10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 1, 2007

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	(I.R.S. Employer
incorporation or organization)	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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o   No  x

As of May 1, 2007 there were 68,628,132 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, our Annual Report on Form 10-K/A Amendment No. 2, our shareholders’ annual report, press releases and certain information provided periodically in writing or orally by our 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,” “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 report might not occur. These risks and uncertainties include, among others, those described in the section of this report and our Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2006 filed with the Securities and Exchange Commission on May 15, 2007 entitled “Risk Factors.” 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 to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

WJ COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
THREE MONTHS ENDED APRIL 1, 2007
TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the Three Months ended April 1, 2007 and April 2, 2006	2
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months ended April 1, 2007 and April 2, 2006	3
	Condensed Consolidated Balance Sheets at April 1, 2007 and December 31, 2006	4
	Condensed Consolidated Statements of Cash Flows for the Three Months ended April 1, 2007 and April 2, 2006	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosure About Market Risks	23
Item 4.	Controls and Procedures	24
PART II	OTHER INFORMATION	25
Item 1A.	Risk Factors	25
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 6.	Exhibits	28
	Signatures	29

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
	April 1, 2007			April 2, 2006
Net sales	$	10,757		$	12,341
Cost of goods sold	5,988			6,140
Gross profit	4,769			6,201
Operating expenses:
Research and development	5,497			5,147
Selling and administrative	3,830			5,365
Restructuring charges	212			—
Total operating expenses	9,539			10,512
Loss from operations	(4,770		)	(4,311		)
Interest income	263			292
Interest expense	(14		)	(30		)
Other income—net	120			3
Loss before income taxes	(4,401		)	(4,046		)
Income tax benefit	—			(1,289		)
Net loss	$	(4,401	)	$	(2,757	)
Basic and diluted net loss per share	$	(0.07	)	$	(0.04	)
Basic and diluted average shares	67,484			65,707

See notes to condensed consolidated financial statements.

2

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

	Three Months Ended
	April 1, 2007			April 2, 2006
Net loss	$	(4,401	)	$	(2,757	)
Other comprehensive loss:
Unrealized holding gains on securities arising during the period net of reclassification adjustments	3			5
Comprehensive loss	$	(4,398	)	$	(2,752	)

See notes to condensed consolidated financial statements.

3

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

	April 1,			December 31,
	2007			2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	12,053		$	17,024
Short-term investments	6,866			8,399
Receivables (net of allowances of $756 and $417, respectively)	5,778			5,759
Inventories	6,885			5,281
Other current assets	2,007			1,563
Total current assets	33,589			38,026
PROPERTY, PLANT AND EQUIPMENT, net	7,339			7,232
Goodwill	6,834			6,834
Intangible assets, net	893			960
Other assets	180			181
	$	48,835		$	53,233
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	5,000		$	4,522
Accrued liabilities	3,838			4,080
Income tax contingency liability	42			419
Deferred margin on distributor inventory	2,364			2,824
Restructuring accrual	3,510			3,212
Total current liabilities	14,754			15,057
Restructuring accrual	11,149			12,006
Other long-term obligations	544			580
Total liabilities	26,447			27,643
STOCKHOLDERS’ EQUITY:
Preferred stock	—			—
Common stock	699			693
Treasury stock	(22		)	(20		)
Additional paid-in capital	209,643			208,840
Accumulated deficit	(187,929		)	(183,923		)
Other comprehensive loss	(3		)	—
Total stockholders’ equity	22,388			25,590
	$	48,835		$	53,233

See notes to condensed consolidated financial statements.

4

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

	Three Months Ended
	April 1,			April 2,
	2007			2006
OPERATING ACTIVITIES:
Net loss	$	(4,401	)	$	(2,757	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,202			904
Amortization of deferred financing costs	8			8
Net (gain)/loss on disposal of property, plant and equipment	(1		)	37
Restructuring charges (reversals)	66			(17		)
Intangible assets impairment	—			637
Stock based compensation	875			368
Allowance for doubtful accounts	—			2
Asset retirement obligations	—			(109		)
Amortization of premiums on short-term investments	(1		)	15
Net changes in:
Receivables	(19		)	(114		)
Inventories	(1,604		)	703
Other assets	(418		)	722
Accruals and accounts payable	(550		)	(116		)
Income tax contingency liability	18			(1,318		)
Deferred margin on distributor inventory	(459		)	76
Restructuring liabilities	(624		)	(620		)
Net cash used in operating activities	(5,908		)	(1,579		)
INVESTING ACTIVITIES:
Purchase of short-term investments	(5,871		)	(7,059		)
Proceeds from sale and maturities of short-term investments	7,400			11,587
Purchases of property, plant and equipment	(508		)	(383		)
Proceeds on disposal of property, plant and equipment	26			11
Net cash provided by investing activities	1,047			4,156
FINANCING ACTIVITIES:
Principal payments on capital lease	(8		)	—
Payments on long-term borrowings	(32		)	(32		)
Repurchase of common stock	(263		)	(35		)
Net proceeds from issuances of common stock	193			112
Net cash (used in)/provided by financing activities	(110		)	45
Net (decrease)/increase in cash and cash equivalents	(4,971		)	2,622
Cash and cash equivalents at beginning of period	17,024			14,169
Cash and cash equivalents at end of period	$	12,053		16,791
Other cash flow information:
Income taxes paid	$	3		$	28
Interest paid	6			22
Noncash investing and financing activities:
Increase in accounts payable related to property, plant and equipment purchases	757			682

See notes to condensed consolidated financial statements.

5

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, which are considered to be normal and recurring in nature. Operating results for the three months period ended April 1, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.  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, 2006, which are included in the Company’s Annual Report on Form 10-K/A Amendment No. 2 filed with the Securities and Exchange Commission on May 15, 2007. The balance sheet at December 31, 2006 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.

2.     BUSINESS COMBINATIONS

EiC Acquisition

On June 18, 2004, the Company completed its acquisition of the wireless infrastructure business and associated assets from EiC. The aggregate purchase price was $13.3 million.  In connection with the acquisition, $1.5 million in cash and 294,118 shares of common stock were held in escrow as security against certain financial contingencies. On March 30, 2005, the Company made a claim against the escrow account for unpaid invoices issued under the supply agreement.  The Company received those funds on May 4, 2005.  The uncontested amount was released to EiC on April 5, 2005 per the escrow agreement and the residual balance of the $1.5 million was released to EiC on May 4, 2005. On March 24, 2006 the Company made a claim against 147,059 of the 294,118 shares in the escrow account pending resolution of claims made by a vendor regarding a pre-acquisition contract and released the uncontested 147,059 shares from escrow.  The Company reached a settlement with EiC on May 25, 2006 and the remaining 147,059 shares were released from escrow on June 16, 2006.

The EiC acquisition agreement contained contingency clauses which could have required the Company to pay further compensation of up to $14.0 million if specific revenue and gross margin targets were achieved by March 31, 2005 and March 31, 2006 of which $7.0 million of additional compensation related to the period ended March 31, 2005. The Company determined that the revenue and the gross margin targets were not met for both the periods ended March 31, 2005 and March 31, 2006, and this was communicated to EiC. EiC subsequently notified the Company that it disagreed with the Company’s conclusions. While the Company believes EiC’s assertions are without merit and have notified EiC of such, there can be no assurance as to the eventual outcome of this matter.

The $14.0 million would have been payable 10% in cash and, at the Company’s election, 90% in shares of its common stock. If the targets were fully attained and the Company elected to pay in shares of common stock, the number of additional shares issued would have been 2,540,323 computed at $2.48 per share which represents the average closing price of the Company’s stock on The Nasdaq Global Market (“NASDAQ”) during the ten day period prior to the end of the earnout period.   If the Company is ultimately required to pay such consideration, the amounts would be recorded as an increase to goodwill.

Telenexus Acquisition

On January 28, 2005, the Company completed its acquisition of Telenexus, Inc. (“Telenexus”). Pursuant to an Agreement and Plan of Merger, dated January 19, 2005, by and between the Company, WJ Newco, LLC (the “WJ Sub”), Telenexus and Richard J. Swanson, Wilfred K. Lau, David Fried, Kurt Christensen and Mark Sutton (collectively the “Shareholders”), Telenexus merged with and into the WJ Sub effective on January 29, 2005. The WJ Sub was the survivor in the merger and is a wholly owned subsidiary of the Company. Telenexus designs, develops, manufactures and markets radio frequency identification (“RFID”) reader products for a broad range of industries and markets. By virtue of the merger, the Company purchased through the WJ Sub all of the assets necessary for the conduct of the RFID business of Telenexus, consisting primarily of, and including, but not limited to RFID modules, baseband processing algorithm technology, applications software and realizations of several reader product designs. The consideration paid by the Company on the closing date in connection with the merger consisted of cash in the amount of $3.0 million, which was paid out of the Company’s cash reserves on the closing date, and 2,333,333 shares of the Company’s common stock valued at $8.2 million at the closing date. Including acquisition costs of $230,000, the aggregate purchase price for the net assets of Telenexus totaled $11.4 million. Of the closing consideration, cash in the amount of $500,000 and 333,333 shares of the Company’s common stock was held in escrow with respect to any indemnification matters under the merger agreement.

6

The outstanding cash balance of the escrow account less any properly noticed unpaid or contested amounts was to be distributed within two days after October 28, 2005. The Company released the full amount of the cash balance of the escrow account on October 31, 2005. The 333,333 shares in the escrow account less any shares for any properly noticed unpaid or contested amounts have been fully distributed. The fair value of the Company’s common stock was determined based on the average closing price per share of the Company’s common stock over a 5-day period beginning two trading days before and ending two trading days after the amended terms of the acquisition were agreed to and announced (January 31, 2005). In addition to the closing consideration, the sellers may be entitled to further compensation of up to $2.5 million in cash and up to 833,333 shares of the Company’s common stock if the Company achieves certain revenue targets by July 28, 2006. The Company determined that the revenue targets were not met and communicated its conclusion to the selling shareholders. Any change in the fair value of the net assets of Telenexus or any additional consideration to the Shareholders would change the amount of the purchase price allocable to goodwill. Two of the Shareholders, Richard J. Swanson and Wilfred K. Lau also entered into three-year employment agreements with the Company. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations”  (“SFAS No. 141”), and accordingly the Company’s consolidated financial statements from January 28, 2005 include the impact of the acquisition.

3.             GOODWILL AND INTANGIBLE ASSETS

In connection with the acquisition of the wireless infrastructure business and associated assets from EiC on June 18, 2004, the Company recorded $1.8 million of goodwill. Adjustments to the EiC goodwill subsequent to the EiC acquisition date resulted in 2005 from a $576,000 benefit from the termination settlement of the associated supply agreement with EiC and partially offset by $152,000 of additional registration statement related expenses.  In connection with the acquisition of Telenexus acquisition on January 28, 2005, the Company recorded $5.5 million of goodwill. This goodwill was based upon the values assigned to the transactions at the time they were announced in accordance with SFAS 142. The carrying value of goodwill as of April 1, 2007 and December 31, 2006 is as follows (in thousands):

	EiC		Telenexus		Total
Balance as of December 31, 2006 and April 1, 2007	$	1,405	$	5,429	$	6,834

The Company periodically evaluates its goodwill in accordance with SFAS 142 for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of the Company’s use of the acquired assets or the strategy for the Company’s overall business, or significant negative industry or economic trends.  If these criteria indicate that the value of the goodwill may be impaired, an evaluation of the recoverability of the net carrying value is made.  Irrespective of the aforementioned circumstances where impairment indicators are present, the Company is required by SFAS 142 to test its goodwill for impairment at least annually.  The Company has chosen the end of its fiscal month of May as the date of its annual impairment test.  The Company has determined its goodwill was not impaired as of May 31, 2006.

Intangible assets are recorded at cost, less accumulated amortization. During the quarter ended April 2, 2006, the Company determined that it would no longer use the Telenexus trademarks and trade names and would instead market its RFID products under the WJ Communications brand.  As such, the remaining unamortized balance of $637,000 was expensed as “Selling and administrative” which is reflected in the accompanying unaudited condensed consolidated statements of operations for the three month period ended April 1, 2006. The following tables present details of the Company’s purchased intangible assets (in thousands):

As of April 1, 2007:

Description	Useful  Life	Gross		Accumulated Amortization		Net
EiC acquisition
Purchased developed technology	5 years	$	200	$	110	$	90
Telenexus acquisition
Purchased developed technology	1.2 years	40		40		—
Customer relationships	7 years	900		282		618
Non-competition agreements	4 years	400		215		185
Total identified intangible assets		$	1,540	$	647	$	893

As of December 31, 2006:

	Useful			Accumulated
Description	Life	Gross		Amortization		Net
EiC acquisition
Purchased developed technology.	5 years	$	200	$	100	$	100
Telenexus acquisition
Purchased developed technology.	1.2 years	40		40		—
Customer relationships	7 years	900		250		650
Non-competition agreements	4 years	400		190		210
Total identified intangible assets		$	1,540	$	580	$	960

7

In the three months ended April 1, 2007 and April 2, 2006, amortization of purchased intangible assets included in cost of goods sold was approximately $10,000 and $18,000, respectively. In the three months ended April 1, 2007 and April 2, 2006, amortization of purchased intangible assets included in operating expense was approximately $57,000 and $66,000, respectively. The intangible assets related to purchased developed technology is amortized to cost of goods sold.  The intangible assets related to customer relationships, trademarks and trade names and non-competition agreements with sales/engineering personnel are amortized to operating expense.

Amortization is computed using the straight-line method over the estimated useful life of the intangible asset. The Company expects that annual amortization of acquired intangible assets to be as follows (in thousands):

Fiscal year:	EiC		Telenexus		Total
2007 (remaining nine months)	$	30	$	171	$	201
2008	40		228		268
2009	20		228		248
2010	—		176		176
2011	—		—		—
2012 and beyond	—		—		—
Total amortization	$	90	$	803	$	893

4.     RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defined fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008, although early adoption is permitted. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.

5. INVENTORIES

Inventories are stated at the lower of cost, using an average-cost basis, or market. Cost of inventory items is based on purchase and production cost including labor and overhead. Write-downs, when required, are made to reduce excess inventories to their estimated net realizable values. Such estimates are based on assumptions regarding future demand and market conditions. These write-downs were $217,000 and $376,000 in the three month periods ended April 1, 2007 and April 2, 2006, respectively, and $1.6 million for the year ended December 31, 2006.  If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required.  Inventories at April 1, 2007 and December 31, 2006 consisted of the following (in thousands):

	April 1,		December 31,
	2007		2006
Finished goods	$	1,779	$	1,661
Work in progress	3,099		1,808
Raw materials and parts	2,007		1,812
	$	6,885	$	5,281

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6. CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and trade receivables. The Company maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company invests in a variety of financial instruments such as money market funds, commercial paper and high quality corporate bonds, and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. At April 1, 2007, two customers represented 34% and 11% of the total accounts receivable balance, respectively. At December 31, 2006, two customers represented 23% and 20% of the total accounts receivable balance, respectively. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of receivables.

7. STOCKHOLDERS’ EQUITY

STOCK OPTION PLANS

The Company’s stock option program is a long-term retention program that is intended to attract, retain and provide incentives for employees, officers and directors, and to align stockholder and employee interests. The Company considers its option programs critical to its operation and productivity; essentially all of our employees participate. Currently, the Company grants options from the 1) 2000 Stock Incentive Plan, as amended, under which the Company 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 officers and employees and consultants, 2) the 2000 Non-Employee Director Stock Compensation Plan, as amended, under which options are granted to non-employee directors and 3) 2001 Employee Stock Incentive Plan under which the Company 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 consultants.  The Company’s stock option plans provide that options granted will have a term of no more than 10 years and have vesting periods ranging from two to four years. The provisions of the stock option plans provide that under certain circumstances, such as a change in control, the achievement of certain performance objectives, or certain liquidity events, outstanding options may be subject to accelerated vesting.  As of April 1, 2007 the number of shares available for future grants under the above plans was 4,673,507.

On June 1, 2006, the Company’s Board of Directors approved the adoption of an amendment to the Company’s “Amended and Restated 2000 Non-Employee Director Compensation Plan” to increase the number of shares of common stock authorized for issuance from 800,000 to 1,000,000, which was approved by the Company’s stockholders on July 20, 2006 at the Company’s Annual Meeting of Stockholders.

During the three months ended April 1, 2007, the Compensation Committee of the Board of Directors awarded 173,000 Performance Accelerated Restricted Stock Units (PARSUs) to employees which were issued under the Amended and Restated 2000 Stock Incentive Plan.  The Performance Accelerated Restricted Stock Units vest upon the achievement of performance targets that are determined by the Compensation Committee of the Board of Directors.  Any Performance Accelerated Restricted Stock Units that do no vest upon the achievement of performance targets cliff vest at the end of four years.

Combined Incentive Plan Information

Option and Performance Accelerated Restricted Stock Unit activity under the Company’s stock incentive plans for the three months ended April 1, 2007 is set forth below (in thousands except per share amounts):

					Weighted
					Average
			Weighted		Remaining
			Average		Contractual Term
	Shares		Exercise Price		(in years)
Outstanding at December 31, 2006	8,888,280		$	1.40
Grants	173,000		$	0.00
Exercised	(272,469	)	$	0.72
Forfeited/expired/cancelled	(326,083	)	$	2.20
Outstanding at April 1, 2007	8,462,728		$	1.37	6.66

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Restricted stock activity under the Company’s stock incentive plans for the three months ended April 1, 2007 is set forth below (in thousands except per share amounts):

			Weighted
			Average
			Grant Date Fair
	Shares		Value per Share
Unvested at December 31, 2006	783,904		$               1.65
Grants	—		$                 —
Vested	(301,664	)	$               1.68
Forfeited/expired/cancelled	—		—
Unvested at April 1, 2007	482,240		$               1.63

EMPLOYEE STOCK PURCHASE PLAN (“ESPP”)

The Company has an employee stock purchase plan for all eligible employees. Under the plan, employees may purchase shares of the Company’s common stock at six-month intervals at 85% of fair market value (calculated in the manner provided under the plan). Employees purchase such stock using payroll deductions, which may not exceed 15% of their total cash compensation.  The plan imposes certain limitations upon an employee’s right to acquire common stock, such as no employee may be granted rights to purchase more than $25,000 worth of common stock for each calendar year in which such rights are at any time outstanding. At April 1, 2007, 936,582 shares were available for future issuance under this plan.

STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted SFAS 123R. During the three months ended April 1, 2007, the Company granted only PARSUs and no stock options.

The assumptions used to value option grants for the three months ended April 2, 2006 and employee stock purchase rights for the three months ended April 1, 2007 and April 2, 2006 are as follows:

	Three Months Ended
	April 1,		April 2,
	2007		2006
Employee Stock Option Plans:
Fair value	—		$                      1.20
Dividend yield	—		0.0	%
Volatility	—		85.52	%
Risk free interest rate at the time of grant	—		4.44	%
Expected term to exercise (in years from the grant date)	—		4.42
Employee Stock Purchase Plan:
Fair value	$                      0.60		$                      0.36
Dividend yield	0.0	%	0.0	%
Volatility	74.62	%	57.67	%
Risk free interest rate at the time of grant	5.19	%	4.15	%
Expected term to exercise (in years from the grant date)	0.50		0.49

The following table presents details of stock-based compensation expense by functional line item (in thousands):

	Three Months Ended
	April 1,	April 2,
	2007	2006
Cost of goods sold	$                       224	$                         42
Research and development	232	106
Selling and administrative	419	220
	$                       875	$                       368

The impact on basic and diluted net loss per share for the three months ended April 1, 2007 and April 2, 2006 from the adoption of SFAS 123R was $0.02 and $0.01, respectively.

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The adoption of SFAS 123R will continue to have an adverse impact on the Company’s reported results of operations, although it will have no impact on its overall financial position. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional equity awards to employees or assumes unvested equity awards in connection with acquisitions.

8.     NET LOSS PER SHARE CALCULATION

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

	Three Months Ended
	April 1,		April 2,
	2007		2006
Net loss	$                   (4,401	)	$                   (2,757	)
Denominator for basic and diluted net loss per share:
Weighted average shares outstanding	68,240		66,597
Less weighted average shares subject to repurchase	(756	)	(890	)
Weighted average shares outstanding	67,484		65,707
Basic and diluted net loss per share	$                     (0.07	)	$                     (0.04	)

For the periods ended April 1, 2007, the incremental shares from the assumed exercise of 8,462,728 of the Company’s stock options outstanding and 146,349 shares related to contributions under the Employee Stock Purchase Plan for pending purchases were excluded from the calculation of diluted earnings per share because operations resulted in a loss and the effect of such assumed conversion would be anti-dilutive. For the periods ended April 2, 2006, the incremental shares from the assumed exercise of 10,274,467 of the Company’s stock options outstanding and 113,571 shares related to contributions under the Employee Stock Purchase Plan for pending purchases were excluded from the calculation of diluted earnings per share because operations resulted in a loss and the effect of such assumed conversion would be anti-dilutive.

9.          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 the Company’s business. Such charges were established in accordance with Emerging Issues Task Force Issue 94-3 (“EITF 94-3”) “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges.” These charges include abandoned leased properties comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and asset impairment charges on tenant improvements deemed no longer realizable as detailed in Note 12 of the Company’s Annual Report on Form 10-K/A Amendment No. 2 for the year December 31, 2006. In determining these estimates, the Company made certain assumptions with regards to it’s ability to sublease the space and reflect offsetting assumed sublease income in line with it’s best estimate of current market conditions.

Fourth Quarter 2006 Restructuring Plan

On October 30, 2006, the Company committed to a restructuring plan to close and exit the Company’s Milpitas fabrication facility (“fab”) during the first quarter of 2007. The Company completed the closure of the Milpitas fab at the end of March 2007.  The Milpitas fab produced some of the Company’s gallium arsenide semiconductor products and had substantial excess capacity. The Company’s lease of the fab expired on November 14, 2006 and in accordance with the terms of the lease the Company is continuing the lease on a month-to-month basis until the closure is complete.

The Company has a strategic foundry relationship with Global Communication Semiconductors, Inc. (“GCS”), and with the closure of the Company’s Milpitas fab, GCS is the sole source for the manufacturing and supply of its GaAs and InGaP HBT wafers.

During the fourth quarter of 2006, a restructuring charge of $174,000 was recognized related to employee severance under the plan, which was offset by reversals of restructuring accruals under the previous restructuring plans of approximately $460,000.

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The following table summarizes the historical restructuring accrual activity for the period January 1, 2006 through April 1, 2007 (in thousands): 

	Q3 2001		Q3 2002
	Restructuring		Restructuring
	Plan		Plan		Q4 2006
					Restructuring
	Lease Loss		Lease Loss		Plan	Total
Balance at January 1, 2006	9,818		8,290		—	18,108
2006 additional charge (credit)	27		(487	)	174	(286	)
Cash payments	(1,291	)	(1,314	)	—	(2,605	)
Balance at December 31, 2006	8,554		6,489		174	15,217
2007 additional charge (credit)	(258	)	314		10	66	(1)
Cash payments	(283	)	(341	)	—	(624	)
Balance at April 1, 2007	$          8,013		$         6,462		$             184	$    14,659	(2)

(1)The condensed consolidated statements of operations  “restructuring charges” for the three months ended April 1, 2007, includes $56,000 of restructuring charges under the Q3 2001 and Q3 2002 restructuring plans, $10,000 of restructuring charges that were accrued under the Q4 2006 Restructuring Plan and $146,000 of restructuring charges that were expensed as incurred.

(2)Of the accrued restructuring charge at April 1, 2007, the Company expects $3.5 million of the lease loss to be paid out over the next twelve months. As such, this amount is recorded as a current liability and the remaining $11.1 million to be paid out over the remaining life of the lease of approximately four years is recorded as a long-term liability.

10.  BUSINESS SEGMENT REPORTING

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.

Sales to individual customers representing greater than 10% of Company consolidated sales during at least one of the periods presented are as follows (in thousands):

	Three Months Ended
	April 1,	April 2,
	2007	2006
Richardson Electronics, Ltd (1)	$    4,917	$    5,419
Celestica (2)	—	2,212

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

(2)Celestica was less than 10% of consolidated sales during the three months ended April 1, 2007

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

	Three Months Ended
	April 1,	April 2,
	2007	2006
United States	$    5,545	$    5,971
Export sales from United States:
China	2,473	2,464
Thailand	677	1,264
Europe	685	1,128
Republic of Korea	246	497
Other	1,131	1,017
Total	$  10,757	$  12,341

Long-lived assets located outside of the United States are not significant.

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11.          INCOME TAXES

The Company computes income taxes for interim reporting purposes using estimates of the effective annual income tax rate for the entire fiscal year. This process involves estimating the full-year tax liability and assessing the temporary differences between the book and tax entries. These temporary differences result in deferred tax assets and liabilities, which are recorded on the Company’s Condensed Consolidated Balance Sheet in accordance with SFAS No. 109, Accounting for Income Taxes, which established financial accounting and reporting standards for the effect of income taxes. The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent the Company believes that recovery is not likely, the Company must establish a valuation allowance. Changes in the Company’s net deferred tax asset, less off-setting valuation allowance, in a period are recorded through the Income Tax Provision on the Consolidated Statement of Operations.

Based on the available objective evidence and the recent history of losses and forecasted United States taxable income/loss, management concluded that it is more likely than not that the Company’s deferred tax assets would not be fully realizable. Accordingly, the Company had a valuation allowance of $56.5 million and $55.0 million as of April 1, 2007 and December 31, 2006, respectively. Changes in the Company’s valuation allowance of $1.5 million for the three months ended April 1, 2007 were recorded through the income tax provision in the Condensed Consolidated Statement of Operations. Off-setting increases to the net deferred tax asset of $1.5 million for the three months ended April 1, 2007 were recorded through the income tax provision in the Condensed Consolidated Statement of Operations.

On January 1, 2007, the Company adopted the Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of the implementation of FIN 48, the Company recognized a cumulative adjustment to the liability for unrecognized income tax benefits in the amount of $0.8 million, which was accounted for as a reduction to the January 1, 2007 net deferred tax asset and valuation allowance balances. At the adoption date of January 1, 2007, the Company had $1.2 million of unrecognized tax benefits, $24,000 of which would affect its effective tax rate if recognized. At April 1, 2007, the Company had $1.5 million of unrecognized tax benefits.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN No. 48, the amount of any accrued interest or penalties associated with any unrecognized tax positions was insignificant, and the amount of interest and penalties for the three months ended April 1, 2007 was also insignificant.

Uncertain tax positions relate primarily to the determination of the research and experimental tax credit. The Company estimates that there will be no material changes in its uncertain tax positions in the next 12 months.

The Company files income tax returns in the U.S. federal jurisdiction, a few states and foreign jurisdictions. As of April 1, 2007, the federal returns for the years ended 2003 through the current period and certain state returns for the years ended 2001 through the current period are still open to examination. However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried forward to open years.

12. CONTINGENCIES

Environmental Remediation

The Company’s current operations are subject to federal, state and local laws and regulations governing the use, storage, disposal of and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination.

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The Company has an accrued liability of $61,000 as of April 1, 2007 to offset estimated program oversight, remediation actions and record retention costs.  There were no expenditures charged against the accrual for the three month periods ended April 1, 2007 and April 2, 2006, respectively.

The Company continues to be in compliance with the remedial action plans being monitored by various regulatory agencies at its former Palo Alto and Scotts Valley sites.  The Company has entered into funded fixed price remediation contracts and obtained cost-overrun and unknown pollution conditions insurance coverage.  The Company believes that it is remote that it would incur any liability beyond that which it has recorded.  The Company does ultimately retain responsibility for these environmental liabilities in the unlikely event that the environmental firm and the insurance company do not meet their obligations.

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

Indemnification

As part of the Company’s normal ongoing business operations and consistent with industry practice, the Company enters into numerous agreements with other parties, which apportion future risks among the parties to the transaction or relationship governed by the agreements. One method of apportioning risk is the inclusion of provisions requiring one party to indemnify the other against losses that might otherwise be incurred by the other party in the future. Many of the Company’s agreements contain an indemnity or indemnities that require us to perform certain acts, such as remediation, as a result of the occurrence of a triggering event or condition. The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company customarily agrees to hold the other party harmless against losses arising from a breach of representations and covenants related to such matters as title to assets sold, certain IP rights, specified environmental matters, and certain income taxes. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by the Company.

The nature of these numerous indemnity obligations are diverse and each has different terms, business purposes, and triggering events or conditions. Consistent with customary business practice, any particular indemnity obligation incurred is the result of a negotiated transaction or contractual relationship for which we have accepted a certain level of risk in return for a financial or other type of benefit. In addition, the indemnities in each agreement vary widely in their definitions of both triggering events and the resulting obligations contingent on those triggering events.  It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement.

Historically, payments made by the Company under these agreements have not had a material effect on the Company’s business, financial condition or results of operations and the Company is unable to estimate the maximum potential impact of these indemnification provisions on its future results of operations.

As permitted under Delaware law, the Company has agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director and officer insurance coverage that reduces its exposure and enables it to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Other Contingencies

In addition to the above matters, the Company is involved in various legal actions which arose in the ordinary course of its business activities. Management does not currently believe that the final resolution of these matters will ultimately have a material impact on the Company’s results of operations or financial position.

13. SUBSEQUENT EVENTS

In conjunction with the closure of the Milpitas fab, we classified the manufacturing equipment used in the fab as held for sale and no longer being depreciated as of April 1, 2007.  The carrying value of these assets was approximately $671,000 as of April 1, 2007.  We expect to complete the sale of these assets by the end of our second fiscal quarter.

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Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS O F 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,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from those projected in these forward-looking statements as a result of a number of factors, including, but not limited to, Those factors described in the “Risk Factors” section of this Form 10-Q and our Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2006 filed with the SEC on May 15, 2007. 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 on Form 10-K/A Amendment No. 2 for the year ended December 31, 2006 filed with the SEC on May 15, 2007. 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 the “Risk Factors” section of this Form 10-Q and our Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2006 filed with the SEC on May 15, 2007 for a discussion of certain factors that could cause future actual results to differ from those described in the following discussion.

OVERVIEW

We are a radio frequency (“RF”) semiconductor company providing RF product solutions worldwide to communications equipment companies. We design, develop and manufacture innovative, high performance products for both current and next generation wireless and RF identification (“RFID”) systems. Our RF product solutions are comprised of advanced, highly functional RF semiconductors, components and integrated assemblies which address the radio frequency challenges of these various systems.  We currently generate the majority of our revenue from our products utilized in wireless networks.  Our revenue from our products used in RF identification systems represents a less significant portion of our current revenue, however, we believe these systems represent one of our future growth opportunities.  The RF challenge is to create product designs that function within the unique parameters of various wireless system architectures. Our solution is comprised of design expertise, advanced device technology and manufacturability. Our communications products are used by telecommunication equipment manufacturers supporting and facilitating mobile communications, enhanced voice services, data and image transport. Our objective is to be a leading supplier of innovative RF semiconductor products.

During the first quarter of 2007 we ceased internal wafer manufacturing and adopted the fabless semiconductor business model. The fabless semiconductor model is more cost effective than having our own facility due to our limited volumes and the cost of developing and supporting our process technologies. There is a viable commercial wafer foundry market which we have accessed for the production of our wafers and we may enter into limited process development activities with some of these vendors to further optimize the processes and our products.

In 2004 and 2005, we augmented our technology base and design capabilities from time to time through acquisitions.  On January 28, 2005, we acquired Telenexus, Inc. We believe the addition of Telenexus’ RFID products and technology will allow us to continue to enhance our RFID reader offerings to further capitalize on the market opportunity. On June 18, 2004, we completed our acquisition of the wireless infrastructure business and associated assets from EiC Corporation, a California corporation, and EiC Enterprises Limited (together “EiC”).  We believe that the addition of EiC’s technical expertise further enhanced our strategy of offering customers what we believe to be industry leading products for the wireless infrastructure market. WJ Communications, Inc. (formerly Watkins-Johnson Company, “we,” “us,” “our” , “WJ” or the “Company”) was formed after a recapitalization merger with Fox Paine on January 31, 2000.  We were originally incorporated in California and reincorporated in Delaware in August 2000.

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

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our 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 liabilities. On a continuous basis, we evaluate all our significant estimates including those related to doubtful accounts receivable, inventory valuation, impairment of long-lived assets, income taxes, restructuring including accruals for abandoned lease properties, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstance, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Business Combinations

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

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

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.”  This SAB 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.

Effective for the second quarter ended July 3, 2005, the Company recognizes revenue from its distribution channels only when its distributors have sold the product to the end customer.  Although revenue is deferred until resale, title of products sold to distributors transfers upon shipment.  Accordingly, shipments to distributors are reflected in the consolidated balance sheets as accounts receivable and a reduction of inventories at the time of shipment.  Deferred revenue and the corresponding cost of sales on shipments to distributors are reflected in the consolidated balance sheets on a net basis as “Deferred margin on distributor inventory.”

Beginning in September 2003, we entered into a program where the distributor would receive a credit if it sold specific product at a reduced price to specific end-customers pre-authorized by us.  We maintain a log of all such pre-authorized price reductions which we accrue as a reduction to revenue in the period that the pre-authorization occurs per issue 4 of EITF 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”  Through the quarter ended April 3, 2005, the Ship & Debit Allowance was offset solely by an offset to revenue.  Since we began recognizing revenue from our distribution channels only when our distributors have sold the product to the end customer, the Ship & Debit allowance will offset revenue only when the products with pre-authorized price reductions have shipped to the end-customer otherwise it will offset “Deferred margin on distributor inventory.” As of April 1, 2007 and April 2, 2006, our Ship & Debit Allowance was $426,000 and $105,000, respectively.

If we reduce the prices of our products as negotiated with the distributor, the distributor may receive a credit for the difference between the price paid by the distributor and the reduced price on applicable unsold products remaining in the distributor’s inventory on the effective date of the price reduction assuming that inventory is less than 24 months old as determined by the original invoice date.  When we recognized revenue upon shipment to our distributors, we reserved for distributor price protection per issue 4 of EITF 01-9 based on specific identification of our initiated price reductions and the associated reported distributor inventory.  There were no such price reductions in the three month periods ended April 1, 2007.

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We may enter into contracts to perform research and development for others meeting the requirements of Statement of Financial Accounting Standards No. 68 “Research and Development Arrangements”.  Revenue under these development agreements is recognized when applicable contractual non-refundable milestones have been met, including deliverables, and in any case, does not exceed the amount that would be recognized using the percentage-of-completion accounting method based on the actual physical completion of work performed and the ratio of costs incurred to total estimated costs to complete the contract in accordance with Accounting Research Bulletin 45 “Long-Term Construction Type Contracts” using the relevant guidance in the American Institute of Certified Public Accountants Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Given the duration and nature of these development contracts, we believe that recognizing revenue under the percentage completion method best represents the legal and economic results of contract performance on a timely basis.  Losses on contracts are recognized when determined. Revisions in estimates are reflected in the period in which the conditions become known. These development contracts with customers have enabled us to accelerate our own product development efforts. Such development revenues have only partially funded our product development activities, and we generally retain ownership of the products developed under these arrangements. As a result, we classify all development costs related to these contracts as research and development expenses. The achievement of contractual milestones is evidenced by written documentation provided by the customer in accordance with the applicable terms and conditions of each contract.  In any period, progress on the contract is based on input measures (direct labor dollars, direct material costs and direct outside processing costs) in the ratio of costs incurred to total estimated costs.  Estimated costs to complete are provided by engineering personnel directly involved in the development program and are reviewed by management and finance personnel for reasonableness given the known facts and circumstances.  A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. If different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and the recognition of all revenue and costs would be deferred until the project was completed. Such a change could have a material impact on our results of operations. If we bill the customer prior to performing services under the development agreement, the amounts are recorded as deferred revenue.  Our balance of deferred revenue was $223,000 at April 1, 2007 and $424,000 December 31, 2006.

Stock-based Compensation

We adopted the provisions of, and account for stock-based compensation in accordance with, SFAS 123R effective January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

We use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

We estimate the expected term of options granted by reviewing annual historical employee exercise behavior of option grants with similar vesting periods and the expected life assumptions of semiconductor peer companies.  Our estimate of pre-vesting option forfeitures is based on historical pre-vest termination rates and those of semiconductor peer companies and we record stock-based compensation expense only for those awards that are expected to vest. We considered (along with our own actual experience) the forfeiture rates of semiconductor peer companies due to our lack of extensive history.  Our volatility assumption is forecasted based on our historical volatility over the expected term. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. All share based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share.  In addition, we have issued options, restricted stock and performance accelerated restricted stock units whose vesting is based on the achievement of specified performance targets.  Stock-based compensation expense for these awards is recognized when achievement of the performance targets is probable, except for the performance accelerated restricted stock units, where stock based compensation expense is recognized both on a graded vesting basis and when achievement of the performance targets is probable.  As a result of the unpredictability of the vesting of the performance based options, restricted stock and performance accelerated restricted stock units, our stock-based compensation expense is subject to fluctuation. The guidance in SFAS 123R and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

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See Note 8 to the unaudited condensed consolidated financial statements for further information regarding the SFAS 123R disclosures.

Write-down of Excess and Obsolete Inventory

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

Valuation of Intangible Assets and Goodwill

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

Income Taxes

Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes establishes financial accounting and reporting standards for the effect of income taxes. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, we recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities for our estimate of future tax effects attributable to temporary differences and carryforwards. We record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

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

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.  Due to the adoption of FIN 48 effective January 1, 2007, we calculated our contingencies based on certain estimates and judgments related primarily to the determination of research and experimental tax credits.

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Restructuring

During fiscal 2002 and 2001, we recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses and the costs of downsizing our business. Such charges were established in accordance with Emerging Issues Task Force Issue 94-3 (“EITF 94-3”) “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges.” These charges include abandoned leased properties comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and asset impairment charges on tenant improvements deemed no longer realizable. In determining these estimates, we make certain assumptions with regards to our ability to sublease the space and reflect offsetting assumed sublease income in line with our best estimate of current market conditions. Should there be a further significant change in market conditions, the ultimate losses on these could be higher and such amount could be material. Except for changes in the sublease estimates we have made from time to time, actual results to date have been consistent, in all material respects, with our assumptions at the time of the restructuring charges.

On October 30, 2006, our Board of Directors committed us to a restructuring plan to close and exit our Milpitas fabrication facility (“fab”) during the first quarter of 2007. We completed the closure of the Milpitas fab at the end of March 2007.  The Milpitas fab produced some of our gallium arsenide semiconductor products and had substantial excess capacity.

We have a strategic foundry relationship with Global Communication Semiconductors, Inc. (“GCS”), and with the closure of our Milpitas fab GCS is the sole source for the manufacturing and supply of our GaAs and InGaP HBT wafers.

Impairment of Long-Lived Assets

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

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

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CURRENT OPERATIONS

For the Period Ended April 1, 2007 Compared to April 2, 2006

Sales

We recognized $10.8 million and $12.3 million in sales for the three months ended April 1, 2007 and April 2, 2006 respectively. Total sales decreased 13% in the comparable three month period due to decreased demand from our OEM and distribution customers as they worked through their current inventory levels.  Over the comparable three month period, we have experienced an approximate 2% decrease in the mix weighted average selling price of our semiconductor products.  Units shipped during the three months ended April 1, 2007 decreased to 5.4 million units from 6.6 million units in the three months ended April 2, 2006.

Cost of Goods Sold

Our cost of goods sold for the three months ended April 1, 2007 was $6.0 million, a decrease of $152,000 or 2% as compared with cost of goods sold of $6.1 million in the three months ended April 2, 2006.   During the three months ended April 1, 2007, cost of goods sold were 56% as a percentage of sales which compares to 50% in the corresponding prior year period.  The increase in our cost of goods sold as a percentage of sales during the three months ended April 1, 2007 is primarily due to the delayed qualification by a customer for several of our cost reduced semiconductor products, our inability to reduce fixed overhead relative to the decline in revenue, and inefficiencies incurred during the ramp down of our Milpitas wafer fab.

With our transition to a fabless semiconductor manufacturing model and as our anticipated cost saving initiatives are realized, we expect cost of goods sold will decrease as a percentage of sales on a full year basis, continuing the trend we demonstrated in 2006, contingent upon increasing revenue levels.

Research and Development

 Our research and development expense for the three months ended April 1, 2007 was $5.5 million, an increase of $350,000 or 7% as compared with research and development expense of $5.1 million in the three months ended April 2, 2006.  The increase for the three months periods ended April 2, 2007 was related to increased spending related to the acceleration of new product development in the first quarter. During the three months ended April 2, 2007, research and development expenses were 51% as a percentage of sales which compares to 42% in the corresponding prior year period.

Product research and development is essential to our future success and we expect to continue making investments in new product development and engineering talent. In 2007 we will continue to focus our research efforts and resources on semiconductor development targeting multiple growth markets such as RF amplifiers, mixer and converters for wireless infrastructure, Base Station Power amplifiers, WiMAX and RFID. We will also explore process capabilities of third party foundries and develop products under new process technologies such as SiGe BiCMOS. We expect expenditures for new product development to increase although we expect a decrease in overall R&D expense during 2007 as a result of significantly reducing process development costs as we continue with our fabless semiconductor manufacturing model.

Selling and Administrative

Selling and administrative expense for the three months ended April 1, 2007 was $3.8 million or 36% of sales, a decrease of $1.5 million or 29% as compared with selling and administrative expense of $5.4 million or 43% of sales in the three months ended April 2, 2006. The decrease in expense in the relative three month period resulted from a decrease in professional service fees of $660,000, a decrease in external commissions of $273,000 and the intangible asset write-off of $637,000 in the first quarter of 2006 that was related to our decision to cease the use of the Telenexus trademark and trade names intangible asset in favor of using the WJ Communications brand to market our RFID products.

Restructuring Charges

On October 30, 2006, we committed to a restructuring plan to close and exit our Milpitas fabrication facility (“fab”) during the first quarter of 2007. We completed the closure of the Milpitas fab at the end of March 2007. The Milpitas fab produced a substantial portion of our gallium arsenide semiconductor products and had substantial excess capacity.

We have a strategic foundry relationship with Global Communication Semiconductors, Inc. (“GCS”), and with the closure of our Milpitas fab GCS is the sole source of the manufacturing and supply of our GaAs and InGaP HBT wafers.

During the period ended April 1, 2007, $156,000 of restructuring charges were recognized related to cost associated with the closure of our Milpitas wafer fab.

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Interest Income, net

Interest income represents interest earned on cash equivalents and short-term available-for-sale investments. Our net interest income in the three months ended April 1, 2007 was $249,000, a decrease of $13,000 or 5% as compared with net interest income of $262,000 in the three months ended April 2, 2006.

Other Income, net

Other income in the three months ended April 1, 2007 primarily consisted of the settlement of an insurance claim for a theft loss of approximately $118,000.

Income Tax

No tax provision or benefit was recorded in the three months ended April 1, 2007. During the three months ended April 2, 2006, we recorded a tax benefit of $1.3 million resulting from a revision of our estimated tax liability based on the statute expiration of certain estimated state tax exposures.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments at April 1, 2007 totaled $18.9 million, a decrease of $6.5 million or 26% compared to the balance of $25.4 million at December 31, 2006.

On January 23, 2007, the Company entered into a fifth amendment which extends the maturity date from January 21, 2007 to June 30, 2008 of its Amended and Restated Loan and Security Agreement (the “Credit Facility”) between Comerica Bank and the Company dated September 23, 2003 and as amended June 13, 2005, July 12, 2005, September 28, 2005 and December 27, 2005. Comerica also provided the Company with a letter agreement that, starting on January 22, 2007, the Company had a 30-day grace period until the credit facility automatically expired during which period the credit facility remained in full force without lapse or termi-nation. Interest rates on outstanding borrowings are periodically adjusted based on certain financial ratios and are initially set, at our option, at LIBOR plus 2.0% or Prime less 0.25%. The Revolving Facility requires us to maintain certain financial ratios, (such as a minimum unrestricted cash balance and a minimum tangible net worth), 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 April 1, 2007.  As of April 1, 2007 and December 31, 2006, there were no outstanding borrowings under the Revolving Facility. We have letters of credit of $3.2 million available as of April 1, 2007 that are being used as collateral on our leased facilities.

Net Cash Used in Operating Activities

Net cash used in operations was $5.9 million and $1.6 million in the three months ended April 1, 2007 and April 2, 2006, respectively. Net loss in the three months ended April 1, 2007 and April 2, 2006 was $4.4 million and $2.8 million, respectively.

The most significant cash item impacting the difference between net loss and cash flows used in operations in the first three months of 2007 was $3.7 million used by working capital. The $3.7 million used by working capital relates to a $550,000 decrease in accruals and accounts payable and a $624,000 decrease in restructuring liabilities and a $1.6 million increase in inventories. The $550,000 decrease in accruals and payables relates to the timing of invoice payments relative to our quarter end. The $624,000 decrease in restructuring liabilities relates to payments against the remaining lease loss accrual.  The $1.6 million increase in inventories resulted from a strategic inventory build associated with the closure of the wafer fab.  Non-cash items included in net loss in the three months ended April 1, 2007 were primarily $1.2 million of depreciation and amortization and $875,000 of stock based compensation expense.

The most significant cash item impacting the difference between net loss and cash flows used in operations in the first three months of 2006 was $151,000 used by working capital. The $151,000 used by working capital relates to a $116,000 decrease in accruals and accounts payable and a $620,000 decrease in restructuring liabilities which were partially offset by a $703,000 decrease in inventories. The $116,000 decrease in accruals and payables relates to the timing of our bi-weekly payroll relative to our quarter end offset by bonus accruals. The $620,000 decrease in restructuring liabilities relates to payments against the remaining lease loss accrual.  The $703,000 decrease in inventories resulted from decreased cycle time in our wafer fabrication process. Non-cash items included in net loss in the three months ended April 2, 2006 included $1.3 million related to a decrease in our income tax liability, $904,000 of depreciation and amortization, $637,000 charge for the impairment of an intangible asset, $368,000 of stock based compensation and $109,000 of asset retirement obligations.  The $1.3 million decrease in our income tax liability resulted from a revised estimate based on the statute expiration of certain estimated state tax exposures during April 2006.

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Net Cash Provided by Investing Activities

Net cash provided by investing activities was $1.0 million and $4.2 million in the three months ended April 1, 2007 and April 2, 2006, respectively.  In the first three months of 2007, we realized $7.4 million in proceeds from the sale and maturities of our short-term investments which was partially offset by $5.9 million used to purchase short-term investments and $508,000 to invest in property, plant and equipment.  In the first three months of 2006, we realized $11.6 million in proceeds from the sale and maturities of our short-term investments which was partially offset by $7.1 million used to purchase short-term investments and $383,000 to invest in property, plant and equipment. During 2007, we expect to invest approximately $4 million to $5 million in capital expenditures of which $508,000 million was purchased in the first three months. We have funded our capital expenditures from cash, cash equivalents and short-term investments and expect to continue to do so throughout 2007.

In conjunction with our recent acquisitions, we may be required to pay additional consideration related to the achievement of specific revenue and gross margin targets. With respect to EiC, we determined that the revenue and gross margin targets that had to be achieved by March 31, 2005 and 2006 respectively were not achieved. We communicated our conclusion to EiC and they notified us that they disagree with our conclusions. We believe EiC’s assertions are without merit. Should we be required to pay the additional consideration, it may be up to $14.0 million in cash (10%) and shares (90%). With respect to Telenexus, we determined that the revenue targets that had to be achieved by October 28, 2006 were not achieved and we communicated our conclusion to the selling shareholders. The Telenexus selling shareholders had thirty days to review and possibly contest our calculation. The Telenexus selling shareholders did not so notify us during the thirty day period.

Net Cash Used in/Provided by Financing Activities

Net cash used in financing activities was $110,000 for the three months ended April 1, 2007 and $45,000 provided by financing activities in the three months ended April 2, 2006, respectively.  In the first three months of 2007, we received net proceeds of $193,000 from the sale of our common stock to employees through our option plans which was partially offset by $263,000 used to repurchase our common stock from employees to cover the income tax withholdings and $32,000 of financing costs associated with our revolving credit facility. In the first three months of 2006, we received net proceeds of $112,000 from the sale of our common stock to employees through our option plans which was partially offset by $35,000 used to repurchase our common stock from employees to cover income tax withholdings and $32,000 of financing costs associated with our revolving credit facility.

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

Contractual Obligations

Our contractual obligations and the effect those obligations are expected to have on our liquidity and cash flows are set forth in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” of our annual report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2006.

Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet financing arrangements except for certain operating leases discussed in Note 10 to the consolidated financial statements contained in our Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2006.

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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.

			Weighted
	Expected Maturity		Average Interest
Expected Maturity Dates	Amounts		Rate
	(in thousands)
Cash equivalents:
2007	$	10,636	4.84	%
Short-term investments:
2007	6,866		5.12	%
Fair value at April 1, 2007	$	17,502

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 Item 4.CONTROLS AND PROCEDURES

Attached as exhibits 31.1 and 31.2 to this Form 10-Q are certifications of WJ Communication’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Evaluation of Disclosure Controls and Procedures

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

During the preparation of our financial statements for the quarterly period ended October 1, 2006, we determined that we had not properly accrued cash bonuses earned under employment agreements, including executive officers. As a result, management concluded, after discussions with the Audit Committee of the Company’s Board of Directors, that we should restate our previously filed financial statements for the quarterly periods ended April 2, 2006 and July 2, 2006 in order to correct these errors. As a result of our determination that the errors should be corrected and that previously filed financial statements should be restated, management concluded that there was a material weakness in our internal control over financial reporting. Although we have already taken some actions to remediate the material weakness described above, including the retention of a skilled outside resource to advise us on such matters and processes, we believe that further action is required to complete its remediation, including the need to develop and implement enhanced processes. The effectiveness of the steps we have taken to date and the steps we are still in the process of completing is subject to continued management review, as well as Audit Committee oversight, and we may make additional changes to our internal control over financial reporting other than those described above.

In connection with the preparation of our financial statements for the year ended December 31, 2006, we identified a material weakness in the Company’s internal control over financial reporting as of December 31, 2006. We did not maintain a sufficient number of qualified resources with the required proficiency to apply our accounting policies in accordance with generally accepted accounting principles of the United States of America. This control deficiency resulted in adjustments, including audit adjustments, recorded in the financial statements, affecting revenue, restructuring accruals, operating expenses and SFAS 123R expenses. This control deficiency could result in misstatements of our financial statements and disclosures that could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.  We are currently evaluating further actions required to remediate this material weakness.

Subsequent to the issuance of our December 31, 2006 financial statements, we determined we had not properly recorded the restructuring accrual that was established in 2001 and 2002.  As a result, we concluded, after discussions with the Audit Committee of the Company’s Board of Directors, that we should restate the Company’s previously filed financial statements for the fiscal year ended December 31, 2006 in order to correct this error.  As a result of our determination that the errors should be corrected and that previously filed financial statements should be restated, management has concluded that there is a material weakness in the Company’s internal control over financial reporting.  We are currently assessing the actions necessary to remediate such material weakness.

Changes in Internal Controls

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

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PART II — OTHER INFORMATION

Item 1A.  RISK FACTORS

You should carefully consider the risks described in the “Risk Factors” section of our Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2006 filed with the SEC on May 15, 2007 and described herein below before making an investment in our securities.  Set forth below are the specific risk factors which have been updated or included to reflect material changes from the risk factors previously disclosed in our Form 10-K/A Amendment No. 2 for the year ended December 31, 2006 in response to Item 1A.of Part I of Form 10-K.  There have been no other material changes from the risk factors previously disclosed in our Form 10-K/A Amendment No. 2 for the year ended December 31, 2006.  The forward-looking statements in this Quarterly Report on Form 10-Q involve risks and uncertainties and actual results may differ materially from the results we discuss in the forward-looking statements. If any of the risks we have described in the “Risk Factors” section and elsewhere in our SEC filings actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our stock could decline, and you may lose all or part of your investment.

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

We have not recorded operating income since 1999 and we may not be able to achieve revenue or earnings growth or obtain sufficient revenue to sustain profitability. In the three months ended April 1, 2007 our sales were $10.8 million and we incurred an operating loss of $4.8 million compared to sales of $12.3 million and an operating loss of $4.3 million for the three months ended April 2, 2006.  In addition, our sales for 2006 were $48.8 million and we incurred an operating loss of $10.8 million compared to sales of $31.6 million and an operating loss of $22.1 million for 2005.  Our accumulated deficit was $187.9 million at April 1, 2007.

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

·production overcapacity in the industry, which could reduce the price of our products adversely affecting our sales and margins;

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

·any loss of a key customer;

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

·political and economic instability, foreign conflicts involving or the impact of regional and global infectious illnesses (such as outbreaks of SARS and bird flu) in the countries of our vendors, manufacturers, subcontractors and customers, particularly in the countries of China, South Korea, Malaysia and the Philippines.

We may incur losses for the foreseeable future, particularly if our revenues do not increase substantially or if our expenses increase faster than our revenues. In order to return to profitability, we must achieve substantial revenue growth and reduce expenses, and we currently face an environment of uncertain demand in the markets our products address.

We depend on our sole worldwide distributor for distribution of our RF semiconductor products and the loss of this relationship could materially reduce our sales.

Richardson Electronics, Ltd is the sole worldwide distributor of our complete line of RF semiconductor products. Richardson Electronics, Ltd is our largest semiconductor customer, and our sales to Richardson Electronics represent 46% and 44% of our total sales for the three months ended April 1, 2007 and April 2, 2006, 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 Richardson Electronics 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 may be terminated at any time. If this distribution relationship is discontinued, our RF semiconductor sales could decline significantly.

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

We depend on a small number of customers for a majority of our sales. We had one customer, Richardson Electronics, who accounted for more than 10% of our sales for the three months ended April 1, 2007.  We had two customers, Richardson Electronics and Celestica, which each accounted for more than 10% of our sales and in aggregate accounted for 62% of our sales for the three months ended April 2, 2006.  Sales to Richardson Electronics accounted for 46% and 44% of our sales for the three months ended April 1, 2007 and April 2, 2006, respectively.  Sales to Celestica accounted for 9% and 18% of our sales for the three months ended April 1, 2007 and April 2, 2006, respectively. This concentration exposes us to significant risk if either customer was to reduce their level of business with us.

In addition, most of our sales result from purchase orders or from contracts that can be cancelled on short notice. Moreover, it is possible that our customers may develop their own products internally or purchase products from our competitors. Also, events that impact our customers, for example wireless equipment manufacturers consolidation and/or wireless carrier consolidation, can adversely affect our sales. We expect that our key customers will continue to account for a substantial portion of our revenue in 2007. The loss of, or a reduction in orders from, a significant customer for any reason could cause our sales to decrease.

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

We use rolling forecasts based on anticipated product orders to determine our component requirements. It is important that we accurately predict both the demand for our products and the lead times required to obtain the necessary products and/or components and materials. Lead times for components and materials that we, or our outsourced manufacturers, order can vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. To the extent that we rely on outsourced manufacturers, many of these factors will be outside of our direct managerial control. For substantial increases in production levels, our outsourced manufacturers and some suppliers may need nine months or more lead time. As a result, we may be required to make financial commitments in the form of purchase commitments. We lack visibility into the finished goods inventories of our customers and the end-users. This lack of visibility impacts our ability to accurately forecast our requirements. If we overestimate our component, material and outsourced manufactured requirements, we may have excess inventory, which would increase our costs. An additional risk for potential excess inventory results from our volume purchase commitments with certain material suppliers, which can only be reduced in certain circumstances. Additionally, if we underestimate our component, material, and outsourced manufactured requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact our sales and profitability. We have incurred, and may in the future incur, charges related to excess and obsolete inventory. These charges amounted to $217,000 and $376,000 in the three month periods ended April 1, 2007 and April 2, 2006, respectively. While these charges may be partially offset by subsequent sales of previously written-down inventory, there can be no assurance that any such sales will be significant. As we broaden our product lines we must outsource the manufacturing of or purchase a wider variety of components. In addition, new product lines contain a greater degree of uncertainty due to a lack of visibility of customer acceptance and potential competition. Both of these factors will contribute a higher level of inventory risk in our near future.

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

We sell a significant portion of our product to customers outside of the United States. Sales to customers outside of the United States accounted for 48% and 52% of our sales in the three month periods ended April 1, 2007 and April 2, 2006, respectively and 52%, 44% and 35% of our sales in 2006, 2005 and 2004, respectively. Most of our foreign sales are to customers located in China. We expect that sales to customers outside of the United States will continue to account for a significant portion of our sales. Although all of our foreign sales are denominated in U.S. dollars, such sales are subject to certain risks, including, among others, changes in regulatory requirements, the imposition of tariffs and other trade barriers, the existence of political, legal and economic instability in foreign markets, language and cultural barriers, seasonal reductions in business activities, our ability to receive timely payment and collect our accounts receivable, currency fluctuations, and potentially adverse tax consequences, which could adversely affect our business and financial results.

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Our dependence on a sole source foundry partner exposes us to a risk of manufacturing disruption or uncontrolled price changes.

On October 30, 2006, our board of directors committed us to a restructuring plan to close and exit our Milpitas fabrication facility during the first quarter of 2007. We completed the closure of the Milpitas fabrication facility at the end of March 2007. The Milpitas fabrication facility produced some of our gallium arsenide semiconductor products and Global Communication Semiconductors, Inc., our foundry partner, has become the sole source of the manufacturing and supply or our GaAs and InGap HBT wafers as a result of the fab closure.

If the operations of our foundry partner should be disrupted, or if they should choose not to devote capacity to our products in a timely manner, our business could be adversely impacted, as we might be unable to manufacture some of our products on a timely basis. In addition, the cyclicality of the semiconductor industry has periodically resulted in disruption of supply. We may not be able to find sufficient capacity at a reasonable price or at all if such disruptions occur. As a result, we face significant risks, including:

·reduced control over delivery schedules and quality;

·longer lead times;

·the potential lack of adequate capacity during periods when industry demand exceeds available capacity;

·difficulties finding and integrating new subcontractors;

·limited warranties on products supplied to us;

·potential increases in prices due to capacity shortages, currency exchange fluctuations and other factors; and

·potential misappropriation of our intellectual property.

We determined that we had material weaknesses in our internal control over financial reporting as which have caused us to restate our financial results. These material weaknesses and any future restatements to our financial statements which may result from it, could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price and potentially limit our access to financial markets.

During the preparation of our financial statements for the quarterly period ended October 1, 2006, we determined that we had not properly accrued cash bonuses earned under employment agreements, including executive officers. As a result, management concluded, after discussions with the Audit Committee of the Company’s Board of Directors, that we should restate our previously filed financial statements for the quarterly periods ended April 2, 2006 and July 2, 2006 in order to correct these errors. As a result of our determination that the errors should be corrected and that previously filed financial statements should be restated, management concluded that there was a material weakness in our internal control over financial reporting.

In connection with the preparation of our financial statements for the year ended December 31, 2006, we identified a material weakness in the Company’s internal control over financial reporting as of December 31, 2006. We did not maintain a sufficient number of qualified resources with the required proficiency to apply our accounting policies in accordance with generally accepted accounting principles of the United States of America. This control deficiency resulted in adjustments, including audit adjustments, recorded in the financial statements, affecting revenue, restructuring accruals, operating expenses and SFAS 123R expenses. This control deficiency could result in misstatements of our financial statements and disclosures that could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Subsequent to the issuance of our December 31, 2006 financial statements, we determined we had not properly recorded the restructuring accrual that was established in 2001 and 2002.  As a result, we concluded, after discussions with the Audit Committee of the Company’s Board of Directors, that we should restate the Company’s previously filed financial statements for the fiscal year ended December 31, 2006 in order to correct this error.  As a result of our determination that the errors should be corrected and that previously filed financial statements should be restated, management has concluded that there is a material weakness in the Company’s internal control over financial reporting.

As a result of the Company’s determination that these errors should be corrected and that previously filed financial statements should be restated, management has concluded that there is are material weaknesses in the Company’s internal controls over financial reporting and that the disclosure controls and procedures are not effective. Should we discover that we have material weaknesses in our internal control over financial reporting in the future, especially considering that we have had material weaknesses in the past, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price and could limit our access to financial markets.

27

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

There were no matters submitted to a vote of security holders in the first quarter of 2007.

Item 6.  EXHIBITS

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

		Incorporated by Reference
Exhibit						Filing	Filed
Number	Exhibit Description		Form	File No	Exhibit	Date	Herewith
31.1	Certification of Bruce W. Diamond, Chief Executive Officer (principal executive officer), pursuant to Rule 13a-14/15d-14(a) of the Securities Exchange Act of 1934.						X
31.2	Certification of R. Gregory Miller, Chief Financial Officer (principal financial officer), pursuant to Rule 13a-14/15d-14(a) of the Securities Exchange Act of 1934.						X
32.1	Certification of Bruce W. Diamond, Principal Executive Officer, Pursuant To 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.						X
32.2	Certification of R. Gregory Miller, Principal Financial Officer, Pursuant To 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.						X

28

SIGNATURES

Pursuant to the requirements 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

		WJ COMMUNICATIONS, INC.
		(Registrant)
Date	May 16, 2007	By:	/s/ BRUCE W. DIAMOND
			Bruce W. Diamond
			President and Chief Executive Officer
			(principal executive officer)
Date	May 16, 2007	By:	/s/ R. GREGORY MILLER
			R. Gregory Miller
			Vice President and Chief Financial Officer
			(principal financial officer)

29

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Bruce W. Diamond, 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:	May 16, 2007	By:	/s/ BRUCE W. DIAMOND
		Bruce W. Diamond
		President and Chief Executive Officer
		(principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, R. Gregory Miller, 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 officer 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:	May 16, 2007	By:	/s/ R. GREGORY MILLER
		R. Gregory Miller
		Vice President and 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 ended April 1, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bruce W. Diamond, 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 1350 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/ BRUCE W. DIAMOND

Bruce W. Diamond

President and Chief Executive Officer

(principal executive officer)

May 16, 2007

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 ended April 1, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Gregory Miller, 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 1350 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/ R. GREGORY MILLER

R. Gregory Miller

Vice President and Chief Financial Officer

(principal financial officer)

May 16, 2007