announced that our Board of Directors approved an additional $2.0 million to expand its existing share repurchase program increasing the total amount authorized to $4 million. These funds are available for immediate use and shares will be purchased from time to time in the open market or in private transactions at management’s discretion subject to market conditions. As of September 28, 2003, approximately $1.2 million has been utilized to purchase 1,013,215 shares of our common stock at a weighted average purchase price of $1.22 per share.

CURRENT OPERATIONS

For The Period Ended September 28, 2003 Compared to September 29, 2002

Sales – We recognized $6.9 million and $9.3 million in sales for the three months ended and $20.1 million and $31.0 million in sales for the nine months ended September 28, 2003 and September 29, 2002, respectively. The decline in sales for the three month period primarily reflects the decline in our wireless assembly sales as these products near the end of their life cycle. This decline in wireless assembly sales also effected the sales for the relative nine month periods as well as our decision in 2002 to exit our fixed wireless and fiber optics businesses due to the prolonged downturn in those markets. Wireless assembly sales for the first nine months of 2002 included $3.7 million for final product delivery of our last major fixed wireless contract. RF semiconductor sales during the third quarter of 2003 totaled $5.2 million, representing 75% of total sales and stayed flat in comparison to the third quarter of 2002 sales of $5.2 million. Our RF semiconductor sales includes sales of our Thin-Film products which represents approximately $742,000 for the three months ended September 29, 2002 and approximately $855,000 and $2.0 million for the nine months ended September 28, 2003 and September 29, 2002, respectively. As we announced on December 10, 2002, we entered into an agreement to sell our Thin-Film product line to M/A-COM, a unit of Tyco Electronics. The product line was transfered to M/A-COM and title passed on May 14, 2003.  Excluding our Thin-Film sales, our Semiconductor IC sales increased $809,000 or 18% to $5.2 million from $4.4 million in the three months ended and increased $2.4 million or 22% to $13.4 million from $11.0 million in the nine months ended September 28, 2003 and September 29, 2002, respectively. The increase in both comparative periods related to an increase in the volume of our Semiconductor IC products sold. Wireless assembly sales during the third quarter of 2003 totaled $1.7 million, representing 25% of total sales and a decrease of $1.9 million over the third quarter of 2002 sales of $3.6 million. Wireless assembly sales for the current nine months ended totaled $5.8 million, representing 29% of total sales and a decrease of $6.3 million over the same period last year. As noted previously, the decrease in both comparative periods related to a decrease in the volume of our Wireless assembly products sold as these products are nearing the end of their life cycle. From a geographic perspective, for the nine month periods our sales from Canada decreased by 77% due to our decision in 2002 to exit our fiber optics. Looking forward to the fourth quarter of 2003, we believe that sales from our semiconductor IC products will increase sequentially based on forecasted customer demand but will be offset by further significant declines in our wireless assembly sales.  As we previously announced, we currently anticipate that our total fourth quarter revenues will be in the range of $6.0 to $7.0 million. However, there can be no assurance that our actual fourth quarter revenues will be within the anticipated range.

We depend on a small number of customers for a majority of our sales. During the three months and nine months ended September 28, 2003, we had two customers which each accounted for more than 10% of our sales and in aggregate accounted for 76% and 70% of our sales, respectively.  During the corresponding prior year periods, we had two and three customers which each accounted for more than 10% of our sales and in aggregate accounted for 65% and 63% of our sales, respectively. We have diversified our customer base over the last few years and intend to further diversify our

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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.

Cost of Goods Sold – Our cost of goods sold for the three months ended September 28, 2003 was $3.9 million, a decrease of $2.8 million or 41% as compared with cost of goods sold of $6.7 million in the three months ended September 29, 2002. For the nine months ended September 28, 2003 our cost of goods sold was $12.3 million a decrease of $11.3 million or 48% as compared with cost of goods sold of $23.6 million in the nine months ended September 29, 2002. During the three months and nine months ended September 28, 2003, cost of goods sold were 57% and 61% as a percentage of sales which compares to 72% and 76% in the corresponding prior year periods.  This decrease in our cost of goods sold as a percentage of sales for both relative periods in 2003 reflects the change in our product sales mix to a greater percentage of higher margin semiconductor products from relatively lower margin wireless assembly products and the cost reductions generated by our restructuring program implemented in our third quarter of 2002 including reductions in wages and benefits, rent, and depreciation expenses. These reduced costs were partially offset by additional expenses incurred to transition our semiconductor manufacturing processes to outside foundries. During the first nine months of 2002, our cost of goods sold benefited from the sale of $5.9 million of fixed wireless CPE inventory of which $3.1 million had been previously written off in 2001. Due to rapidly changing customer forecasts and orders, additional write-downs of excess or obsolete inventory, while not currently expected, could be required in the future. In addition, the sale of previously written down inventory could result from significant unforeseen increases in customer demand. In absolute dollars, the decrease in our cost of goods sold reflects the factors previously noted as well as our decline in sales during 2003. We have a significant amount of unabsorbed overhead costs related to the increased manufacturing infrastructure we put in place to support our customers’ demand in the second half of 2000. This increased infrastructure includes, among other things, a new manufacturing facility and investments in equipment. Our 2002 restructuring program has reduced our unabsorbed overhead through the write down of excess facilities and equipment, but we will still have fixed manufacturing costs that these efforts will not impact. Given the current economic slowdown, our capacity may not be fully utilized and the ongoing costs thereof will still be incurred until such time as the market demand for our products increases or our transition to an outsourced business model is complete. In addition, we typically generate lower gross margin on new product introductions which we expect to be a higher percentage of our sales mix going forward. Over time, we typically become more efficient relative to new products through learning and increased volumes as well as through introducing lower cost elements to the product designs. New product lines also contain a greater degree of inventory risk due to uncertainty regarding a lack of visibility and predictability of customer demand and potential competition

Research and Development – Our research and development expense for the three months ended September 28, 2003 was $4.2 million, a decrease of approximately $211,000 or 5% as compared with research and development expense of $4.4 million in the three months ended September 28, 2002.  For the nine months ended September 28, 2003 our research and development expense was $12.9 million, a decrease of approximately $559,000 or 4% as compared with research and development expense of $13.5 million over the same period last year. The decrease in absolute dollars in 2003 is primarily related to a decrease in procured materials used in our research and development. Research and development efforts in all periods were primarily attributable to spending on the development of RF semiconductor products. During the three months and nine months ended September 28, 2003, research and development expenses were 61% and 64% as a percentage of sales which compares to 48% and 44% in the corresponding prior year periods. The increase in research and development expense as a percentage of sales in 2003 relates to our decline in sales in the same period. Product research and development is essential to our future success and we expect to continue to make investments in new product development and engineering talent.  In particular, we will continue to focus our research efforts and resources on RF semiconductor development.

Selling and Administrative – Selling and administrative expense for the three months ended September 28, 2003 was $2.2 million or 32% of sales, a decrease of approximately $262,000 or 11% as compared with selling and administrative expense of $2.5 million or 27% of sales in the three months ended September 29, 2002.  For the nine months ended September 28, 2003 selling and administrative expenses were $7.6 million or 38% of sales, a decrease of approximately $904,000 or 11% as compared with selling and administrative expense of $8.5 million or 27% of sales in the nine months ended September 29, 2002.  The decrease in absolute dollars for both relative periods in 2003 is primarily related to cost reductions generated by our restructuring program implemented in our third quarter of 2002 including reductions in wages

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and benefits, rent and tax expenses. Additionally, 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. These reduced expenses were partially offset by increased insurance and commission costs. As a percentage of sales, the increase in selling and administrative expense during 2003 reflects the decrease in sales in the same period.

Amortization of Deferred Stock Compensation – Amortization of deferred stock compensation expense for all periods represents the granting of restricted stock during 2002 at a price below fair market value and the issuance of stock options during 2000 at prices deemed below fair market value. As of September 28, 2003, the balance of our remaining unamortized deferred stock compensation was approximately $139,000 to be amortized over the next 18 months.

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”). Fox Paine and its affiliates currently own 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, however, we expect these expenses to continue through the remainder of 2003.

Restructuring charges –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, approximately $21,000 of the third quarter 2002 restructuring charge was reversed. For the three and nine months ended September 29, 2002, we recorded a restructuring charge of $22.9 million reflecting consolidation and abandonment of leased space and associated impairment of tenant improvements, severance costs, an asset impairment charge and the initiation of a program to sell excess manufacturing equipment resulting from the prolonged downturn in the telecommunications industry, especially related to our fiber optics products. For further discussion, see Note 10 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 28, 2003 was approximately $167,000, a decrease of $144,000 or 46% as compared with interest income of $311,000 in the three months ended September 29, 2002. For the nine months ended September 28, 2003 our interest income was approximately $581,000, a decrease of $365,000 or 39% as compared with interest income of $946,000 in the nine months ended September 29, 2002. This relative decrease in both comparative periods primarily resulted from decreased average amounts of funds available for investment and a decrease in interest rates.  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, which are generally lower than they were a year ago.

Interest Expense – Our interest expense for the three months ended September 28, 2003 was approximately $23,000, a slight decrease as compared with interest expense of approximately $27,000 for the three months ended September 29, 2002. For the nine months ended September 28, 2003 our interest expense was approximately $74,000, a decrease of approximately $35,000 or 32% as compared with interest expense of approximately $109,000 for the nine months ended September 29, 2002.  Interest expense for all periods relates to 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 approximately $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 approximately $1.8 million. For further discussion, see Note 11 to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q.

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Income Tax Benefit – In the nine months ended September 28, 2003 we recorded a tax benefit of $647,000 related to an income tax refund of $480,000 from the State of Maryland as the result of amending our 1999 state tax return and an adjustment to our deferred tax asset of $167,000 for additional federal income tax refund determined after finalizing our 2002 carryback claim filed in the first quarter of 2003. Beginning in 2002, it was determined that it was not more likely than not that any additional deferred tax assets would be realized through the application of carryforward claims, thus we will not record income tax benefits on future net operating losses.

LIQUIDITY AND CAPITAL RESOURCES

On September 28, 2003, cash and equivalents and short-term investments totaled $61.6 million, a decrease of approximately $3.1 million from the December 31, 2002 balance of $64.7 million.

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 28, 2003. As of December 31, 2002 and September 28, 2003, there were no outstanding borrowings under the Revolving Facility. The Company has letters of credit of $3.2 million outstanding as of September 28, 2003 against which no amounts have been drawn.

Net Cash Provided by Operating Activities – Net cash provided (used) by operations was ($5.5) million and $11.8 million in the nine months ended September 28, 2003 and September 29, 2002, respectively. Net loss in the nine months ended September 28, 2003 and September 29, 2002 was $11.3 million and $37.0 million, respectively. Items impacting the difference between net loss and cash flows from 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 approximate $1.4 million increase in accounts receivable and a $3.4 million decrease in restructuring and accruals, payables and income taxes 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. As a result, our average payment terms have increased from 30 days to 60 days. 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.  Significant items impacting the difference between net loss and cash flows from operations in the first nine months of 2002 were $12.4 million provided by working capital and $8.2 million provided by the utilization of deferred tax assets. The $12.4 million provided by working capital primarily relates to a $5.7 million decrease in inventories and a $9.2 million decrease in receivables partially offset by a $2.7 million decrease in restructuring and accruals, payables and income taxes. The $8.2 million provided by the utilization of deferred tax assets relates to the receipt of an income tax refund generated by the carryback of our 2001 net operating loss.

Net Cash Provided by Investing Activities – Net cash provided (used) by investing activities was ($10.5) million and $10.1 million in the nine months ended September 28, 2003 and September 29, 2002, respectively. 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 (see Note 11 to the unaudited condensed consolidated financial statements included elsewhere in the Form 10-Q).  In the first nine months of 2002, we received $45.8 million in proceeds from the sale of short-term investments which was partially offset by $34.1 million used to purchase short-term investments and $1.8 million to invest in property, plant and equipment. During 2003, we expect to invest approximately $1.0 to $2.0 million in capital expenditures of which approximately $589,000 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 2003.

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Net Cash Provided (Used) by Financing Activities – 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 approximately $2.7 million from the sale of our common stock to employees through our option plans which was partially offset by approximately $1.2 million of cash used to repurchase our common stock under our stock repurchase program announced March 31, 2003 (see Note 8 to the unaudited condensed consolidated financial statements included elsewhere in the Form 10-Q) and $32,000 of financing costs associated with our revolving credit facility. Net cash provided by financing activities totaled $459,000 in the nine months ended September 29, 2002. In the first nine months of 2002, we received net cash of approximately $471,000 from the sale of our common stock to employees through our employee stock purchase and option plans which was partially offset by $12,000 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 our expected cash flows from operations and anticipated available borrowings under our credit facility, 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.

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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:
2003	$	27,429	1.00	%
Short-term investments:
2003	22,184		1.05	%
2004	10,449		1.16	%
Fair value at September 28, 2003	$	60,062

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Item 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In order to ensure that the information required to be disclosed in this report is recorded, processed, summarized and reported on a timely basis, we have adopted internal controls and procedures.  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.  Based on the Evaluation, our CEO and CFO concluded that our Disclosure Controls are effective as of the end of the period covered by this report.

Changes in Internal Control

We have also evaluated our internal control over financial reporting (as defined in Rule 13a-15(e) under the Exchange Act), and there have been no changes in our internal control over financial reporting during the period covered by this report that has 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.

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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 recently incurred substantial operating losses and we anticipate additional future losses.

In the nine months ended September 28, 2003, our sales were $20.1 million and we incurred an operating loss of $11.3 million. In addition, our sales for the year ended December 31, 2002 were $40.2 million compared to $62.2 million for 2001.  The decrease in revenue was due to sharply reduced end-customer demand in many of the communications end-markets, which our products address. We incurred an operating loss of $52.5 million for the year ended December 31, 2002.

We expect that reduced end-customer demand, underutilization of our manufacturing capacity and other factors will continue to adversely affect our operating results in the near term and we anticipate incurring additional losses in 2003. In order to return to profitability, we must achieve substantial revenue growth and we currently face an environment of uncertain demand in the markets our products address. We cannot assure you as to whether or when we will return to profitability or whether we will be able to sustain such profitability, if achieved.

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 to sell your shares.

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

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

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

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

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

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

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

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

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

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, 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.

External factors such as general economic conditions can harm our business.

External factors such as slower economic activity, concerns about inflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the telecommunications and related industries, unemployment trends, international conflicts and terrorist and military activity have adversely affected our business in the past. As a result of unfavorable general economic conditions during 2002 we experienced a significant slow down in customer orders, an increase in the number of cancellations and reschedulings of backlog and higher overhead costs as a percentage of our reduced net sales. In 2003, concerns remain regarding the timing, strength and duration of economic recovery in the semiconductor industry and commercial communications infrastructure markets. In addition, political and social turmoil related to international conflicts, terrorist acts and the severe acute respiratory syndrome (“SARS”) outbreak make it difficult for us to accurately forecast and plan future business activities and may adversely affect our business. We cannot provide assurance that our business will not suffer as a result of external factors.

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A small number of 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 reduction of sales.

We depend on a small number of customers for a majority of our sales. During the nine months ended September 28, 2003, we had two customers which each accounted for more than 10% of our sales and in aggregate accounted for 70% of our sales, including sales to their respective manufacturing subcontractors. Sales to our 10% customers, including sales to their respective manufacturing subcontractors, in aggregate accounted for 63% of our sales for the nine months ended September 29, 2002. In addition, most of our sales result from purchase orders or from contracts that can be cancelled on short-term notice. We expect that our key customers will continue to account for a substantial portion of our revenue in 2003 and in the foreseeable future. The loss of or a reduction in orders from a significant customer for any reason could cause our sales to decrease.

We depend solely on Richardson Electronics, Ltd. for distribution of our RF semiconductor products.

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 42% and 20% of our Semiconductor sales for the nine months ended September 28, 2003 and September 29, 2002, 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.

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

•continued slow down and uncertainty in capital spending by communications service providers;

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

•the timing, rescheduling, reduction or cancellation of significant customer orders and the ability of our customers to manage their inventories;

•the gain or loss of a key customer;

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

•our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner 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;

•the rate of adoption and acceptance of new industry standards in our target markets;

•the effects of new and emerging technologies;

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

•the effectiveness of our expense and product cost control and reduction efforts;

•fluctuations in our manufacturing yields 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 risks of producing products with new suppliers and at new fabrication and assembly facilities;

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

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

•cost and expense of outsourcing our semiconductor manufacturing;

•our ability to retain and hire key executives, technical personnel and other employees in the numbers, with the capabilities and at the compensation levels that we need to implement our business and product plans;

•changes in our product mix or customer mix;

•the extent and duration of the current downturn in the economy and the weakness in demand by our customers;

•lack of visibility into the finished product inventories of our customers and end-users;

•increased in-house production by our customers;

•continued excessive inventories held by our customers or end-users;

•the quality of our products and any remediation costs;

•the effects of natural disasters and other events beyond our control;

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

•our inability to utilize our line of credit or comply with its terms;

•the availability and affordability of raw materials;

•cyclical nature of semiconductor business;

•continued reduction or loss of customer orders due to economic and business factors affecting our customers;

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

•increased warranty claims;

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

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

•our ability to successfully complete our restructuring programs;

•the impact of international conflicts and acts of terrorism on economic and market conditions;

•the impact of regional and global infectious illnesses (such as the SARS outbreak) on economic and market conditions;

•dependency on a limited number of outsourced semiconductor wafer fabrication facilities;

•diversion of management’s attention and resources as a result of defending against litigation matters;

•continued poor economic and market conditions in our industry; and

•external factors including general economic and market conditions.

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.

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

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

•the 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

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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

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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.

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 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. Additionally, initial lower margins are typically experienced with new products under development.

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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. Some of the semiconductor 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. 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 two years and the first nine months of 2003, the demand for telecom equipment has been very soft. This weakness in demand is currently projected to continue throughout the fourth quarter of 2003 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 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 have incurred, and may in the future incur, charges related to excess and obsolete inventory. 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 purchase a wider variety of components to utilize in our manufacturing processes. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility of customer acceptance and potential competition. Both of these factors will contribute a higher level of inventory risk in our near future.

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We depend on 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. In the event one of our sole source suppliers is unable or unwilling to sell us material components this could have a significant adverse effect on our operations. Additionally, 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, we utilize overseas vendors in our semiconductor business to provide GaAs wafers, fabricate certain products and package the majority of our products. These vendors are located in Singapore, The Philippines, Malaysia, Taiwan and France. Reliance on oversea vendors subject us 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 our 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, 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. 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.

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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 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

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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.

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

As of September 28, 2003, Fox Paine & Company, LLC (“Fox Paine”) is the indirect beneficial owner of 64.5% of our outstanding share capital. As a result, Fox Paine has and will continue to have control over the outcome of matters requiring stockholder approval, including the power to:

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

•amend our charter or by-laws; and

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

Fox Paine also will be able to delay, prevent or cause a change in control relating to us. Fox Paine’s control over us and our subsidiaries, and its ability to delay or prevent a change in control relating to us could adversely affect the market price of our common stock.

Fox Paine’s controlling interest could also subject us to a class action lawsuits which could result in substantial costs and divert our management’s attention and financial resources from more productive uses. As previously announced, we received a proposal from Fox Paine to acquire all of the shares of our common stock held by unaffiliated stockholders (the “Acquisition Proposal”). The Acquisition Proposal was withdrawn by Fox Paine on March 27, 2003. Three putative class action lawsuits and one lawsuit by our former chief executive officer were filed against Fox Paine, the Company and certain of our current and former directors in connection with the Acquisition Proposal. The lawsuits sought to enjoin the Acquisition Proposal and unspecified compensatory damages. Although each of these lawsuits have been voluntarily dismissed without prejudice as a result of the withdrawal of the Acquisition Proposal, we cannot assure you that, in the future, no other purported class action lawsuits will be filed against us based on similar allegations. During the first nine months of 2003, we have incurred approximately $773,000 of costs and expenses related to the Acquisition Proposal. We expect these expenses to continue through the remainder of 2003. Furthermore, we cannot assure you that Fox Paine will not in the future attempt to acquire complete control of the Company or engage in a going private transaction.

In addition, Fox Paine receives management fees from us which could influence their decisions regarding us.

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.

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We have also identified the following additional risks which are described in detail in our Form 10-K for the year ended December 31, 2002:

i.	We face intense competition, and, if we do not compete effectively in our markets, we will lose sales and have lower margins.
ii.	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.
iii.	Claims that we are infringing third-party intellectual property rights may result in costly litigation.
iv.	Changes in the regulatory environment of the communications industry may reduce the demand for our products.
v.	Our future profitability could suffer from known or unknown liabilities that we retained when we sold parts of our company.
vi.	If we fail to comply with environmental regulations we could be subject to substantial fines.
vii.	If RF emissions pose a health risk, the demand for our products may decline.
viii.	Our facilities are concentrated in an area susceptible to earthquakes.
ix.	Our stock price is highly volatile.
x.	Our business experiences seasonality.
xi.	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.
xii.	There are inherent risks associated with sales to our foreign customers.
xiii.	Future sales of our common stock could depress its market price.
xiv.	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 the Annual Report on Form 10-K and any of our other public filings is determined to contain false statements.

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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 AND USE OF PROCEEDS

Not applicable.

Item 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

We held our annual meeting of stockholders on July 15, 2003 and reported the information required by this Item 4 in our Form 10-Q for the quarter ended June 29, 2003 filed with the Securities and Exchange Commission on August 12, 2003.

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
10.1	Amended and Restated Loan and Security Agreement, dated September 29, 2003, by and among the Registrant and Comerica Bank.
10.2	Intellectual Property Security Agreement, dated September 29, 2003, by and among the Registrant and Comerica Bank.
31.1	Certification of Michael R. Farese, Chief Executive Officer, pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
31.2	Certification of Fred J. Krupica, Chief Financial Officer, pursuant to Rule 13a-14 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 Fred J. Krupica, Principal Financial Officer, Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

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(b)Reports on Form 8-K during the quarter ended September 28, 2003.

On July 22, 2003, we filed a Form 8-K with the Securities and Exchange Commission under Item 9 (pursuant to Item 12) relating to the issuance of a press release announcing our second quarter 2003 financial results.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 30st day of October 2003.

		WJ COMMUNICATIONS, INC.
		(Registrant)
Date	October 30, 2003	By:	/s/ MICHAEL R. FARESE, Ph.D.
			Michael R. Farese, Ph.D.
			President and Chief Executive Officer (principal executive officer)
Date	October 30, 2003	By:	/s/ FRED J. KRUPICA
			Fred J. Krupica
			Chief Financial Officer (principal financial officer)

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EX-10.1

Exhibit 10.1

WJ COMMUNICATIONS, INC.

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of September 23, 2003, by and between COMERICA BANK, successor in interest to COMERICA BANK-CALIFORNIA (“Bank”) and WJ COMMUNICATIONS, INC. (“Borrower”) (this “Agreement”).

RECITALS

A. Bank and Borrower are parties to that certain Loan and Security Agreement dated as of December 15, 2000, as amended (the “Original Agreement”).

B. Borrower and Bank wish to amend and restate the terms of the Original Agreement.  This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank.

AGREEMENT

The parties agree as follows:

1.DEFINITIONS AND CONSTRUCTION.

1.1Definitions.  As used in this Agreement, the following terms shall have the following definitions:

“Accounts” means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrower’s Books relating to any of the foregoing.

“Advance” or “Advances” means a cash advance or cash advances made, or Letters of Credit issued, under the Revolving Facility.

“Affiliate” means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person’s senior executive officers, directors, and partners.

“Bank Expenses” means all:  reasonable costs or expenses (including reasonable attorneys’ fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; reasonable Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses incurred in amending, enforcing or defending the Loan Documents (including fees and expenses of appeal), incurred before, during and after an Insolvency Proceeding, whether or not suit is brought.

“Borrower’s Books” means all of Borrower’s books and records including:  ledgers; records concerning Borrower’s assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.

“Business Day” means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.

“Change in Control” shall mean a transaction in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of stock then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering

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such “person” or “group” to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction.

“Closing Date” means the date of this Agreement.

“Code” means the California Uniform Commercial Code.

“Collateral” means the property described on Exhibit A attached hereto.

“Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person, services relating to initiation of electronic funds transfer entries, corporate credit cards, or merchant services provided for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business.  The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

“Copyrights” means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.

“Credit Extension” means each Advance, Letter of Credit, ACH service provided by Bank under Section 2.1.3, Swing Loan, or any other extension of credit by Bank for the benefit of Borrower hereunder.

“Daily Balance” means the amount of the Obligations owed at the end of a given day.

“Equipment” means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

“Event of Default” has the meaning assigned in Article 8.

“GAAP” means generally accepted accounting principles as in effect from time to time.

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations.

“Insolvency Proceeding” means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

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“Intellectual Property Collateral” means all of Borrower’s right, title, and interest in and to the following:

(a)Copyrights, Trademarks and Patents;

(b)Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held;

(c)Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held;

(d)Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above;

(e)All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights;

(f)All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and

(g)All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

“Interest Period” means for each LIBOR Rate Advance, a period thirty (30), sixty (60), and ninety (90) days, as Borrower may elect, provided that a LIBOR option is quoted for such period on the applicable LIBOR interbank market and that the last day of an Interest Period for a LIBOR Rate Advance shall be determined in accordance with the practices of the LIBOR interbank market as from time to time in effect, provided, further, in all cases such period shall expire not later than the applicable Revolving Maturity Date.

“Inventory” means all present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Borrower’s Books relating to any of the foregoing.

“Investment” means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person.

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

“Letter of Credit” means a letter of credit issued under this Agreement.

“LIBOR Base Rate” means, for any Interest Period for a LIBOR Rate Advance, the rate of interest per annum determined by Bank to be the per annum rate of interest at which deposits in United States Dollars are offered to Bank in the London interbank market in which Bank customarily participates at 10:00 a.m. California time on the day that is the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such Advance.

“LIBOR Rate” shall mean, for any Interest Period for a LIBOR Rate Advance, a rate per annum (rounded upwards, if necessary, to the nearest whole 1/8 of 1%) equal to (i) the LIBOR Base Rate for such Interest Period divided by (ii) 1 minus the Reserve Requirement for such Interest Period.

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“LIBOR Rate Advances” means any Advances made or a portion thereof on which interest is payable based on the LIBOR Rate in accordance with the terms hereof.

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

“Loan Documents” means, collectively, this Agreement, any note or notes executed by Borrower, and any other agreement entered into in connection with this Agreement, all as amended or extended from time to time.

“Material Adverse Effect” means a material adverse effect on (i) the business operations, financial or other condition of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents.

“Material Subsidiary” means a Subsidiary with assets having a fair market value of more than $250,000.

“Negotiable Collateral” means all of Borrower’s present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper, and Borrower’s Books relating to any of the foregoing.

“Obligations” means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise.

“Patents” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

“Periodic Payments” means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank.

“Permitted Indebtedness” means:

(a)Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document;

(b)Indebtedness existing on the Closing Date and disclosed in the Schedule;

(c)Subject to the capital expenditures limitation set forth in Section 7.12 below, Indebtedness with respect to capital lease obligations or Indebtedness secured by a lien described in clause (c) of the defined term “Permitted Liens,” provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness determined as of the date of such financing;

(d)Subordinated Debt; and

(e)Extensions, renewals, refundings, refinancings, modifications, amendments and restatements of any of the items of Permitted Indebtedness (a) through (d) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower.

“Permitted Investment” means:

(a)Investments existing on the Closing Date disclosed in the Schedule;

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(b)(i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor’s Corporation or Moody’s Investors Service, (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank and (iv) Bank’s money market accounts; and

(c)Investments permitted pursuant to Borrower’s investment policy in the form presented to Bank as of the Closing Date, as amended from time to time upon notice to Bank.

“Permitted Liens” means the following:

(a)Any Liens existing on the Closing Date and disclosed in the Schedule;

(b)Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings;

(c)Liens (i) upon or in any equipment acquired, leased or held by Borrower or any of its Subsidiaries to secure the purchase price or lease amount of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment;

(d)Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase;

(e)Liens securing claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like persons or entities incurred in the ordinary course of business and imposed without action of such parties; and

(f)Liens incurred or deposits made in the ordinary course of Borrower’s business in connection with worker’s compensation, unemployment insurance, social security and other like laws.

“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

“Prime Rate” means the variable rate of interest, per annum, most recently announced by Bank, as its “prime rate,” whether or not such announced rate is the lowest rate available from Bank.

“Reserve Requirement” means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against “Eurocurrency liabilities” (as such term is used in Regulation D) by member banks of the Federal Reserve System, adjusted by Bank for expected changes in such reserve percentage during the applicable Interest Period.  Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of “LIBOR Base Rate” or (ii) any category of extensions of credit or other assets which include Advances.

“Responsible Representative” means each authorized signer named on the Corporate Resolutions to Borrow dated September 23, 2003, as thereafter amended.

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“Revolving Facility” means the facility under which Borrower may request Bank to issue Advances, as specified in Section 2.1.1 hereof.

“Revolving Line” initially means Credit Extensions of up to Twenty Million Dollars ($20,000,000).  Notwithstanding the foregoing, the amount of the Revolving Line may be reduced by Borrower in increments of not less than One Million Dollars ($1,000,000) upon five (5) Business Days prior written notice to Bank and repayment of the Obligations as required to bring the outstanding balance to an amount equal to or less than the new Revolving Line amount requested by Borrower.

“Revolving Maturity Date” means September 22, 2005.

“Schedule” means the schedule attached hereto, if any.

“Subordinated Debt” means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified in writing as being such by Borrower and Bank).

“Subsidiary” means any corporation, company or partnership in which (i) any general partnership interest or (ii) more than 50% of the stock or other units of ownership which by the terms thereof has the ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate.

“Swing Loan” has the meaning set forth in Section 2.1.4.

“Tangible Net Worth” means at any date as of which the amount thereof shall be determined, all assets of Borrower, excluding any value of goodwill, trademarks, patents, copyrights, organization expenses and other similar intangible items, less Total Liabilities.

“Total Liabilities” means at any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP, be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness.

“Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.

1.2Accounting Terms.  All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations made hereunder shall be made in accordance with GAAP.  When used herein, the terms “financial statements” shall include the notes and schedules thereto.

2.LOAN AND TERMS OF PAYMENT.

2.1Credit Extensions.

Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder.  Borrower shall also pay interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.

2.1.1Revolving Advances.

(a)Subject to and upon the terms and conditions of this Agreement, Borrower may request Advances in an aggregate outstanding amount not to exceed the Revolving Line minus the aggregate face amount of outstanding Letters of Credit, including any drawn but unreimbursed Letters of Credit, and the ACH Reserves (as defined below).  Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to

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this Section 2.1.1 may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1.1 shall be immediately due and payable.

(b)Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 10:00 a.m. California time, on the Business Day that is one (1) Business Day prior to the Business Day on which a Prime Rate Advance is to be made (or prior to 11:00 a.m. California time, on the Business Day that a Swing Loan is to be made), and noon California time on the Business Day that is three (3) Business Days prior to the Business Day on which a LIBOR Rate Advance is made.  Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B-1 or Exhibit B-2 hereto.  Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Representative or a designee of a Responsible Representative.  Bank shall be entitled to rely on any telephonic notice given by a person whom Bank reasonably believes to be a Responsible Representative or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance.  Bank will credit the amount of Advances made under this Section 2.1.1 to Borrower’s deposit account, as specified by Borrower.

Each such notice shall specify:

(i)the date such Advance is to be made, which shall be a Business Day;

(ii)the amount of such Advance;

(iii)whether such Advance is to be a Prime Rate Advance or a LIBOR Rate Advance; and

(iv)if the Advance is to be a LIBOR Rate Advance, the Interest Period for such Advance;

Each written request for an Advance, and each confirmation of a telephone request for such an Advance, shall be in substantially the form of Exhibit B-1 or Exhibit B-2 hereto executed by Borrower.

(c)Prime Rate Advances.  Except for Prime Rate Advances that are Swing Loans, each Prime Rate Advance shall be in an amount of not less than Five Hundred Thousand Dollars ($500,000).  Unless otherwise agreed to by Bank in writing, each Swing Loan shall not be in an amount of less than Two Hundred Fifty Thousand Dollars ($250,000).  The outstanding principal balance of each Prime Rate Advance shall bear interest until principal is due (computed daily on the basis of a 360 day year and actual days elapsed), at a floating rate per annum equal to the Prime Rate less One Half Percent (0.5%).  Borrower shall pay the entire outstanding principal amount of each Prime Rate Advance on the Revolving Maturity Date.

(d)LIBOR Rate Advances.  Each LIBOR Rate Advance shall be in an amount of not less than One Million Dollars ($1,000,000).  The outstanding principal balance of each LIBOR Rate Advance shall bear interest until principal is due (computed daily on the basis of a 360 day year and actual days elapsed) at a rate per annum equal to the LIBOR Rate plus One Percent (1.0%) for such LIBOR Rate Advance.  Unless converted or continued pursuant to Section 2.6, the entire outstanding principal amount of each LIBOR Rate Advance shall be due and payable on the earlier of (i) the last day of the LIBOR Rate Interest Period for such LIBOR Rate Advance, and (ii) the Revolving Maturity Date.  At no time may the outstanding LIBOR Rate Advances be subject to more than three LIBOR Rate Interest Periods.

(e)Prepayment of the Advances.  Borrower may at any time prepay any Prime Rate Advance or any LIBOR Rate Advance, in full or in part.  Each partial prepayment for a Swing Loan shall be in an amount not less than Two Hundred Fifty Thousand Dollars ($250,000), unless otherwise agreed to by Bank, and each partial prepayment for a LIBOR Rate Advance shall be in an amount not less than One Hundred Thousand Dollars ($100,000).  Each prepayment shall be made upon the irrevocable written or telephone notice of Borrower received by Bank not later than 10:00 a.m. California time on the date of the prepayment of a Prime Rate Advance, and not less than three (3) Business Days prior to the date of the prepayment of a LIBOR Rate Advance.  The notice

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of prepayment shall specify the date of the prepayment, the amount of the prepayment, and the Advance or Advances prepaid.  Each prepayment of a LIBOR Rate Advance shall be accompanied by the payment of accrued interest on the amount prepaid and any amount required by Section 2.6.

2.1.2Letters of Credit.

(a)Subject to the terms and conditions of this Agreement, at any time until ten (10) days prior to the Revolving Maturity Date, Bank agrees to issue or cause to be issued standby, documentary, or performance Letters of Credit for the account of Borrower in an aggregate outstanding amount of undrawn Letters of Credit not to exceed the Revolving Line minus the then outstanding principal balance of the Advances (including Advances that arise by virtue of amounts paid by Bank under Letters of Credit) and ACH Reserves (as defined below); provided the aggregate face amount of such Letters of Credit shall not in any case exceed Fifteen Million Dollars ($15,000,000) in aggregate.  All Letters of Credit shall be, in form and substance, acceptable to Bank in its reasonable discretion and shall be subject to the terms and conditions of Bank’s form of standard application and letter of credit agreement, including Bank’s fee of one percent (1.0%), payable on the date of issuance of each Letter of Credit.  All amounts actually paid by Bank in respect of a Letter of Credit shall, when paid, constitute an Advance.  Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys’ fees, arising out of or in connection with any Letters of Credit so long as Bank acts reasonably and in good faith in connection with such Letters of Credit.  All Letters of Credit shall have an expiration date which is not later than the earlier of (i) twelve (12) months from the date of issuance (or one hundred twenty (120) days from the date of issuance for documentary Letters of Credit) and (ii) ten (10) days prior to the Revolving Maturity Date.

2.1.3ACH Sublimit.  Subject to the terms and conditions of this Agreement, Borrower may request ACH origination services by delivering to Bank a duly executed ACH application on Bank’s standard form; provided, however, that availability under the Revolving Line shall be reduced by the aggregate amount of the ACH processing reserves established by Bank (the “ACH Reserves”).  At no time shall the ACH services requested by Borrower be such that the ACH Reserves exceed $3,500,000 in the aggregate.  In addition, Bank may, in its sole discretion, charge as Advances any amounts that become due or owing to Bank in connection with the ACH services.  All ACH services will be terminated and no further ACH services will be provided after the date which is ten (10) days prior to the Revolving Maturity Date.

2.1.4Swing Line.

(a)Subject to the terms and conditions set forth in Section 2.1.1(b), any Advance that Borrower requests be made on the same Business Day requested (any such advance being referred to as a “Swing Loan” and such advances being referred to collectively as “Swing Loans”) shall be subject to all the terms and conditions applicable to other Advances, except that no Swing Loan shall be a LIBOR Rate Advance.  The aggregate amount of all outstanding Swing Loans shall not exceed Five Million Dollars ($5,000,000) at any time.

(b)The Swing Loans shall bear interest at the rate applicable from time to time to Advances that are Prime Rate Advances (unless another rate has previously been agreed to in writing by Bank and Borrower).

(c)Upon notice by Bank to Borrower that a Swing Loan has been converted into an Advance that is not a Swing Loan, such Swing Loan shall thereafter be deemed an Advance that is not a Swing Loan under Section 2.1.1 for all purposes.

2.2Interest Rates, Payments, and Calculations.

(a)Interest Rates  Except as set forth in Section 2.2(b), the Advances shall bear interest, on the outstanding daily balance thereof, at the rates specified in Section 2.1.1.

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(b)Default Rate.  All Obligations shall bear interest, from and after the occurrence and during the continuance of an Event of Default, at a rate equal to three (3) percentage points above the interest rate applicable immediately prior to the occurrence of an Event of Default.

(c)Payments.  Interest hereunder shall be due and payable on the first (1^st) calendar day of each month during the term hereof, provided interest on LIBOR Advances shall be payable on the last day of the applicable Interest Period.  Notwithstanding the foregoing, all outstanding interest shall be due and payable on the Revolving Maturity Date.  Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrower’s deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder.  Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder.  Bank shall deliver to Borrower statements of account in the ordinary course of business.

(d)Computation.  In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate.

2.3Crediting Payments.  Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies.  After the occurrence and continuance of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment.  Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day.  Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.

2.4Fees.  Borrower shall pay to Bank the following:

(a)Unused Facility Fee.  On the last day of each fiscal quarter, an amount equal to twenty one-hundredths of one percent (0.20%) of the difference between the Revolving Line and the average Daily Balance (including the face amount of outstanding Letters of Credit and the ACH Reserves) during that quarter (such fee to be automatically charged by Bank against Borrower’s deposit account at Bank);

(b)Bank Expenses.  On the Closing Date, all Bank Expenses incurred through the Closing Date, including reasonable attorneys’ fees and expenses and, after the Closing Date, all Bank Expenses, including reasonable attorneys’ fees and expenses, as and when they become due.

2.5Conversion/Continuation of Advances.

(a)Borrower may from time to time submit in writing a request that Prime Rate Advances be converted to LIBOR Rate Advances or that any existing LIBOR Rate Advances continue for an additional Interest Period.  Such request shall specify the amount of the Prime Rate Advances which will constitute LIBOR Rate Advances (subject to the limits set forth below) and the Interest Period to be applicable to such LIBOR Rate Advances.  Each written request for a conversion to a LIBOR Rate Advance or a continuation of a LIBOR Rate Advance shall be substantially in the form of a Libor Rate Conversion/Continuation Certificate as set forth on Exhibit B-2, which shall be duly executed by a Responsible Representative.  Subject to the terms and conditions contained herein, three (3) Business Days after Bank’s receipt of such a request from Borrower, such Prime Rate Advances shall be converted to LIBOR Rate Advances or such LIBOR Rate Advances shall continue, as the case may be provided that:

(i)no Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists;

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(ii)no party hereto shall have sent any notice of termination of the Agreement;

(iii)Borrower shall have complied with such customary procedures as Bank has established from time to time for Borrower’s requests for LIBOR Rate Advances;

(iv)the amount of a LIBOR Rate Advance shall be $1,000,000 or such greater amount which is an integral multiple of $100,000; and

(v)Bank shall have determined that the Interest Period or LIBOR Rate is available to Bank as of the date of the request for such LIBOR Rate Advance.

Any request by Borrower to convert Prime Rate Advances to LIBOR Rate Advances or continue any existing LIBOR Rate Advances shall be irrevocable.  Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable LIBOR Rate market to fund any LIBOR Rate Advances, but the provisions hereof shall be deemed to apply as if Bank had purchased such deposits to fund the LIBOR Rate Advances.

(b)Any LIBOR Rate Advances shall automatically convert to Prime Rate Advances upon the last day of the applicable Interest Period, unless Bank has received and approved a complete and proper request to continue such LIBOR Rate Advance at least three (3) Business Days prior to such last day in accordance with the terms hereof.  Any LIBOR Rate Advances shall, at Bank’s option, convert to Prime Rate Advances in the event that an Event of Default shall occur and be continuing.  Borrower shall pay to Bank, upon demand by Bank any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of LIBOR Rate Advances to Prime Rate Advances pursuant to any of the foregoing.

2.6Additional Requirements/Provisions Regarding LIBOR Rate Advances.

(a)If for any reason (including voluntary or mandatory prepayment or acceleration), Bank receives all or part of the principal amount of a LIBOR Rate Advance prior to the last day of the Interest Period for such LIBOR Rate Advance, Borrower shall on demand by Bank, pay Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period or term exceeds (ii) the interest which would have been recoverable by Bank by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period or term at the interest rate determined by Bank.

(b)Borrower shall pay to Bank, upon demand by Bank, from time to time such amounts as Bank may reasonably determine to be necessary to compensate it for any costs incurred by Bank that Bank determines are attributable to its making or maintaining of any amount receivable by Bank hereunder in respect of any Advances relating thereto (such increases in costs and reductions in amounts receivable being herein called “Additional Costs”), in each case resulting from any change in applicable law (a “Regulatory Change”) that:

(i)changes the basis of taxation of any amounts payable to Bank under this Agreement in respect of any Advances (other than changes which affect taxes measured by or imposed on the overall net income of Bank; or

(ii)imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of Bank (including any Advances or any deposits referred to in the definition of “LIBOR Base Rate”); or

(iii)imposes any other material condition affecting this Agreement (or any of such extensions of credit or liabilities).

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Bank will notify Borrower of any event occurring after the date of the Agreement which will entitle Bank to compensation pursuant to this section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation.  Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for compensation under this Section 2.6.

(c)Borrower shall pay to Bank, upon the request of Bank, such amount or amounts as shall be sufficient (in the sole good faith opinion of Bank) to compensate it for any reasonable loss, costs or expense incurred by it as a result of any failure by Borrower to borrow a LIBOR Rate Advance on the date for such borrowing specified in the relevant notice of borrowing hereunder.

(d)If Bank shall determine that the adoption or implementation of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any respect or directive regarding capital adequacy of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank (a “Parent”) as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within 15 days after demand by Bank, Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction.

(e)If at any time Bank, in its sole and absolute discretion, determines that:  (i) the amount of the LIBOR Rate Advances for periods equal to the corresponding Interest Periods or any other period are not available to Bank in the offshore currency interbank markets, or (ii) the LIBOR Rate does not accurately reflect the cost to Bank of lending the LIBOR Rate Advance, then Bank shall promptly give notice thereof to Borrower, and upon the giving of such notice Bank’s obligation to make the LIBOR Rate Advances shall terminate, unless Bank and Borrower agree in writing to a different interest rate applicable to LIBOR Rate Advances.  If it shall become unlawful for Bank to continue to fund or maintain any Advances, or to perform its obligations hereunder, upon demand by Bank, Borrower shall prepay the Advances in full with accrued interest thereon and all other amounts payable by Borrower hereunder (including, without limitation, any amount payable in connection with such prepayment pursuant to Section 2.6(a).

2.7Additional Costs.  In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority:

(a)subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank;

(b)imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or

(c)imposes upon Bank any other condition with respect to its performance under this Agreement,

and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to the Obligations, Bank shall notify Borrower thereof.  Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and setting forth Bank’s calculation thereof, all in reasonable detail.

2.8Term.  This Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement.  Notwithstanding the foregoing, Bank shall have the right to

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terminate its obligation to make Credit Extensions under this Agreement immediately upon the occurrence and during the continuance of an Event of Default.  Notwithstanding termination, Bank’s Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.

3.CONDITIONS OF LOANS.

3.1Conditions Precedent to Initial Credit Extension.  The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance reasonably satisfactory to Bank, the following:

(a)this Agreement;

(b)a certificate of the Secretary of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement;

(c)Intellectual Property Security Agreement;

(d)UCC National Form Financing Statement;

(e)an executed Compliance Certificate in the form of Exhibit C attached hereto;

(f)agreement to provide insurance;

(g)securities account control agreement (Bear Sterns);

(h)payment of the Bank Expenses then due specified in Section 2.4 hereof;

(i)current financial statements of Borrower; and

(j) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

3.2Conditions Precedent to all Credit Extensions.  The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:

(a)timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and

(b)the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date).  The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b).

4.CREATION OF SECURITY INTEREST.

4.1Grant of Security Interest.  Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents.  Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof.

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4.2Delivery of Additional Documentation Required.  Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral except for Letters of Credit with a face amount of less than $250,000, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank’s security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents.

4.3Right to Inspect.  Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower’s usual business hours but no more than once a year (unless an Event of Default has occurred and is continuing), to inspect Borrower’s Books and to make copies thereof and to check, test, and appraise the Collateral and audit Borrower’s Books in order to verify Borrower’s financial condition or the amount, condition of, or any other matter relating to, the Collateral.

4.4Pledge of Collateral.  Borrower hereby pledges, assigns and grants to Bank a security interest in all shares of stock which are part of the Collateral, including without limitation all Borrower’s equity interests in its Subsidiaries (the “Shares”), together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the performance of the Obligations.  The certificate or certificates for 100% of the Shares of all Material Subsidiaries (or 65% of the Shares of any Material Subsidiary which is not formed under the laws of the United States and is not treated as a disregarded entity for United States tax purposes) will be delivered to Bank, accompanied by an instrument of assignment duly executed in blank by Borrower, and Borrower shall cause the books of each entity whose shares are part of the Shares and any transfer agent to reflect the pledge of the Shares.  Upon the occurrence of an Event of Default, Bank may effect the transfer of the Shares into the name of Bank and cause new certificates representing such securities to be issued in the name of Bank or its transferee.  Borrower will execute and deliver such documents, and take or cause to be taken such actions, as Bank may reasonably request to perfect or continue the perfection of Bank’s security interest in the Shares.  Unless an Event of Default shall have occurred and be continuing, Borrower shall be entitled to exercise any rights with respect to the Shares and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms.

5.REPRESENTATIONS AND WARRANTIES.

Borrower represents and warrants as follows:

5.1Due Organization and Qualification.  Borrower and each Material Subsidiary is a corporation duly existing under the laws of its state of incorporation and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified except where the failure to be so qualified and licensed will not have a Material Adverse Effect.

5.2Due Authorization; No Conflict.  The execution, delivery, and performance of the Loan Documents are within Borrower’s powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrower’s Articles of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement to which Borrower is a party or by which Borrower is bound.  Borrower is not in default under any agreement to which it is a party or by which it is bound, which default is reasonably likely to have a Material Adverse Effect.

5.3No Prior Encumbrances.  Borrower has good and marketable title to its property, free and clear of Liens, except for Permitted Liens.

5.4Bona Fide Accounts.  Except for Accounts for which Borrower maintains normal reserves in accordance with GAAP, the Accounts are bona fide existing obligations.  All Accounts are maintained and reported on in accordance with GAAP.

5.5Merchantable Inventory.  Except for reserves maintained in accordance with GAAP, all Inventory is in all material respects of good and marketable quality, free from all material defects.

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5.6Intellectual Property.  Borrower is the sole owner of the Intellectual Property Collateral, except for licenses granted by or to Borrower.  Each of the Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property Collateral violates the rights of any third party, except to the extent that such invalidity, unenforceability or violation has not and will not cause a Material Adverse Effect.  Except as set forth in the Schedule, Borrower’s rights as a licensee of intellectual property do not give rise to more than five percent (5%) of its gross revenue in any given month, including without limitation revenue derived from the sale, licensing, rendering or disposition of any product or service.  Except as set forth in the Schedule, Borrower is not a party to, or bound by, any agreement that restricts the grant by Borrower of a security interest in Borrower’s rights under such agreement.

5.7Name; Location of Chief Executive Office.  Except as disclosed in the Schedule, Borrower has not done business under any name other than that specified on the signature page hereof.  The chief executive office of Borrower is located at the address indicated in Section 10 hereof.  Except as set forth in the Schedule or in Section 7.10, all Borrower’s Inventory and Equipment is located only at the location set forth in Section 10 hereof.

5.8Litigation.  Except as set forth in the Schedule, there are no actions or proceedings pending by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision is reasonably likely to have a Material Adverse Effect.

5.9No Material Adverse Change in Financial Statements.  All consolidated financial statements other than projections related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrower’s consolidated financial condition as of the date thereof and Borrower’s consolidated results of operations for the period then ended.  There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.

5.10Solvency, Payment of Debts.  Borrower is solvent and able to pay its debts (including trade debts) as they mature.

5.11Regulatory Compliance.  Borrower and each Material Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to the minimum funding requirements of ERISA.  No event has occurred resulting from Borrower’s failure to comply with ERISA that is reasonably likely to result in Borrower’s incurring any liability that is reasonably likely to have a Material Adverse Effect.  Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940.  Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T and U of the Board of Governors of the Federal Reserve System).  Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act.  Borrower has not violated any statutes, laws, ordinances or rules applicable to it, violation of which is reasonably likely to have a Material Adverse Effect.

5.12Environmental Condition.  Except as disclosed in the Schedule, none of the properties or assets currently owned, leased or occupied by Borrower or any Material Subsidiary has ever been used by Borrower or any Material Subsidiary or, to the best of Borrower’s knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower’s knowledge, none of Borrower’s properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Material Subsidiary; and neither Borrower nor any Material Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Material Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment.

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5.13Taxes.  Borrower and each Material Subsidiary has filed or caused to be filed all tax returns required to be filed, and has paid, or has made adequate provision for the payment of, all taxes reflected therein, except those contested in good faith.

5.14Subsidiaries.  Borrower does not own any stock, partnership interest or other equity securities of any Person, except for Permitted Investments.

5.15Government Consents.  Borrower and each Material Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrower’s business as currently conducted, the failure to obtain, make or give which is reasonably likely to have a Material Adverse Effect.

5.16Shares.  Borrower has full power and authority to create a first lien on the Shares and no disability or contractual obligation exists that would prohibit Borrower from pledging the Shares pursuant to this Agreement.  There are no subscriptions, warrants, rights of first refusal or other restrictions on, or options exercisable with respect to the Shares.  The Shares have been and will be duly authorized and validly issued, and are fully paid and non-assessable.  The Shares are not the subject of any present or overtly threatened suit, action, arbitration, administrative or other proceeding, and Borrower knows of no reasonable grounds for the institution of any such proceedings.

5.17Full Disclosure.  No representation, warranty or other statement made by Borrower in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading.

6.AFFIRMATIVE COVENANTS.

Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following:

6.1Good Standing.  Borrower shall maintain its and each of its Material Subsidiaries’ corporate existence in its jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify is reasonably likely to have a Material Adverse Effect.  Borrower shall maintain, and shall cause each of its Material Subsidiaries to maintain in force all licenses, approvals and agreements, the loss of which is reasonably likely to have a Material Adverse Effect.

6.2Government Compliance.  Borrower shall meet, and shall cause each Material Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA.  Borrower shall comply, and shall cause each Material Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which is reasonably likely to have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank’s Lien on the Collateral.

6.3Financial Statements, Reports, Certificates.  Borrower shall deliver to Bank:  (a) as soon as available, but in any event within forty-five (45) days after the end of each quarter, Borrower’s report on Form 10-Q, including Borrower’s company prepared financial statements, (b) as soon as available, but in any event within ninety (90) days after the end of Borrower’s fiscal year, audited consolidated and consolidating financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank and Borrower’s report on Form 10-K; (c) promptly upon receipt of notice thereof, a report of any legal actions pending or overtly threatened against Borrower or any Subsidiary that is reasonably likely to result in damages or costs to Borrower or any Subsidiary of Five-Hundred Thousand Dollars ($500,000) or more; (d) within thirty (30) days of the last day of each fiscal quarter, a report signed by Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any material Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower’s intellectual property, including but not limited to any subsequent ownership right of Borrower in or to any material Trademark, Patent or Copyright not specified in Exhibits A, B, and C of the Intellectual Property Security Agreement delivered to Bank by Borrower in connection with this Agreement; and (e) such budgets, sales

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projections, operating plans or other financial information as Bank may reasonably request from time to time generally prepared by Borrower in the ordinary course of business.

Borrower shall deliver to Bank with the quarterly 10Q report a Compliance Certificate (including covenant calculations providing detail acceptable to Bank) signed by a Responsible Representative in substantially the form of Exhibit C hereto, provided that Borrower shall deliver covenant calculations for the covenant set forth in Section 6.8 within thirty (30) days of the last day of each month at all times that the aggregate balance of Borrower’s unrestricted cash and cash equivalents located in the United States minus the aggregate balance of all Indebtedness (including without limitation any Contingent Obligations) owing from Borrower to Bank, is less than Thirty Five Million Dollars ($35,000,000).

6.4Inventory; Returns.  Borrower shall keep all Inventory in good and marketable condition, free from all material defects except for Inventory for which adequate reserves have been made in accordance with GAAP.  Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement.  Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than One Million Dollars ($1,000,000).

6.5Taxes.  Borrower shall make, and shall cause each Material Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Material Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Material Subsidiary has made such payments or deposits; provided that Borrower or a Material Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.

6.6Insurance.

(a)Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrower’s business is conducted on the date hereof.  Borrower shall also maintain insurance relating to Borrower’s ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to Borrower’s.

(b)All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Bank.  All such policies of property insurance shall contain a lender’s loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason.  Upon Bank’s request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor.  All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations.

6.7Tangible Net Worth.  Borrower shall maintain a Tangible Net Worth of not less than Twenty Million Dollars ($20,000,000) plus an amount equal to fifty percent (50%) of Borrower’s net income for each quarter after the quarter ending June 30, 2003, calculated in accordance with GAAP, plus an amount equal to seventy-five percent (75%) of the proceeds received after the Closing Date from the sale or issuance by Borrower of its equity or Subordinated Debt securities.

6.8Domestic Cash Balance.  The aggregate balance of Borrower’s unrestricted cash and cash equivalents located in the United States minus the aggregate balance of all Indebtedness (including without limitation any issued Letters of Credit (whether drawn or undrawn) and other Contingent Obligations) owing from Borrower to Bank, shall be at least Twenty Five Million Dollars ($25,000,000) at all times.

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6.9Principal Depository. Borrower shall maintain its principal depository, money market and operating accounts with Bank.

6.10Subsidiary Guaranties.  Promptly upon acquisition or formation, each Material Subsidiary formed under the laws of the United States shall sign a guaranty of the Obligations, in form and substance satisfactory to Bank, secured by all of such Subsidiary’s assets, along with such other documents as Bank deems necessary or advisable to effectuate such secured guaranty, including without limitation a third party security agreement, intellectual property security agreement, and UCC financing statement, each in form and substance satisfactory to Bank.

6.11Intellectual Property Rights.

(a)Borrower shall register or cause to be registered (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as the case may be, those registerable intellectual property rights now owned or hereafter developed or acquired by Borrower, to the extent that Borrower, in its reasonable business judgment, deems it appropriate to so protect such intellectual property rights.

(b)Borrower shall promptly give Bank written notice of any applications or registrations of intellectual property rights filed with the United States Patent and Trademark Office, including the date of such filing and the registration or application numbers, if any.  Borrower shall (i) give Bank not less than 30 days prior written notice of the filing of any applications or registrations with the United States Copyright Office, including the title of such intellectual property rights to be registered, as such title will appear on such applications or registrations, and the date such applications or registrations will be filed, and (ii) prior to the filing of any such applications or registrations, shall execute such documents as Bank may reasonably request for Bank to maintain its perfection in such intellectual property rights to be registered by Borrower, and upon the request of Bank, shall file such documents simultaneously with the filing of any such applications or registrations.  Upon filing any such applications or registrations with the United States Copyright Office, Borrower shall promptly provide Bank with (i)  a copy of such applications or registrations, without the exhibits, if any, thereto, (ii) evidence of the filing of any documents requested by Bank to be filed for Bank to maintain the perfection and priority of its security interest in such intellectual property rights, and (iii) the date of such filing.

(c)Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect and maintain the priority of Bank’s security interest in the Intellectual Property Collateral.  Borrower shall (i) protect, defend and maintain the validity and enforceability of the trade secrets, Trademarks, Patents and Copyrights, (ii) use commercially reasonable efforts to detect infringements of the Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld.

(d)Bank may audit Borrower’s Intellectual Property Collateral to confirm compliance with this Section, provided such audit may not occur more often than twice per year, unless an Event of Default has occurred and is continuing.  Bank shall have the right, but not the obligation, to take, at Borrower’s sole expense, any actions that Borrower is required under this Section to take but which Borrower fails to take, after 15 days’ written notice to Borrower.  Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section.

6.12Further Assurances.  At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement.

7.NEGATIVE COVENANTS.

Borrower covenants and agrees that, so long as any credit hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following:

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7.1Dispositions.  Convey, sell, lease, transfer or otherwise dispose of (collectively, a “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than: (i) Transfers of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries; (iii) Transfers of worn -out or obsolete Equipment; and (iv) Transfers of fixed assets in the ordinary course of business that do not exceed $2,500,000 in the aggregate during the term of this Agreement.  Notwithstanding the foregoing, nothing in this Section 7.1 shall prohibit Borrower from selling its Gallium Arsenide foundry located in Milpitas, California (the “Gallium Arsenide Sale”).

7.2Change in Business; Change in Control or Executive Office.  Engage in any business, or permit any of its Subsidiaries to engage in any business, other than the businesses currently engaged in by Borrower and any business substantially similar or related thereto (or incidental thereto); or cease to conduct business in the manner conducted by Borrower as of the Closing Date, excluding the Gallium Arsenide Sale; or suffer or permit a Change in Control or a change in management; or without thirty (30) days prior written notification to Bank, relocate its chief executive office or state of incorporation or change its legal name; or without Bank’s prior written consent, change the date on which its fiscal year ends.

7.3Mergers or Acquisitions.  Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person (collectively, “Merger and Acquisition Activities”).  Notwithstanding the foregoing, Borrower may engage in Merger and Acquisition Activities (i) that are generally entered into in Borrower’s industry, and (ii) at the end of which, Borrower is the surviving entity as a result of such transaction and there is no change in Borrower’s executive management, provided that Borrower may not engage in any Merger and Acquisition Activity if an Event of Default has occurred and is continuing at the time of such a proposed transaction, if an Event of Default would exist after giving effect to such transaction, or if Borrower would not be in compliance with all covenants set forth in this Agreement on a pro forma basis for the remaining term of this Agreement after giving effect to such transaction.  Notwithstanding any of the foregoing, Borrower shall not use the proceeds of any Advance hereunder in connection with any Merger and Acquisition Activity unless it has submitted to Bank a combined, post-merger balance sheet prior to its request for such Advance and such balance sheet is satisfactory to Bank.

7.4Indebtedness.  Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness.

7.5Encumbrances.  Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens.  Borrower will not enter into any agreement with any Person other than Bank that prohibits or otherwise restricts Borrower from encumbering any of its property other than restrictions in equipment leases or equipment financing documents on Liens on the specific equipment being leased or financed.

7.6Distributions.  Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock other than stock splits, except that Borrower may repurchase certain of its capital stock in an aggregate amount not to exceed Five Million Dollars ($5,000,000).

7.7Investments.  Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries so to do, other than Permitted Investments; or maintain or invest any of its property with a Person other than Bank or permit any of its Subsidiaries to do so unless such Person has entered into an account control agreement with Bank in form and substance satisfactory to Bank; or suffer or permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower.

7.8Transactions with Affiliates.  Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

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7.9Subordinated Debt.  Make any payment in respect of any Subordinated Debt, or permit any of its Material Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or amend any provision contained in any documentation relating to the Subordinated Debt without Bank’s prior written consent.

7.10Inventory and Equipment.  Other than Inventory which does not exceed an aggregate value of $5,000,000 at any time sent to contractors in the ordinary course of business for refinement and packaging and Inventory sold on consignment, store the Inventory or the Equipment with a bailee, warehouseman, or third party unless the third party has been notified of Bank’s security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Bank’s benefit or (b) is in pledge possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment.  Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, store or maintain any Equipment or Inventory at a location other than the location set forth in Section 10 of this Agreement.

7.11Compliance.  Become an “investment company” or be controlled by an “investment company,” within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose.  Fail to meet the minimum funding requirements of ERISA to the extent applicable, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, which such Reportable Event or Prohibited Transaction could reasonably be expected to have a Material Adverse Effect, fail to comply in any material respect with the Federal Fair Labor Standards Act or violate any law or regulation, which violation is reasonably likely to have a Material Adverse Effect, or a material adverse effect on the Collateral or the priority of Bank’s Lien on the Collateral, or permit any of its Subsidiaries to do any of the foregoing.

7.12Capital Expenditures.  Make or become committed to make capital expenditures (excluding any capital expenditures for Merger and Acquisition Activities) in excess of Seven Million Five Hundred Thousand Dollars ($7,500,000) in the aggregate during any calendar year.

7.13Negative Pledge Agreements.  Permit the inclusion in any contract to which it or a Subsidiary becomes a party of any provisions that could restrict or invalidate the creation of a security interest in any of Borrower’s or such Subsidiary’s property.

8.EVENTS OF DEFAULT.

Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:

8.1Payment Default.  If Borrower fails to pay within five (5) Business Days, when due, any of the Obligations;

8.2Covenant Default.  If Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement, or fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) Business Days after Borrower receives written notice from Bank with respect thereto; provided, however, that if the default cannot by its nature be cured within such period or cannot after diligent attempts by Borrower be cured within such period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed sixty (60) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions will be required to be made during such cure period);

8.3Material Adverse Change.  If there occurs a material adverse change in Borrower’s business or financial condition, or if there is a material impairment of the prospect of repayment of any portion of the Obligations or a material impairment of the aggregate value or priority of Bank’s security interests in the Collateral;

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8.4Attachment.  If any material portion of Borrower’s assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within thirty (30) days or in any event not less than five (5) Business Days prior to the date of any proposed sale thereunder, or if Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower’s assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower’s assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within thirty (30) days after Borrower receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower (provided that no Credit Extensions will be required to be made during such cure period);

8.5Insolvency.  If Borrower becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced against Borrower and is not dismissed or stayed within sixty (60) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);

8.6Other Agreements.  If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in the right by such third party or parties whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000) or that is reasonably likely to have a Material Adverse Effect;

8.7Subordinated Debt.  If Borrower makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank;

8.8Judgments.  If a judgment or judgments for the payment of money that is not insured under coverage confirmed by Borrower’s insurance company in an amount, individually or in the aggregate, of at least Five Hundred Thousand Dollars ($500,000) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of thirty (30) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment);

8.9Misrepresentations.  If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Representative pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document which is reasonably likely to result in a Material Adverse Effect; or

8.10Guaranty.  If any guaranty of all or a portion of the Obligations (a “Guaranty”) ceases for any reason to be in full force and effect, or any guarantor fails to perform any obligation under any Guaranty or a security agreement securing any Guaranty (collectively, the “Guaranty Documents”), or any event of default occurs under any Guaranty Document or any guarantor revokes or purports to revoke a Guaranty, or any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth in any Guaranty Document or in any certificate delivered to Bank in connection with any Guaranty Document, or if any of the circumstances described in Sections 8.3 through 8.8 occur with respect to any guarantor or any guarantor dies or becomes subject to any criminal prosecution, or any circumstances arise causing Bank, in good faith, to become insecure as to the satisfaction of any of any guarantor’s obligations under the Guaranty Documents.

9.BANK’S RIGHTS AND REMEDIES.

9.1Rights and Remedies.  Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:

(a)Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank);

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(b)Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;

(c)Require that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letter of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit;

(d)Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable;

(e)Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral.  Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate.  Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank’s determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith.  With respect to any of Borrower’s owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Bank’s rights or remedies provided herein, at law, in equity, or otherwise;

(f)Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;

(g)Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral.  Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section 9.1, Borrower’s rights under all licenses and all franchise agreements shall inure to Bank’s benefit;

(h)Dispose of the Collateral in accordance with the Code, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate;

(i)Bank may credit bid and purchase at any public sale; and

(j)Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.

9.2Power of Attorney.  Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank’s designated officers, or employees) as Borrower’s true and lawful attorney to:  (a) send requests for verification of Accounts or notify account debtors of Bank’s security interest in the Accounts; (b) endorse Borrower’s name on any checks or other forms of payment or security that may come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrower’s policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower’s approval of or signature to such modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest; (h) file, in its

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sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; (i) dispose of the Collateral to the extent permitted under the Code; and (j) transfer the Intellectual Property Collateral into the name of Bank or a third party to the extent permitted under the Code; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4 regardless of whether an Event of Default has occurred.  The appointment of Bank as Borrower’s attorney in fact, and each and every one of Bank’s rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank’s obligation to provide Credit Extensions hereunder is terminated.

9.3Accounts Collection.  At any time during the term of this Agreement, Bank may notify any Person owing funds to Borrower of Bank’s security interest in such funds and verify the amount of such Account.  Following an Event of Default and during the continuance thereof, Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Bank’s trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.

9.4Bank Expenses.  If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Facility as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent.  Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral.  Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.

9.5Bank’s Liability for Collateral.  So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.  All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.

9.6Remedies Cumulative.  Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative.  Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity.  No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower’s part shall be deemed a continuing waiver.  No delay by Bank shall constitute a waiver, election, or acquiescence by it.  No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given.

9.7Demand; Protest.  Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable.

9.8Shares.  Borrower recognizes that Bank may be unable to effect a public sale of any or all the Shares, by reason of certain prohibitions contained in federal securities laws and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof.  Borrower acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner.  Bank shall be under no obligation to delay a sale of any of the Shares for the period of time necessary to permit the issuer thereof to register such securities for public sale under federal securities laws or under applicable state securities laws, even if such issuer would agree to do so.

22

10.Notices.

Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below:

If to Borrower:	WJ COMMUNICATIONS, INC.
	401 River Oaks Parkway
	San Jose, CA 95134
	Attn: Fred Krupica
	Fax:  (408) 577-6620
with a copy to:	Shumaker, Loop & Kendrick, LLP
	101 East Kennedy Boulevard, Suite 2800
	Tampa, FL 33602
	Attn: Darrell C. Smith, Esq.
	Fax:  (813) 229-1660
If to Bank:	Comerica Bank
	9920 S. La Cienega Blvd., Suite 1401
	Inglewood, CA 90301
	Attn: Manager
	Fax:  (310) 338-6110
with a copy to:	Comerica Bank
	226 Airport Blvd., Suite 100
	San Jose, CA 95110
	Attn: Guy Simpson
	Fax:  (408) 451-8568

Notwithstanding the foregoing, notice sent to Borrower in accordance with this Section 10 shall be effective despite any failure to provide a copy of such notice to Borrower’s counsel.  The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.  Such notices and demands shall be deemed to have been delivered on the date personally delivered or transmitted by facsimile, one Business Day after having been sent by overnight delivery service or three Business Days after having been deposited in the U.S. mail as provided above.

11.CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California, without regard to principles of conflicts of law.  Each of Borrower and Bank hereby submits to the nonexclusive jurisdiction of the state and Federal courts located in the County of Santa Clara, State of California.  BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.  EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT.  EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

23

12.GENERAL PROVISIONS.

12.1Successors and Assigns.  This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank’s prior written consent, which consent may be granted or withheld in Bank’s reasonable discretion.  Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits hereunder, provided that such transferee shall have assets in excess of $100,000,000.

12.2Indemnification.  Borrower shall defend, indemnify and hold harmless Bank and its officers, employees, and agents against:  (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by this Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between the parties whether under this Agreement, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank’s gross negligence or willful misconduct.

12.3Time of Essence.  Time is of the essence for the performance of all obligations set forth in this Agreement.

12.4Severability of Provisions.  Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

12.5Amendments in Writing, Integration.  This Agreement cannot be amended or terminated orally.  All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents.

12.6Counterparts.  This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.

12.7Survival.  All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding.  The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.

12.8Effect of Amendment and Restatement.  This Agreement is intended to and does completely amend and restate, without novation, the Original Agreement.  All security interests granted under the Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

WJ COMMUNICATIONS, INC.

By:

Title:

COMERICA BANK

By:

Title:

24

EXHIBIT A

COLLATERAL DESCRIPTION ATTACHMENT

TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

All personal property of Borrower (herein referred to as “Borrower” or “Debtor”) whether presently existing or hereafter created or acquired, and wherever located, including, but not limited to:

(a)all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtor’s books and records with respect to any of the foregoing, and the computers and equipment containing said books and records;

(b)all common law and statutory copyrights and copyright registrations, applications for registration, now existing or hereafter arising, in the United States of America or in any foreign jurisdiction, obtained or to be obtained on or in connection with any of the forgoing, or any parts thereof or any underlying or component elements of any of the forgoing, together with the right to copyright and all rights to renew or extend such copyrights and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of copyright;

(c)all trademarks, service marks, trade names and service names and the goodwill associated therewith, together with the right to trademark and all rights to renew or extend such trademarks and the right (but not the obligation) of Secured Party to sue in its own name and/or in the name of the Debtor for past, present and future infringements of trademark;

(d)all (i) patents and patent applications filed in the United States Patent and Trademark Office or any similar office of any foreign jurisdiction, and interests under patent license agreements, including, without limitation, the inventions and improvements described and claimed therein, (ii) licenses pertaining to any patent whether Debtor is licensor or licensee, (iii) income, royalties, damages, payments, accounts and accounts receivable now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past, present or future infringements thereof, (iv) right (but not the obligation) to sue in the name of Debtor and/or in the name of Secured Party for past, present and future infringements thereof, (v) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for, and (vi) reissues, divisions, continuations, renewals, extensions and continuations-in-part with respect to any of the foregoing; and

(e)any and all cash proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment.  All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time, including revised Division 9 of the Uniform Commercial Code-Secured Transactions, added by Stats. 1999, c.991 (S.B. 45), Section 35, operative July 1, 2001.

25

EXHIBIT B-1

The undersigned hereby certifies as follows:

I,                                            , am the duly elected and acting                                             of WJ COMMUNICATIONS, INC. (“Borrower”).

This Advance Request Form is delivered on behalf of Borrower to Comerica Bank, pursuant to that certain Amended and Restated Loan and Security Agreement between Borrower and Comerica Bank dated September 23, 2003 (the “Agreement”).  The terms used herein which are defined in the Agreement have the same meaning herein as ascribed to them therein.

Borrower hereby requests on                                            , 200   [an Advance / a Swing Loan] (the “Advance”) as follows:

(a)The date on which the Advance is to be made is                   , 200   .

(b)The amount of the Advance is to be                                         ($                    ), in the form of a Prime Rate Advance of $                                 ; and/or a LIBOR Rate Advance of $                         for an Interest Period of                                           months.

All representations and warranties of Borrower stated in the Agreement are true, correct and complete in all material respects as of the date of this request for an Advance; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

IN WITNESS WHEREOF, this Advance Request Form is executed by the undersigned as of this              day of                                      , 200   .

WJ COMMUNICATIONS, INC.

By:

Title:

26

EXHIBIT B-2

LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE

The undersigned hereby certifies as follows:

I,                                                        , am the duly elected and acting                                         of WJ Communications, Inc. (“Borrower”).

This certificate is delivered on behalf of Borrower to Bank, pursuant to Section 2 of that certain Amended and Restated Loan and Security Agreement between Borrower and Bank (the “Agreement”).  The terms used in this LIBOR Rate Conversion/Continuation Certificate which are defined in the Agreement have the same meaning herein as ascribed to them therein.

Borrower hereby requests on                                   , 200    a LIBOR Rate Advance (the “Advance”) as follows:

(a)(i)A rate conversion of an existing Prime Rate Advance from a Prime Rate Advance to a LIBOR Rate Advance; or

(ii)A continuation of an existing LIBOR Rate Advance as a LIBOR Rate Advance.

[Check (i) or (ii) above]

(b)The date on which the Advance is to be made is                                      , 200   .

(c)The amount of the Advance is to be                                             ($                       ), for an Interest Period of                                     month(s).

All representations and warranties of Borrower stated in the Agreement are true, correct and complete in all material respects as of the date of this request for an Advance; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date.

IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate is executed by the undersigned as of this                                day of                                         , 200   .

WJ Communications, Inc.

By:

Title:

For Internal Bank Use Only

LIBOR Pricing Date	LIBOR Rate	LIBOR Rate Variance		Maturity Date
		—	%

27

EXHIBIT C

COMPLIANCE CERTIFICATE

TO:COMERICA BANK

FROM :WJ COMMUNICATIONS, INC.

The undersigned authorized officer of WJ COMMUNICATIONS, INC. hereby certifies that in accordance with the terms and conditions of the Amended and Restated Loan and Security Agreement between Borrower and Bank (the “Agreement”), (i) Borrower is in complete compliance for the period ending                                    with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof.  Attached herewith are the required documents supporting the above certification.  The undersigned officer further certifies that the documents identified below were prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required		Complies
Quarterly 10Q/Financial statements	Quarterly within 45 days		Yes	No
Annual (CPA Audited)	FYE within 90 days (consolidated and consolidating)		Yes	No
10-K Report	FYE within 90 days		Yes	No
Financial Covenant	Required	Actual	Complies
Minimum Unrestricted Domestic Cash	$25,000,000 plus Bank debt	$	Yes	No
Minimum Tangible Net Worth	$20,00,000*	$	Yes	No

*Borrower shall maintain a Tangible Net Worth of not less than Twenty Million Dollars ($20,000,000) plus an amount equal to fifty percent (50%) of Borrower’s net income for each quarter after the quarter ending June 30, 2003, calculated in accordance with GAAP, plus an amount equal to seventy-five percent (75%) of the proceeds received after the Closing Date from the sale or issuance by Borrower of its equity or Subordinated Debt securities.

	Comments Regarding Exceptions:	BANK USE ONLY
	See Attached.
Sincerely,		Received By:
SIGNATURE		Date:
TITLE		Reviewed By:
DATE		Compliance Status: Yes / No

28

CORPORATE RESOLUTIONS TO BORROW

Borrower:WJ COMMUNICATIONS, INC.

I, the undersigned Secretary or Assistant Secretary of WJ COMMUNICATIONS, INC. (the “Corporation”), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Delaware.

I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and complete copies of the Certificate of Incorporation, as amended and the Restated Bylaws of the Corporation, each of which is in full force and effect on the date hereof.

I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and held, at which a quorum was present and voting (or by other duly authorized corporate action in lieu of a meeting), the following resolutions were adopted.

BE IT RESOLVED, that any one (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below:

NAMES POSITIONS ACTUAL SIGNATURES

acting for and on behalf of this Corporation and as its act and deed be, and they hereby are, authorized and empowered:

Borrow Money.  To borrow from time to time from Comerica Bank (“Bank”), on such terms as may be agreed upon between the officers, employees, or agents of the Corporation and Bank, such sum or sums of money as in their judgment should be borrowed, without limitation.

Execute Loan Agreement.  To execute and deliver to Bank the Amended and Restated Loan and Security Agreement dated as of September 23, 2003 (the “Loan Agreement”) and any other agreement entered into between the Corporation and Bank in connection with the Loan Agreement, including any Amendments, all as amended or extended from time to time (collectively, with the Loan Agreement, the “Loan Documents”), and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for the Loan Documents, or any portion thereof.

Grant Security.  To grant a security interest to Bank in the Collateral described in the Loan Documents, which security interest shall secure all of the Corporation’s Obligations, as described in the Loan Documents.

Negotiate Items.  To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to the Corporation or in which the Corporation may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of the Corporation with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable.

Letters of Credit.  To execute letters of credit applications and other related documents pertaining to Bank’s issuance of letters of credit.

29

ACH.  To execute applications and other related documents pertaining to Bank’s initiation of electronic funds transfer entries on the Corporation’s behalf.

Further Acts.  In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, and in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions.

BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank.  Any such notice shall not affect any of the Corporation’s agreements or commitments in effect at the time notice is given.

I FURTHER CERTIFY that the officers, employees, and agents named above are duly elected, appointed, or employed by or for the Corporation, as the case may be, and occupy the positions set forth opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever.

IN WITNESS WHEREOF, I have hereunto set my hand on September 23, 2003 and attest that the signatures set opposite the names listed above are their genuine signatures.

CERTIFIED TO AND ATTESTED BY:

X

30

AGREEMENT TO PROVIDE INSURANCE

TO:	COMERICA BANK	Date:	September 23, 2003
	attn: Collateral Operations, M/C 4604 9920 South La Cienega Blvd, 14th Floor Inglewood, CA 90301	Borrower:		WJ COMMUNICATIONS, INC.

In consideration of a loan in the amount of $20,000,000, secured by all tangible personal property including

inventory and equipment.

I/We agree to obtain adequate insurance coverage to remain in force during the term of the loan.

I/We also agree to advise the below named agent to add Comerica Bank as lender’s loss payable on the new or existing insurance policy, and to furnish Bank at above address with a copy of said policy/endorsements and any subsequent renewal policies.

I/We understand that the policy must contain:

1.Fire and extended coverage in an amount sufficient to cover:

(a)The amount of the loan, OR

(b)All existing encumbrances, whichever is greater,

But not in excess of the replacement value of the improvements on the real property.

2.Lender’s “Loss Payable” Endorsement Form 438 BFU in favor of Comerica Bank, or any other

form acceptable to Bank.

INSURANCE INFORMATION
Insurance Co./Agent		Telephone No.:
Agent’s Address:
	Signature of Obligor:
	Signature of Obligor:

FOR BANK USE ONLY
INSURANCE VERIFICATION: Date:
Person Spoken to:
Policy Number:
Effective From:	To:
Verified by:

31

COMERICA BANK

Member FDIC

ITEMIZATION OF AMOUNT FINANCED

DISBURSEMENT INSTRUCTIONS

(Revolving Line)

Name(s):  WJ COMMUNICATIONS, INC.	Date:  September 23, 2003
$                                      credited to deposit account No.                        when Advances are requested by Borrower
Amounts paid to others on your behalf:
$                                     to Bank counsel fees and expenses
$                                     to
$                                     to
$20,000,000                   TOTAL (AMOUNT FINANCED)

Upon consummation of this transaction, this document will also serve as the authorization for Comerica Bank to disburse the loan proceeds as stated above.

Signature Signature

32

COMERICA BANK
Member FDIC	AUTOMATIC DEBIT AUTHORIZATION

To: Comerica Bank

Re: Loan #                                                         

You are hereby authorized and instructed to charge account No.                                             in the name of WJ COMMUNICATIONS, INC. for principal and interest payments due on above referenced loan as set forth below and credit the loan referenced above.

ýDebit each interest payment as it becomes due according to the terms of the note and any renewals or amendments thereof.

oDebit each principal payment as it becomes due according to the terms of the note and any renewals or amendments thereof.

This Authorization is to remain in full force and effect until revoked in writing.

Borrower Signature	Date
	September 23, 2003

33

EX-10.2

Exhibit 10.2

INTELLECTUAL PROPERTY SECURITY AGREEMENT

This Intellectual Property Security Agreement is entered into as of September 23, 2003 by and between COMERICA BANK (“Bank”) and WJ COMMUNICATIONS, INC., a Delaware corporation (“Grantor”).

RECITALS

A. Bank has agreed to make certain advances of money and to extend certain financial accommodations to Grantor (the “Loans”) in the amounts and manner set forth in that certain Amended and Restated Loan and Security Agreement by and between Bank and Grantor dated of even date herewith (as the same may be amended, modified or supplemented from time to time, the “Loan Agreement”; capitalized terms used herein are used as defined in the Loan Agreement).  Bank is willing to make the Loans to Grantor, but only upon the condition, among others, that Grantor shall grant to Bank a security interest in certain Copyrights, Trademarks and Patents to secure the obligations of Grantor under the Loan Agreement.

B. Pursuant to the terms of the Loan Agreement, Grantor has granted to Bank a security interest in all of Grantor’s right, title and interest, whether presently existing or hereafter acquired, in, to and under all of the Collateral.

NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and intending to be legally bound, as collateral security for the prompt and complete payment when due of its obligations under the Loan Agreement and all other agreements now existing or hereafter arising between Grantor and Bank, Grantor hereby represents, warrants, covenants and agrees as follows:

AGREEMENT

To secure its obligations under the Loan Agreement and under any other agreement now existing or hereafter arising between Grantor and Bank, Grantor grants and pledges to Bank a security interest in all of Grantor’s right, title and interest in, to and under its Intellectual Property Collateral (including without limitation those Copyrights, Patents and Trademarks listed on Schedules A, B and C hereto), and including without limitation all proceeds thereof (such as, by way of example but not by way of limitation, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world and all re-issues, divisions continuations, renewals, extensions and continuations-in-part thereof.

This security interest is granted in conjunction with the security interest granted to Bank under the Loan Agreement.  The rights and remedies of Bank with respect to the security interest granted hereby are in addition to those set forth in the Loan Agreement and the other Loan Documents, and those which are now or hereafter available to Bank as a matter of law or equity.  Each right, power and remedy of Bank provided for herein or in the Loan Agreement or any of the Loan Documents, or now or hereafter existing at law or in equity shall be cumulative and concurrent and shall be in addition to every right, power or remedy provided for herein and the exercise by Bank of any one or more of the rights, powers or remedies provided for in this Intellectual Property Security Agreement, the Loan Agreement or any of the other Loan Documents, or now or hereafter existing at law or in equity, shall not preclude the simultaneous or later exercise by any person, including Bank, of any or all other rights, powers or remedies.

Grantor represents and warrants that Exhibits A, B, and C attached hereto set forth any and all intellectual property rights in connection to which Grantor has registered or filed an application with either the United States Patent and Trademark Office or the United States Copyright Office, as applicable.

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute the same instrument.

1

IN WITNESS WHEREOF, the parties have caused this Intellectual Property Security Agreement to be duly executed by its officers thereunto duly authorized as of the first date written above.

	GRANTOR:
	WJ COMMUNICATIONS, INC.
Address of Grantor:
401 River Oa ks Parkway	By:
San Jose, CA 95134
	Title:
Attn: Darrell C. Smith, Esq.
	BANK:
	COMERICA BANK
Address of Bank:
9920 S. La Cienega Blvd., Suite 1401	By:
Inglewood, CA 90301
	Title:
Attn: Manager

2

EXHIBIT A

Copyrights

NONE TO BE INCLUDED

EXHIBIT B

Patents

Description	Patent/Application Number	Issue/Application Date
System and method for dynamic channel allocation in a cellular communication network	6,023,622	02/08/00
Wireless base station with near-far gain compensation	6,075,991	06/13/00
Method and apparatus for self-tuning cellular system	6,131,031	10/10/00
Totem pole mixer having grounded serially connected stacked FET pair	6,064,872	05/16/0
High capacity communication system	6,285,720	09/04/01
Method for the compensation of time dispersion in wavefield spaces for digital receivers	09/678,420	10/02/00
System, apparatus and method of estimating multiple-input multiple-output wireless channel with compensation for phase noise and frequency offset and system using method thereof	10/024,120	12/17/01

EXHIBIT C

Trademarks

Description	Registration/ Application Number	Registration/ Application Date
Watkins-Johnson	866,185	03/11/69
WJ Watkins-Johnson (and design)	866,186	03/11/69
WJ (stylized letters)	856,401	09/10/68
WJ Watkins-Johnson (and design)	1,042,169	06/29/76
WJ (stylized letters)	1,041,669	06/22/76
Watkins-Johnson	1,041,670	06/22/76
The Wireless Edge	2,431,918	02/27/01
Base2 (stylized letters)	2,149,141	04/07/98

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael R. Farese, certify that:

1.I have reviewed this quarterly report on Form 10-Q of WJ Communications, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	October 30, 2003	By:	/s/ MICHAEL R. FARESE, PhD.
				Michael R. Farese, Ph.D.
				President and Chief Executive Officer
				(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Fred J. Krupica, certify that:

1.I have reviewed this quarterly report on Form 10-Q of WJ Communications, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	October 30, 2003	By:	/s/ FRED J. KRUPICA
			Fred J. Krupica
			Chief Financial Officer
			(principal financial officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of WJ Communications, Inc. (the “Company”) on Form 10-Q for the period ending September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Farese, Ph.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written certification required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ MICHAEL R. FARESE, PhD.

Michael R. Farese, Ph.D.

President and Chief Executive Officer

(principal executive officer)

October 30, 2003

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of WJ Communications, Inc. (the “Company”) on Form 10-Q for the period ending September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Fred J. Krupica, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written certification required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

/s/ FRED J, KRUPICA

Fred J. Krupica

Chief Financial Officer

(principal financial officer)

October 30, 2003