10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 1, 2007

OR

oTRANSITION 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 xNo 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 August 9, 2007 there were 68,929,888 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.

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

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations for the Three and Six Months ended July 1, 2007 and July 2, 2006	4
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months ended July 1, 2007 and July 2, 2006	5
	Condensed Consolidated Balance Sheets at July 1, 2007 and December 31, 2006	6
	Condensed Consolidated Statements of Cash Flows for the Three and Six Months ended July 1, 2007 and July 2, 2006	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosure About Market Risks	31
Item 4.	Controls and Procedures	33
PART II	OTHER INFORMATION
Item 1A.	Risk Factors	34
Item 4.	Submission of Matters to a Vote of Security Holders	37
Item 6.	Exhibits	38
	Signatures	39

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PART I — FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

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

	Three Months Ended						Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Net sales	$	12,744		$	12,412		$	23,501		$	24,753
Cost of goods sold	6,060			5,713			12,048			11,853
Gross profit	6,684			6,699			11,453			12,900
Operating expenses:
Research and development	3,405			4,642			8,902			9,789
Selling and administrative	4,347			3,892			8,177			9,257
Restructuring charges	425			—			637			—
Gain on the sale of assets held for sale	(901		)	—			(901		)	—
Total operating expenses	7,276			8,534			16,815			19,046
Loss from operations	(592		)	(1,835		)	(5,362		)	(6,146		)
Interest income	196			295			459			587
Interest expense	(21		)	(16		)	(36		)	(46		)
Other income - net	1			1			121			4
Loss before income taxes	(416		)	(1,555		)	(4,818		)	(5,601		)
Income tax benefit	—			—			—			(1,289		)
Net loss	$	(416	)	$	(1,555	)	$	(4,818	)	$	(4,312	)
Basic and diluted net loss per share	$	(0.01	)	$	(0.02	)	$	(0.07	)	$	(0.07	)
Basic and diluted average weighted shares	67,986			66,017			67,735			65,861

See notes to condensed consolidated financial statements.

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

	Three Months Ended						Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Net loss	$	(416	)	$	(1,555	)	$	(4,818	)	$	(4,312	)
Other comprehensive loss:
Unrealized holding gain (loss) on securities arising during the period	2			2			(1		)	7
Comprehensive loss	$	(414	)	$	(1,553	)	$	(4,819	)	$	(4,305	)

See notes to condensed consolidated financial statements

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

	July 1, 2007			December 31, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	16,142		$	17,024
Short-term investments	1,968			8,399
Receivables (net of allowances of $329 and $417, respectively)	7,818			5,759
Inventories	7,165			5,281
Other current assets	1,021			1,563
Total current assets	34,114			38,026
PROPERTY, PLANT AND EQUIPMENT, net	6,552			7,232
Goodwill	6,834			6,834
Intangible assets, net	826			960
Other assets	179			181
	$	48,505		$	53,233
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	5,095			4,522
Accrued liabilities	3,414			4,080
Income tax contingency liability	53			419
Deferred margin on distributor inventory	2,230			2,824
Restructuring accrual	3,233			3,212
Total current liabilities	14,025			15,057
Restructuring accrual	10,392			12,006
Other long-term obligations	500			580
Total liabilities	24,917			27,643
STOCKHOLDERS’ EQUITY:
Preferred stock	—			—
Common stock	702			693
Treasury stock	(22		)	(20		)
Additional paid-in capital	211,254			208,840
Accumulated deficit	(188,346		)	(183,923		)
Total stockholders’ equity	23,588			25,590
	$	48,505		$	53,233

See notes to condensed consolidated financial statements.

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

	Six Months Ended
	July 1, 2007			July 2, 2006
OPERATING ACTIVITIES:
Net loss	$	(4,818	)	$	(4,312	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,869			1,689
Amortization of deferred financing costs	16			16
Gain on sale of assets held for sale	(901		)	—
Restructuring charges (reversals)	(128		)	(3		)
Intangible assets impairment	—			637
Stock based compensation	2,148			525
Allowance for doubtful accounts	6			13
Asset retirement obligations	—			(109		)
Amortization of (premiums) discounts on short-term investments	(5		)	23
Net changes in:
Receivables	(2,065		)	(827		)
Inventories	(1,884		)	1,485
Other assets	559			1,081
Accruals and accounts payable	(531		)	(982		)
Income tax contingency liability	29			(1,323		)
Deferred margin on distributor inventory	(594		)	344
Restructuring liabilities	(1,465		)	(1,273		)
Net cash used in operating activities	(7,764		)	(3,016		)
INVESTING ACTIVITIES:
Purchase of short-term investments	(6,365		)	(9,515		)
Proceeds from sale and maturities of short-term investments	12,800			20,203
Purchases of property, plant and equipment	(1,374		)	(1,103		)
Proceeds on disposal of property, plant and equipment	1,598			213
Net cash provided by investing activities	6,659			9,798
FINANCING ACTIVITIES:
Principal payments on capital lease	(16		)	—
Payments on long-term borrowings	(32		)	(32		)
Repurchase of common stock	(310		)	(69		)
Net proceeds from issuances of common stock	581			869
Net cash (used in)/provided by financing activities	223			768
Net (decrease)/increase in cash and cash equivalents	(882		)	7,550
Cash and cash equivalents at beginning of period	17,024			14,169
Cash and cash equivalents at end of period	$	16,142		$	21,719
Other cash flow information:
Income taxes paid	$	13		$	40
Interest paid	20			30
Noncash investing and financing activities:
Increase in accounts payable related to property, plant and equipment purchases	375			79

See notes to condensed consolidated financial statements.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     BASIS OF PRESENTATION

The Company is a radio frequency (“RF”) semiconductor company providing RF product solutions worldwide to communications equipment companies. The Company designs, develops and manufactures innovative, high performance products for both current and next generation wireless and RF identification (“RFID”) systems. The Company’s 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.  The Company currently generates the majority of its revenue from its products utilized in wireless networks.

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 and six month periods ended July 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.

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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.

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 $5.4 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 July 1, 2007 and December 31, 2006 is as follows (in thousands):

	EiC		Telenexus		Total
Balance as of December 31, 2006 and July 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

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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, 2007.

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 expenses in the three months ended April 1, 2006. The following tables present details of the Company’s purchased intangible assets (in thousands):

As of July 1, 2007:

Description	Useful Life	Gross		Accumulated Amortization		Net
EiC acquisition
Purchased developed technology	5 years	$	200	$	120	$	80
Telenexus acquisition
Purchased developed technology	1.2 years	40		40		—
Customer relationships	7 years	900		312		588
Non-competition agreements	4 years	400		242		158
Total identified intangible assets		$	1,540	$	714	$	826

As of December 31, 2006:

Description	Useful Life	Gross		Accumulated 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

                In the three and six months ended July 1, 2007 and July 2, 2006, amortization of purchased intangible assets included in cost of goods sold was approximately $10,000, $20,000, $10,000 and $28,000, respectively. In the three and six months ended July 1, 2007 and July 2, 2006, amortization of purchased intangible assets included in operating expense was approximately $57,000, $114,000, $57,000 and $123,000, 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.

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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 six months)	$	20	$	114	$	134
2008	40		228		268
2009	20		136		156
2010	—		129		129
2011	—		129		129
2012 and beyond	—		10		10
Total amortization	$	80	$	746	$	826

 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 $87,000, $300,000, $848,000 and $1.2 million in the three and six month periods ended July 1, 2007 and July 2, 2006, respectively.  If actual conditions become less favorable than the assumptions used, an additional inventory write-down may be required.  Inventories at July 1, 2007 and December 31, 2006 consisted of the following (in thousands):

	July 1, 2007		December 31, 2006
Finished goods	$	1,810	$	1,661
Work in progress	1,695		1,808
Raw materials and parts	3,660		1,812
	$	7,165	$	5,281

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

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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 July 1, 2007, two customers represented 29% and 22% 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) Amended and Restated 2000 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 officers and employees and consultants, 2) the Amended and Restated 2000 Non-Employee Director Stock Compensation Plan 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 July 1, 2007 the number of shares available for future grants under the above plans was 4,646,382.

The Company’s Board of Directors approved the adoption of an amendment to the Company’s “Amended and Restated 2000 Stock Incentive Plan to increase the number of shares of common stock authorized for issuance from 19,000,000 to 19,500,000, which was approved by the Company’s stockholders on July 19, 2007 at the Company’s Annual Meeting of Stockholders.

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 1,000,000 to 1,250,000, which was approved by the Company’s stockholders on July 19, 2007 at the Company’s Annual Meeting of Stockholders.

During the six months ended July 1, 2007, the Compensation Committee of the Board of Directors awarded 425,000 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 not vest upon the achievement of performance targets cliff vest at the end of four years.

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Combined Incentive Plan Information

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

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)
Outstanding at December 31, 2006	8,888,280		$	1.40
Grants	425,000		$	0
Exercised	(373,048	)	$	0.90
Forfeited/expired/cancelled	(550,951	)	$	1.85
Outstanding at July 1, 2007	8,389,281		$	1.33	6.40

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

	Shares		Weighted Average Grant Date Fair Value per Share
Unvested at December 31, 2006	783,904		$	1.65
Grants	—		—
Vested	(353,328	)	1.66
Forfeited/expired/cancelled	—		—
Unvested at July 1, 2007	430,576		1.64

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 July 1, 2007, 767,646 shares were available for future issuance under this plan.

STOCK-BASED COMPENSATION

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

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

	Three Months Ended						Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 2, 2006
Employee Stock Option Plans:
Fair value	—			$	1.70		—			$	1.40
Dividend yield	—			0.0		%	—			0.0		%
Volatility	—			83.88		%	—			84.86		%
Risk free interest rate at the time of grant	—			4.80		%	—			4.58		%
Expected term to exercise (in years from the grant date)	—			3.85			—			4.16
Employee Stock Purchase Plan:
Fair value	$	0.55		$	0.85		$	0.60		$	0.50
Dividend yield	0.0		%	0.0		%	0.0		%	0.0		%
Volatility	71.47		%	64.23		%	74.62		%	60.76		%
Risk free interest rate at the time of grant	5.08		%	4.89		%	5.19		%	4.5		%
Expected term to exercise (in years from the grant date)	0.49			0.49			0.50			0.49

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

	Three Months Ended				Six Months Ended
	July 1, 2007		July 2, 2006		July 1, 2007		July 2, 2006
Cost of goods sold	$	120	$	61	$	343	$	103
Research and development	228		90		460		195
Selling and administrative	925		6		1,345		227
	$	1,273	$	157	$	2,148	$	525

The impact on basic and diluted net loss per share for the three and six months ended July 1, 2007 and July 2, 2006 from stock compensation expense was $0.02, $0.03, $0.00 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						Six Months Ended
	July 1, 2007			July 2, 2006			July 1, 2007			July 1, 2006
Net loss	$	(416	)	$	(1,555	)	$	(4,818	)	$	(4,312	)
Denominator for basic and diluted net loss per share:
Weighted average shares outstanding	68,558			66,956			68,399			66,775
Less: weighted average shares subject to repurchase	(572		)	(939		)	(664		)	(914		)
Weighted average shares outstanding	67,986			66,017			67,735			65,861
Basic and diluted net loss per share	$	(0.01	)	$	(0.02	)	$	(0.07	)	$	(0.07	)

For the six months periods ended July 1, 2007, the incremental shares from the assumed exercise of 8,389,281 of the Company’s stock options outstanding and 58,695 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 six months period ended July 2, 2006, the incremental shares from the assumed exercise of 9,638,660 of the Company’s stock options outstanding and 66,140 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

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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 had continued the lease on a month-to-month basis until the closure of the sale of the fab equipment to AmpTech as described below.  AmpTech then entered into a lease agreement with the owner of the building for the Company’s former Milpitas facility.

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 currently the sole source for the manufacturing and supply of its GaAs and InGaP HBT wafers.  The Company has entered into a wafer manufacturing and supply agreement with AmpTech to provide an additional source of supply for its GaAs and InGap HBT wafers, after AmpTech starts its wafer fabrication line.

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

	Q3 2001 Restructuring Plan		Q3 2002 Restructuring Plan		Q4 2006 Restructuring Plan		Q2 2007 Restructuring Plan (3)
	Lease Loss		Lease Loss		Fab Closure			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)	(461	)	314		10		9	(128	)(1)
Cash payments	(619	)	(707	)	(138	)	—	(1,464	)
Balance at July 1, 2007	7,474		6,096		46		9	13,625	(2)

(1)The condensed consolidated statements of operations  “restructuring charges” for the three and six months ended July 1, 2007, includes $(203,000) and $(147,000) of restructuring credits under the Q3 2001 and Q3 2002 restructuring plans, $0 and $10,000 of restructuring charges that were accrued under the Q4 2006 Restructuring Plan, and $9,000 and $9,000 restructuring charges that were accrued under the Q2 2007 Restructuring Plan and $619,000 and $ 765,000 of restructuring charges that were expensed as incurred.

(2)Of the accrued restructuring charge at July 1, 2007, the Company expects $3.2 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 $10.4 million to be paid out over the remaining life of the lease of approximately four years is recorded as a long-term liability.

(3)Of the $9,000 accrued balance, $98,000 was expensed during the three month period ending July 1, 2007 and $89,000 was paid in the same period.

The Q2 2007 Restructuring Plan covers the restructuring expenses primarily towards severance payments associated with the reduction of personnel.

The restructuring expense for three and six months ended July 1, 2007 was $425,000 and $637,000 respectively which consisted of $530,000 and $686,000 for the Q4 2006 restructuring plan for professional services, lease termination costs and other expenses towards closure of the Milpitas fab and $98,000 and $98,000 for the Q2 2007 restructuring plan primarily for severance payments offset by a credit of $203,000 and $147,000 for the Q3 2001 and Q3 2002 restructuring plans towards adjustment of an estimate based on a new sublease expectation against the lease loss.

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On May 23, 2007 the Company entered into an Asset Purchase Agreement with AmpTech, Inc (“AmpTech”) to sell certain wafer fabrication equipment from it’s recently closed Milpitas fabrication facility. The consideration received by the Company consisted of cash in the amount of $1,800,000 and a warrant to purchase 200,000 shares of AmpTech common stock.  The fair value of the warrant is $1,400 and was not recorded as an asset due to uncertainty of realization in the future.  The company ceased manufacturing at the wafer fabrication facility at the end of March 2007 and subsequently in the beginning of April 2007 decided to classify the wafer fabrication equipment as held-for sale, with a carrying value of approximately $671,000.  The company recorded a gain on the sale of the wafer fabrication equipment of approximately $901,000, net of sales tax provision of $148,500 and property tax of $80,000, which was included in the income from operations in the condensed consolidated statements of operations.  The agreement also obligates AmpTech to reimburse the Company for certain expenses.  In connection with the agreement the parties also entered into a one year Wafer Manufacturing and Supply Agreement which provides for AmpTech to manufacture and supply wafers to the Company utilizing the Company’s wafer production processes and for the Company to purchase such wafers. The Company also entered into a License Agreement whereby the Company licenses to AmpTech certain of the Company’s proprietary process technologies subject to certain restrictions. The License Agreement provides for AmpTech to pay the Company a royalty of 5% of its gross revenue from third parties, up to $750,000, and 3% of gross revenue thereafter for the seven year term. Products for the Company produced using the Company’s proprietary technology will not bear royalty.

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				Six Months Ended
	July 1, 2007		July 2, 2006		July 1, 2007		July 2, 2006
Richardson Electronics, Ltd (1)	$	4,943	$	5,538	$	9,860	$	10,957
Celestica	2,309		2,426		3,240		4,638

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

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

	Three Months Ended				Six Months Ended
	July 1, 2007		July 2, 2006		July 1, 2007		July 2, 2006
United States	$	6,237	$	5,662	$	11,782	$	11,633
Export sales from United States:
China	2,730		1,215		5,203		3,178
Thailand	1,567		1,645		2,244		2,909
Europe	818		1,092		1,503		2,219
Republic of Korea	520		980		766		1,477
Other	872		1,818		2,003		3,337
Total	$	12,744	$	12,412	$	23,501	$	24,753

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 July 1, 2007 and December 31, 2006, respectively. Changes in the Company’s valuation allowance of $1.5 million and $1.5 million for the three months and six months ended July 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 and $1.5 million for the three and six months ended July 1, 2007 were also 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 July 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 and six months ended July 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 July 1, 2007, the federal returns for the years ended 2003 through the current period and certain state returns

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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.

The Company has an accrued liability of $60,000 as of July 1, 2007 to offset estimated program oversight, remediation actions and record retention costs.  There were no expenditures charged against the accrual for the three and six month periods ended July 1, 2007 and July 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.

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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

On August 4, 2007 the Company committed to an offshore program that will result in the transition of our final test and support operations to the Philippines. The operations are currently located in our San Jose, California facility. The Company expects to incur certain restructuring costs during the third quarter of 2007 including severance and retention benefits associated with the implementation of this plan of approximately $600,000 as well as approximately $300,000 in dual staffing and start-up costs. The transition is expected to be completed in the first quarter of 2008.

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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. During the second quarter of 2007 we sold our fab assets to AmpTech, Inc. 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. We have manufacturing and supply agreements with Global Communications Semiconductors, Inc. and AmpTech, Inc. to provide our GaAs and InGap HBT wafers.

Building on the fabless business model, in order to further drive future anticipated cost savings, on August 4, 2007 we committed to an offshore program that will result in the transition of our final test and support operations to the Philippines. The operations are currently located in our San Jose, California facility. The Company expects to incur certain restructuring costs during the third quarter of 2007 including severance and retention benefits associated with the implementation of this plan of approximately $600,000 as well as approximately $300,000 in dual staffing and start-up costs. The transition is expected to be completed in the first quarter of 2008 and the company anticipates cost savings of approximately $400,000 per quarter beginning in the second quarter of 2008.

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In 2004 and 2005, we augmented our technology base and design capabilities through acquisitions.  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.  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.

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.

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.

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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 pricing allowance was solely 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 pricing 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 July 1, 2007 and July 2, 2006, our pricing allowance was $213,000 and $120,000, 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.

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 $36,000 at July 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.

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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.

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

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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 reduce 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.

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 and an adjustment for property tax due to change in the landlord of our San Jose buildings during the three months ended April 1, 2007, 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.

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We have a strategic foundry relationship with Global Communication Semiconductors, Inc. (“GCS”), and with the closure of our Milpitas fab GCS is currently the sole source for the manufacturing and supply of our GaAs and InGaP HBT wafers. With the recent sale of fab assets to AmpTech, Inc. (“AmpTech”) and entering into a wafer manufacturing and supply agreement with AmpTech, AmpTech will provide an additional source of supply for our GaAs and InGap HBT wafers after AmpTech starts its wafer fabrication line.

Impairment of Long-Lived Assets

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

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

CURRENT OPERATIONS

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

Sales

We recognized sales of $12.7 million and $23.5 million for the three months and six months ended July 1, 2007 respectively.  This compares to sales of $12.4 million and $24.8 million in the respective periods in 2006.  Sales increased 3% in the three month period and declined 5% in the six month period compared to the prior year.  The increase in the three month period was driven by increased demand from our OEM customers and a $450,000 one-time revenue related to end of life purchase by a certain customer while the decline in the six month period relates to weak demand from both our OEM and distribution channel customers in the first three months of 2007 relative to 2006.  Over the comparable three and six month periods, we have experienced an approximate 12% and 8% decrease in the mix weighted average selling prices of the semiconductor products shipped.  Units shipped during the three and six month periods were 7.3 million and 12.7 million compared to 6.1 million and 12.7 million in the prior year.

We have experienced a delay in the qualification of reduced cost parts from a customer and that may affect our sales until this customer approves such qualification.  We have introduced several cost reduced parts and expect to limit the shipment of the higher cost parts to this customer in the future. Our decision to limit shipments of higher cost parts is expected to have a positive impact on our gross margin in the future.

Cost of Goods Sold

Our cost of goods sold was $6.1 million and $12.0 million for the three months and six months ended July 1, 2007 respectively.  This compares to $5.7 million and $11.9 million in the respective 2006 periods.  The cost of goods sold was 48% and 51% of sales in the three and six month periods of 2007 which are up from the 46% and 48% in the respective 2006 periods.  The increase in cost of goods sold as a percentage of sales is due to a higher material content of our product mix, primarily due to the delayed qualification by a customer for several of our cost reduced products. Lower inventory reserve charges in 2007 compared to 2006 were offset by higher overhead spending associated with inefficiencies as we closed our wafer fabrication facility in the first quarter and incurred a lower level of support provided for our research and development.

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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 was $3.4 million and $8.9 million for the three and six months ended July 1, 2007.  This compares to research and development expenses of $4.6 million and $9.8 million in the respective 2006 periods.  The decrease in 2007 expense was related to the reduced spending resulting from the closure of our internal wafer fabrication facility which lowered our process development and new product costs during the three month period ending July 1, 2007 as we used lower third-party support.

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 with our fabless semiconductor manufacturing model.

Selling and Administrative

Selling and administrative expense was $4.3 million and $8.1 million for the three and six month periods ended July 1, 2007.  This compares to $3.9 million and $9.3 million in the respective 2006 periods.  The increase in spending for the three months ended July 1, 2007 compared to the 2006 period is due to a higher stock compensation charges which were offset by lower amount of severance charges during the quarter.  For the six month period in 2007 compared to 2006, stock compensation charges were higher which were offset by lower severance, lower professional fees and the absence of the intangible asset write-off related to the Telenexus trade name in the first quarter of 2006.

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.

On May 23, 2007 we entered into an Asset Purchase Agreement with AmpTech to sell certain wafer fabrication equipment from our recently closed Milpitas fabrication facility. The consideration received by us consisted of cash in the amount of $1.8 million and a warrant to purchase 200,000 shares of AmpTech common stock.  The fair value of the warrant is $1,400 and was not recorded as an asset due to uncertainty of realization in the future.  We ceased manufacturing at the wafer fabrication facility at the end of March 2007 and subsequently in the beginning of April 2007 decided to classify the wafer fabrication equipment as held-for sale, with a carrying value of approximately $671,000.  We recorded a gain on the sale of the wafer fabrication equipment of approximately $901,000, net of sales tax provision of $148,500 and property tax of $80,000, which was included in the income from operations in the condensed consolidated statements of operations.  The agreement also obligates AmpTech to reimburse us for certain expenses.  In connection with the agreement the parties also entered into a one year Wafer Manufacturing and Supply Agreement which provides for AmpTech to manufacture and supply wafers to us utilizing our wafer production processes and for us to purchase such wafers. We also entered into a License Agreement whereby we license to AmpTech certain of our proprietary process technologies subject to certain restrictions. The License Agreement provides for AmpTech to pay us a royalty of 5% of its gross revenue from third parties, up to $750,000, and 3% of gross revenue thereafter for the seven year term. Products produced for us using our proprietary technology will not bear royalty.

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We have strategic foundry relationships with Global Communication Semiconductors, Inc. (“GCS”) and AmpTech, Inc., and with the closure of our Milpitas fab GCS is currently the sole source of the manufacturing and supply of our GaAs and InGaP HBT wafers and AmpTech will provide an additional source after AmpTech starts its wafer fabrication line.  The foundry agreements with AmpTech and GCS provide the Company strategy with two qualified foundries.

During the three and six months period ended July 1, 2007, $425,000 and $637,000 of restructuring charges were recorded respectively of which $530,000 and $686,000 were related to costs associated with the closure of our Milpitas wafer fab, $98,000 and $98,000 associated with the further alignment of our cost structure to our current business level partially offset by a reduction in the previously established abandonment liability for our River Oaks, San Jose facility of $203,000 and $147,000 due to a revision in our expected sublease income.

On August 4, 2007, we committed to an offshore program that will result in the transition of our final test and support operations to the Philippines. The operations are currently located in our San Jose, California facility. We expect to incur certain restructuring costs during the third quarter of 2007 including severance and retention benefits associated with the implementation of this plan of approximately $600,000 as well as approximately $300,000 in dual staffing and start-up costs. The transition is expected to be completed in the first quarter of 2008 and we anticipate cost savings of approximately $400,000 per quarter beginning in the second quarter of 2008.

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 July 1, 2007 was $175,000, a decrease of $104,000 or 37% as compared with net interest income of $279,000 in the three months ended July 2, 2006.  Our net interest income in the six months ended July 1, 2007 was $423,000, a decrease of $118,000 or 22% as compared with net interest income of $541,000 in the six months ended July 2, 2006.  The lower level of interest income was primarily related to the lower level of investible assets.

Other Income, net

Other income in the six months ended July 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 and six months ended July 1, 2007. Our effective tax rate differs from the U.S. federal statutory tax rate of 35% primarily due to the losses without tax benefit as the Company has recorded a full valuation allowance. During the six months ended July 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. Our effective tax rate for the remainder of the current fiscal year may not change significantly.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments at July 1, 2007 totaled $18.1 million, a decrease of $7.3 million or 29% compared to the balance of $25.4 million at December 31, 2006.

On January 23, 2007, the Company entered into a fifth amendment to extend the maturity date from January 21, 2007 to June 30, 2008 to its Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) between Comerica Bank and the Company dated September 23, 2003. Comerica also provided the Company with a letter agreement, starting on January 22, 2007, that 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 termination. 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

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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 July 1, 2007.  As of July 1, 2007 and December 31, 2006, there were no outstanding borrowings under the Revolving Facility. We have letters of credit of $3.7 million available as of July 1, 2007 that are being used as collateral on our leased facilities and workers compensation obligations.

Net Cash Used in Operating Activities

Net cash used in operations was $7.8 million and $3.0 million in the six months ended July 1, 2007 and July 2, 2006, respectively. Net loss in the six months ended July 1, 2007 and July 2, 2006 was $4.8 million and $4.3 million, respectively.

The most significant cash item impacting the difference between net loss and cash flows used in operations in the six months ended July 1, 2007 was $6.0 million used by working capital. The $6.0 million used by working capital relates to a $1.5 million decrease in restructuring liabilities, a $1.9 million increase in inventories and a $2.1 million increase in receivables partially offset by $901,000 gain on disposal of property, plant and equipment. The $1.5 million decrease in restructuring liabilities relates to payments against the remaining lease loss accrual and severance payments.  The $1.9 million increase in inventories resulted from a strategic inventory build associated with the closure of the wafer fab and lower demand by one of our distributors.  The $2.1 million increase in receivables relates to higher sales and the higher shipment timing relative to our quarter end.  Non-cash items included in net loss in the six months ended July 1, 2007 were primarily $1.9 million of depreciation and amortization and $2.1 million of stock based compensation expense.

The most significant cash item impacting the difference between net loss and cash flows used in operations in the six months ended July 2, 2006 was $1.4 million used by working capital. The $1.4 million used by working capital relates to a  $1.0 million decrease in accruals and accounts payable and a $1.3 million decrease in restructuring liabilities which were partially offset by a $1.5 million decrease in inventories. The $1.0 million decrease in accruals and payables relates to the timing of invoice payments relative to our quarter end. The $1.3 million decrease in restructuring liabilities relates to payments against the remaining lease loss accrual.  The $1.5 million decrease in inventories resulted from decreased cycle time in our wafer fabrication process and a $1.2 million write-down to reduce excess inventories to their estimated net realizable values.  Non-cash items included in net loss in the six months ended July 2, 2006 included $1.3 million related to a decrease in our income tax liability, $1.7 million of depreciation and amortization, $637,000 charge for the impairment of an intangible asset and $525,000 of stock based compensation expense.  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.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was $6.7 million and $9.8 million in the six months ended July 1, 2007 and July 2, 2006, respectively.  In the six months ended July 1, 2007, we realized $12.8 million in proceeds from the sale and maturities of our short-term investments and $1.6 million in proceeds from the sale of our equipment to AmpTech which was partially offset by $6.4 million used to purchase short-term investments and $1.4 million to invest in property, plant and equipment.  In the six months ended July 2, 2006, we realized $20.2 million in proceeds from the sale and maturities of our short-term investments which was partially offset by $9.5 million used to purchase short-term investments and $1.1 million to invest in property, plant and equipment. During 2007, we expect to invest approximately $4 million to $5 million in capital expenditures of which $1.4 million was purchased in the first six 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 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 of which 10% would be in cash and 90% in shares. 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.

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Net Cash Provided by Financing Activities

Net cash provided by financing activities was $223,000 and $768,000 for the six months ended July 1, 2007 and July 2, 2006, respectively.  In the six months ended July 1, 2007, we received net proceeds of $581,000 from the sale of our common stock to employees through our option plans which was partially offset by $310,000 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 six months ended July 2, 2006, we received net proceeds of $869,000 from the sale of our common stock to employees through our option plans which was partially offset by $69,000 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.

Due to the adoption of FIN 48, a $395,000 liability was recorded in the first quarter of 2007. We do not expect this liability to be satisfied within the next twelve months.

On May 23, 2007 we entered into a one year wafer manufacturing and supply agreement with AmpTech which provides for AmpTech to manufacture and supply wafers to us utilizing our wafer production processes and for us to purchase such wafers.   During the initial term of the agreement, we are required to provide AmpTech with order for a minimum quantity of wafers periodically, beginning after AmpTech is able to consistently deliver wafers.  AmpTech is expected to start delivering wafers in early September of 2007 and thereafter we estimate our obligation to purchase wafers during the agreement term to be approximately $1.7 million.

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.

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

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available-for-sale are reported at fair market value with unrealized gains or losses excluded from earnings and reported as a separate component of stockholders’ equity, net of tax, until realized. These available-for-sale securities are subject to interest rate risk and will rise or fall in value if market interest rates change. They are also subject to short-term market risk. We have the ability to hold our fixed income investments until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

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

Expected Maturity Dates	Expected Maturity Amounts		Weighted Average Interest Rate
	(in thousands)
Cash equivalents:
2007	$	13,502	4.92	%
Short-term investments:
2007	1,968		5.15	%
Fair value at July 1, 2007	$	15,470

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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. We have taken 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 are evaluating the effectiveness of these steps.

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 this 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 six months ended July 1, 2007 our sales were $23.5 million and we incurred an operating loss of $5.4 million compared to sales of $24.8 million and an operating loss of $6.1 million for the six months ended July 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 $188.3 million at July 1, 2007.

We expect that reduced end-customer demand compared to our prior history, and other factors, could adversely affect our operating results in the near term, and we could incur 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 or if our expenses increase faster than our revenues. In order to return to profitability, we must achieve 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 42% and 44% of our total sales for the six months ended July 1, 2007 and July 2, 2006, respectively.  We cannot assure you that this exclusive relationship will improve sales of our semiconductor

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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.

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 two customers, Richardson Electronics and Celestica, who accounted for more than 10% of our sales and in aggregate accounted for 56% of our sales for the six months ended July 1, 2007 and 63% of our sales for the six months ended July 2, 2006.  Sales to Richardson Electronics accounted for 42% and 44% of our sales for the six months ended July 1, 2007 and July 2, 2006, respectively.  Sales to Celestica accounted for 14% and 19% of our sales for the six months ended July 1, 2007 and July 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 $304,000 and $1.2 million in the six month periods ended July 1, 2007 and July 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 to 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 50% and 53% of our sales in the six month periods ended July 1, 2007 and July 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,

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the imposition of tariffs and other trade barriers, the existence of political, legal and economic instability in foreign markets, language and cultural barriers, seasonal reductions in business activities, our ability to receive timely payment and collect our accounts receivable, currency fluctuations, and potentially adverse tax consequences, which could adversely affect our business and financial results.

Our dependence on two foundry partners exposes us to a risk of manufacturing disruption, uncontrolled price changes and other risks which could harm our business.

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. Global Communication Semiconductors, Inc., our foundry partner, has become the primary source of the manufacturing and supply or our GaAs and InGap HBT wafers as a result of the fab closure.  In May 2007 we entered into a manufacturing supply agreement with AmpTech to provide an additional source of supply for our GaAs and InCap HBT wafers.  AmpTech is still in its start up phase and as a result its ability to consistently supply us wafers has not been demonstrated. If our foundry partners are unable to meet our wafer needs for any reason there can be no assurance that we will be able to find alternative sources.

If the operations of our foundry partners 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 which could harm our business and have a negative impact on our operating results, 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 qualifying new foundry partners ;

·limited warranties on products supplied to us;

·potential increases in prices due to capacity shortages and other factors; and

·potential misappropriation of our intellectual property.

We may not achieve the anticipated benefits of our offshore program to transition our final test and support operations to Philippines and offshore operations are also subject to certain inherent risks

We plan to initiate on offshore program that will result in the transition of our final test and support operations to the Philippines from our current location in San Jose, California.  Since we expect the transition to result in future cost savings, if there are significant unexpected delays, difficulties, disruptions, cost or employee issues associated with the transition we may be unable to achieve the anticipated benefits in full or in part. Offshore operations are also subject to certain inherent risks and once the transition is complete we could be exposed to risks which include labor shortages and disputes, difficulties in managing effectively from the U.S., political and economic instability, change in governmental regulations, restriction on foreign ownership and control, currency and exchange rate fluctuations, lack of proprietary protection and other risks which could harm our business and negatively impact our operating results.

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We determined that we had material weaknesses in our internal control over financial reporting 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.

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

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

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Item 6.  EXHIBITS

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

Exhibit Number		Exhibit Description
2.1	*	Asset Purchase Agreement by and between AmpTech Inc. and WJ Communications, Inc. dated May 23, 2007. (The schedules, exhibits and annexes to the Asset Purchase Agreement which are identified in the Asset Purchase Agreement have been omitted and the Company will furnish supplementally copies of the omitted schedules, exhibits and annexes to the Commission upon request.)
3.1		Amended and Restated By-laws as amended effective July 19, 2007 (incorporated by reference to the corresponding exhibit to the Company’s Form 8-K filed on July 25, 2007).
10.1	*	Wafer Manufacturing and Supply Agreement by and between AmpTech Inc. and WJ Communications, Inc. dated May, 23 2007.
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.
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.
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.
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.

* Confidential treatment has been requested for certain portions of this exhibit.

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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	August 14, 2007	By:	/s/ BRUCE W. DIAMOND
			Bruce W. Diamond
			President and Chief Executive Officer
			(principal executive officer)
Date	August 14, 2007	By:	/s/ R. GREGORY MILLER
			R. Gregory Miller
			Vice President and Chief Financial Officer
			(principal financial officer)

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EX-2.1

Exhibit 2.1

[CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY WJ COMMUNICATIONS, INC. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AS INDICATED BY *** AND HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.]

ASSET PURCHASE AGREEMENT

This Asset Purchase Agreement (the “Agreement”) is entered into as of May 23, 2007, by and between AmpTech, Inc., a Delaware corporation (“Buyer”) and WJ Communications, a Delaware corporation (“Seller”).

RECITALS

Seller owns certain wafer fabrication equipment currently located at 1530 McCarthy Boulevard, Milpitas, California.  Buyer desires to acquire from Seller, and Seller desires to sell to Buyer, substantially all of the assets listed on Exhibit A on the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

In consideration of the mutual agreements, representations, warranties and covenants set forth below, Buyer and Seller agree as follows:

1.             Definitions.

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

(a)           “Affiliate” means with respect to any Person, a Person directly or indirectly controlling or controlled by or under common control with such Person.

(b)           “Assets” means the equipment and other assets listed on Exhibit A

(c)           “Closing” means the consummation of the transactions contemplated hereby.

(d)           “Closing Date” means the date of the Closing.

(e)           “Code” means the Internal Revenue Code of 1986, as amended.

(f)            “Environmental Closure Obligations” means those obligations required by Governmental Entities and Environmental Laws with respect to the decomissioning, closure, closure or termination of Environmental Permits relating to the termination or the cessation of operation of the Assets and the Leased Facility, excluding in all cases, the Pre-Existing Contamination.

(g)           “Governmental Authorizations” means the permits, authorizations, consents or approvals of any Governmental Entity which are a condition to the lawful consummation of the transactions contemplated hereby listed on Schedule 1.1(g) to this Agreement.

(h)           “Governmental Entity” means any court, or any federal, state, municipal or other governmental authority, department, commission, board, agency or other instrumentality (domestic or foreign).

(i)            “Lien” means any mortgage, pledge, lien, security interest, option, covenant, condition, restriction, encumbrance, charge or other third-party claim of any kind.

(j)            “Material Adverse Effect” means any event, change or effect that is materially adverse to the Assets taken as a whole.

(k)           “Person” means an individual, corporation, partnership, association, trust, government or political subdivision or agent or instrumentality thereof, or other entity or organization.

(l)            “Pre-Existing Contamination” means (i) the presences of hazardous materials in the soil or groundwater in, on, under or about the Leased Facility prior to the Closing Date, or (ii) Environmental Conditions in the soil or groundwater in, on, under or about the Leased Facility prior to the Closing Date in violation of Environmental Laws or in a manner requiring remediation or other corrective action under Environmental Laws.

(m)          “Taxes” means all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, (i) imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, for which Buyer could become liable as successor to or transferee of the Assets or which could become a charge against or lien on any of the Assets, which taxes shall include, without limiting the generality of the foregoing, all sales and use taxes, ad valorem taxes, excise taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, real property gains taxes, transfer taxes, payroll and employee withholding taxes, unemployment insurance contributions, social security taxes, and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld or collected, or (ii) any liability for amounts referred to in (i) as a result of any obligations to indemnify another person.

2.             Sale and Purchase

2.1           Transfer of Assets.  Subject to the terms and conditions of this Agreement, Seller shall sell, assign, grant, transfer, and deliver (or cause to be sold, assigned, granted, transferred and delivered) to Buyer, or to any Affiliate of Buyer designated by Buyer, and Buyer shall purchase and accept from Seller as of the Closing Date, free and clear of all Liens, all rights, title and interest in and to all of the Assets, on an “AS-Is-Where-Is” basis (except for title), including, without limitation:

(a)           all tangible personal property  and other interests in tangible personal property listed on Exhibit A:

(b)           Seller will consign to Buyer and Buyer will enter into a Consignment Agreement in the form attached as Exhibit C-3, the then current work in process as of the Closing date at the cost as listed in Schedule 2.1(b).  Seller will purchase from the Buyer the finished product from the work in process inventory at prices as listed on Wafer Manufacturing and Supply Agreement (Exhibit E) and will net the value of the consigned inventory against the invoiced price and make a net payment for work in process inventory consigned to the Buyer at the Purchase Date (the “Inventories”);

(c)           all of Seller’s rights, claims, credits, causes of action or rights of set-off against third parties relating to the Assets, including, without limitation, unliquidated rights under warranties;

(d)           all books, records files and papers, whether in hard copy or electronic format, used in connection with Assets, including without limitation, engineering information,  manuals and data, purchase correspondence, lists of present, former and prospective suppliers , personnel and employment records, and any information relating to Taxes on the Assets, but excluding any books, records, files and papers relating to Seller’s proprietary processes related to the Assets and other Intellectual Property of the Seller;

(e)           all computer software programs, data and associated licenses associated with the Asset but excluding any software programs and data relating to Seller’s proprietary processes related to the Assets and other Intellectual Property of the Seller; and

(f)            all goodwill associated with  the Assets, together with the right to represent to third parties that Buyer is the successor to the Assets.

(e)           certain tangible property currently located at 1530 McCarthy Boulevard, Milpitas, California of the Seller will remain in the facility at the time of Closing and the Buyer will enter into an Consigned Equipment Agreement in the form of Exhibit C-4 for those equipment listed as Attachment A to the Consigned Equipment Agreement.

2.2           Assumed Liabilities.  Buyer shall assume all of the following debts, contracts, agreements, commitments, obligations and other liabilities of Seller in connection with the Assets and the Leased Facility (the “Assumed Liabilities”):

(a)           the Environmental Closure;

(b)           any liability or obligation of Seller arising after the Closing Date under any contract related to the Assets;

(c)           Seller does not have a liability to remove the Air Products’ tanks under its non transferable monthly agreement but the Buyer will most likely have such a liability when the Buyer enters into an agreement with Air Products.

2.4           Liabilities Excluded.  Buyer shall not assume and shall not be liable for, and Seller and its direct or indirect subsidiaries shall retain and remain solely liable for and obligated to discharge, all of the debts, contracts, agreements, commitments, obligations and other liabilities of any nature whatsoever of Seller and its direct and indirect subsidiaries, whether known or unknown, accrued or not accrued, fixed or contingent, including without limitation, the following:

(a)           Any liability for breaches by Seller or any of its respective direct or indirect subsidiaries on or prior to the Closing Date of any contract or any other instrument, contract or purchase order or any liability for payments or amounts due under any Contract or any other instrument, contract or purchase order on or prior to the Closing Date;

(b)           Any liability or obligation for Taxes attributable to or imposed upon Seller or any of its direct or indirect subsidiaries, or attributable to or imposed upon the Assets for any period (or portion thereof) through the Closing Date, including, without limitation, any Taxes attributable to or arising from the transactions contemplated by this Agreement that are not otherwise the obligation of the Buyer as set forth elsewhere in this Agreement;

(c)           Any liability or obligation for or in respect of any loan, other indebtedness for money borrowed, or account payable of Seller or any of its direct or indirect subsidiaries, including any such liabilities owed to Affiliates of Seller;

(d)           Any liability or obligation arising as a result of any legal or equitable action or judicial or administrative proceeding initiated at any time, to the extent relating to any action or omission on or prior to the Closing Date by or on behalf of Seller or any of its direct or indirect subsidiaries, including, without limitation, any liability for infringement of intellectual property rights, breach of product warranty, injury or death caused by products, or violations of federal or state securities or other laws;

(e)           Any liability or obligation arising on or prior to the Closing Date out of any “employee benefit plan,” as such term is defined by the Employee Retirement Income Security Act of 1974 (“ERISA”) or other employee benefit plans;

(f)            Any liability or obligation for making payments of any kind (including as a result of the sale of Assets or as a result of the termination of employment by Seller of employees, or other claims arising out of the terms and conditions of employment with Seller, or for vacation or severance pay or otherwise) to employees of Seller or in respect of payroll taxes for employees of Seller;

(g)           Any liability of Seller incurred in connection with the making or performance of this Agreement and the transactions contemplated hereby;

(h)           Any liability of Seller arising out of the violation of or failure to comply with any Environmental Regulations (as hereinafter defined) applicable to any aspect of the ownership or operation of the Assets prior to the Closing Date (excluding the Environmental Closure); and

(i)            Any costs or expenses of Seller incurred in connection with shutting down, deinstalling and removing equipment not purchased by Buyer, and the costs associated with all contracts and agreements not assumed by Buyer.

2.4           Purchase Price.  Subject to the performance by Seller of all of its obligations under this Agreement (including delivering all documents required to be delivered) at the Closing, in consideration of the acquisition of the Assets under Section 2.1, Buyer agrees to deliver to Seller cash in the amount of $1,800,000 and (b) a warrant for 200,000 shares of Common Stock in substantially the form of Exhibit B (the “Warrant” and together with the cash payment the “Purchase Price”).  In addition, Buyer shall reimburse Seller, up to ***.  Such reimbursement payment shall be made within 15 days following Buyer’s receipt of reasonable, written evidence of such payment by Seller.

3.             Closing

3.1           Closing.  Subject to the terms and conditions of this Agreement, the Closing shall take place on such date, as soon as practicable after all conditions precedent in Sections 8 and 9 have been satisfied or waived, as the parties may agree, but in any case, no later than May 25, 2007 (the “Closing Date”).

3.2           Actions at the Closing.  At the Closing, Seller shall deliver the Assets to Buyer, Buyer shall deliver the cash funds and Warrant to Seller, and Buyer and Seller shall take such actions and execute and deliver such agreements, bills of sale, and other instruments and documents as necessary or appropriate to effect the transactions contemplated by this Agreement in accordance with its terms, including without limitation the following:

(a)           Bill of Sale; Assignment Agreement.  Seller shall deliver to Buyer a general Bill of Sale substantially in the form attached as Exhibit C-1 and with respect to each contract assumed, an Assignment Agreement substantially in the form attached as Exhibit C-2 (the “Transfer Documents”) in each case duly executed by Seller, and in the aggregate assigning to Buyer all of Seller’s right, title and interest in and to the Assets.  Buyer may designate one or more of its Affiliates as the recipient of certain of the Assets, and as the party to assume certain of the Assumed Liabilities, in which case Seller shall transfer such Assets and Assumed Liabilities to Buyer or the Affiliate(s) designated by Buyer pursuant to such Transfer Documents.

(b)           Purchase Price.  Buyer shall deliver the cash funds and the Warrant to Seller.

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

(c)           Title.  Seller shall provide reasonable evidence of valid title to such of the Assets as Buyer may reasonably request in writing prior to the Closing, in form and substance reasonably satisfactory to Buyer.

(d)           Third Party Consents and Assignments.  Seller shall deliver to Buyer any assignments, and any required consents to assignment, that it has obtained in respect of the Contracts, duly executed by parties having the authority to so assign or consent to assign, in form and substance as Buyer shall reasonably request, as well as a written confirmation from such third parties that the Contracts are in good standing.

(e)           Wafer Manufacturing and Supply Agreement and License Agreement.  Seller and Buyer shall execute the Wafer Manufacturing and Supply Agreement and the License Agreement.

(f)            Seller Documents.  At the Closing, Seller shall deliver to Buyer any and all documents

required to satisfy the conditions set forth in Section 9 of this Agreement and any other closing documents reasonably requested by Buyer.

(g)           Buyer Documents.  At the Closing, Buyer shall deliver to Seller any and all documents required to satisfy the conditions set forth in Section 8 of this Agreement and any other closing documents reasonably requested by Seller.

(h)           Post-Closing Actions.  Subsequent to the Closing Date, Seller shall, and shall cause any Affiliate of Seller to, from time to time execute and deliver, upon the request of Buyer, all such other and further materials and documents and instruments of conveyance, transfer or assignment as may reasonably be requested by Buyer to effect, record or verify the transfer to and vesting in Buyer of Seller’s and any of Seller’s Affiliates’ right, title and interest in and to the Assets, free and clear of all Liens in accordance with the terms of this Agreement.

4.             Representations and Warranties of Seller.  Each representation and warranty set forth below is qualified by any exception or disclosures set forth in the Seller Disclosure Schedule attached hereto, which exceptions specifically reference the Section(s) to be qualified.  In all other respects, each representation and warranty set out in this Section 4 is not qualified in any way whatsoever, will not merge on Closing or by reason of the execution and delivery of any agreement, document or instrument at the Closing, will remain in force on and after the Closing Date, is separate and independent and is not limited by reference to any other representation or warranty or any other provision of this Agreement, and is made and given with the intention of inducing the Buyer to enter into this Agreement.  Seller represents and warrants to Buyer as follows:

4.1           Organization, Standing and Power.  Seller is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Seller has the requisite corporate power and authority and all necessary permits, authorizations, consents, and approvals of all Governmental Entities to own, lease and operate its properties and to own, use, operate the Assets as now being conducted, except where the failure to have such power, authority and governmental approvals would not, individually or in the aggregate, have a Material Adverse Effect on the ownership, use, or operation of the Assets. Seller is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Material Adverse Effect on Seller’s or Buyer’s ownership, use, or operation of the Assets.

4.2           Authority.  The execution and delivery of this Agreement (and all other agreements and instruments contemplated under this Agreement) by Seller, the performance by Seller of its obligations hereunder and thereunder, and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all necessary action by the Board of Directors and shareholders of Seller, and no other act or proceeding on the part of or on behalf of Seller or its shareholders is necessary to approve the execution and delivery of this Agreement and such other agreements and instruments, the performance by Seller of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby.  The signatory officers of Seller have the power and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Seller pursuant hereto, to consummate the transactions hereby and thereby contemplated and to take all other actions required to be taken by Seller pursuant to the provisions hereof and thereof.

4.3           Execution and Binding Effect.  This Agreement has been duly and validly executed and delivered by Seller and constitutes, and the other agreements and instruments to be executed and delivered by Seller pursuant hereto, upon their execution and delivery by Seller, will constitute (assuming, in each case, the due and valid authorization, execution and delivery thereof by Buyer), legal, valid and binding agreements of Seller, enforceable against Seller in accordance with their respective terms.

4.4           Consents and Approvals of Governmental Entities. Other than the Governmental Authorizations there is no requirement applicable to Seller to make any filing, declaration or registration with, or to obtain any permit, authorization, consent or approval of, any Governmental Entity as a condition to the lawful consummation by Seller of the transactions contemplated by this Agreement and the other agreements and instruments to be executed and delivered by Seller pursuant hereto or the consummation by Seller of the transactions contemplated

herein or therein.

4.5           No Violation.  Neither the execution, delivery and performance of this Agreement and all of the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both, (a) conflict with, violate or result in any breach of the terms, conditions or provisions of the Certificate of Incorporation or Bylaws of Seller, (b) conflict with or result in a violation or breach of, or constitute a default or require consent of any Person (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any contract, notice, bond, mortgage, indenture, license, franchise, permit, agreement, lease or other instrument or obligation to which Seller is a party or by which Seller or any of the Assets may be bound except for the permits on Schedule 1.1(g), (c) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Seller or by which any Assets of Seller may be bound, or (d) result in any cancellation of, or obligation to repay, any grant, loan or other financial assistance received by Seller from any Governmental Entity.  No “bulk sales” legislation applies to the transactions contemplated by this Agreement.

4.6           Consents.  Schedule 4.6 sets forth each agreement, contract or other instrument binding upon Seller requiring a consent as a result of the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except such consents as would not, individually or in the aggregate, have a Material Adverse Effect if not received by the Closing Date (each a “Required Consent”).

4.7           No Undisclosed Liabilities.  Seller does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, in excess of $35,000 individually or in the aggregate associated with the Assets.

4.9           Absence of Material Adverse Changes.  Since March 1, 2007, there has not been any material adverse change in the Assets:

4.10         Assets Generally.

(a)           The Assets include all properties, tangible and intangible, and only such properties, currently listed on Exhibit A.  Other than the Required Consents and the Governmental Approvals, no licenses or other consents from, or payments to, any other Person are or will be necessary for Buyer to use and operate the Assets in the manner in which Seller has used and operated the same.  The Assets include only those items specifically listed on Exhibit A.  All other items are specifically excluded.

(b)           Seller holds good and marketable title, license to all of the Assets and has the complete and unrestricted power and the unqualified right to sell, assign and deliver the Assets to Buyer.  Upon consummation of the transactions contemplated by this Agreement, Buyer will acquire good and marketable title, license to the Assets free and clear of any Liens and there exists no restriction on the use or transfer of the Assets.  No Person other than Seller has any right or interest in the Assets, including the right to grant interests in the Assets to third parties, except for Assets licensed or leased from third parties which are set forth in the Seller Disclosure Schedule and identified as such.  The Assets do not include any assets associated with the Leased Facility which are claimed by the Landlord.

(c)           None of the Assets that constitute tangible personal property is held under any lease, security agreement, conditional sales contract, lien, or other title retention or security arrangement.

(d)           Except as provided in this Agreement, no restrictions will exist on Buyer’s right to sell, resell, license or sublicense any of the Assets, nor will any such restrictions be imposed on Buyer as a consequence of the transactions contemplated by this Agreement or by any agreement referenced in this Agreement.

(e)           All of the Purchased Assets are beginning sold in an “as is where is” condition on the Closing Date with no warranties or representations regarding the condition or quality of the Assets or its suitability for Buyer’s purposes.

4.11 Intellectual Property.

(a)           Effective upon Closing, Seller shall license to Buyer, all processes and Intellectual Property required to operate the Assets (and any replacement assets) as previously operated by Seller pursuant to a license agreement substantially in the form attached to this Agreement as Exhibit F (the “License Agreement”). Such license shall include, without limitation, Seller’s processes known as MSFET, HFET, and 5VHBT for use in using the Assets (and any replacement assets) to produce products for the Seller and for third parties and Seller’s process known as 28VHBT for use in using the Assets (and any replacement assets) to produce products for the Seller. Notwithstanding the license granted to Buyer, pursuant to such License Agreement, Buyer shall not use the licensed processes to produce product for (or transfer the license to) the parties listed in the License Agreement, which are direct competitors of Buyer, unless Buyer obtains advance written approval from the Seller.

(b)           Seller has taken reasonable steps (including, without limitation, entering into confidentiality and non-disclosure agreements with all officers and employees of and consultants to Seller with access to or knowledge of the Assets (including without limitation the Intellectual Property) to maintain the secrecy and confidentiality of, and its proprietary rights in, the Assets.  The Seller Disclosure Schedule contains a complete and accurate list of all applications, filings and other formal actions made or taken pursuant to federal, state, local and foreign laws by Seller to perfect or protect its interest in the Assets

4.12         Supply Agreements Related to Assets.   The Seller Disclosure Schedule contains a list (including names, addresses, contact names and telephone numbers), which is complete in all material respects, of all agreements or other arrangements pursuant to which Seller is obligated relative to the Assets (such agreements, as supplemented below, are referred to collectively as the “Asset Supply Agreements”).  Seller has provided a true and complete copy of all Asset Supply Agreements to Buyer.  All such Asset Supply Agreements are in full force and effect and are valid and effective in accordance with their respective terms against Seller, as the case may be, and against the other party thereto.  Seller holds right, title and interest under the terms of each Asset Supply Agreement free of all Liens.  Seller is not in default under any such Supply Agreements (or has caused an event which with notice or lapse of time, or both, would constitute a default), nor is the other party thereto in default (or has caused an event which with notice or lapse of time, or both, would constitute a default) under any such Supply Agreements.

4.13         Real Property.

(a)           Schedule 2.1(a) sets forth a list of all real property leased by Seller and which relates to the operation of the Assets (the “Leased Facility”).

(b)           To the knowledge of Seller, the Leased Facility currently has access to public roads or valid easements providing access to public roads, water supply, storm and sanitary sewer facilities, telephone, gas and electrical connections, fire protection, drainage and other public utilities, as is necessary for the conduct of the ownership, use, or operation of the Assets.

(c)           No violation of any law, regulation or ordinance, including without limitation, laws, regulations or ordinances relating to zoning, environmental, city planning or similar matters) relating to the any Asset currently exists except for violations which have not had and would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect on the Assets.

4.14         Licenses and Permits.  Seller holds all consents, approvals, registrations, certifications, authorizations, permits and licenses of, and has made all filings with, or notifications to, all Governmental Entities pursuant to applicable requirements of all federal, state, local and foreign laws, ordinances, governmental rules or regulations applicable to the business, including, but not limited to, all such laws, ordinances, governmental rules or regulations relating to operation of the Assets, except where it would not have a Material Adverse Effect.

4.15         Employees.   Seller will permit Buyer to approach only selected employees of Seller as previously agreed by the Seller and make offers of employment to those employees.

4.16         Employee Benefit and Compensation Plans.  Buyer will incur no liability with respect to, or on account of, and Seller will retain any liability for, and on account of, any employee benefit plan of Seller, any of its

Affiliates or any predecessor employer of any employee, including, but not limited to, liabilities Seller may have to such employees under all employee benefit schemes, incentive compensation plans, bonus plans, pension and retirement plans, vacation, profit-sharing plans (including any profit-sharing plan with a cash-or-deferred arrangement) share purchase and option plans, savings and similar plans, medical, dental, travel, accident, life, disability and other insurance and other plans or arrangements, whether written or oral and whether “qualified” or “non-qualified,” or to any employee as a result of termination of employment by Seller as contemplated by this Agreement.  Seller has not, with respect to any employee, maintained or contributed to, or been obligated or required to contribute to, any retirement or pension plan or any employee benefit plan.  Seller is not a party to any collective bargaining agreement covering any employee and Seller knows of no effort to organize any such employee as a part of any collective bargaining unit.  The Seller has complied with all of its obligations (including obligations to make contributions) in respect of the pension funds of which its employees are members, there is no outstanding liability of the Seller or any of its Affiliates to any such funds and all such funds are fully funded to meet all potential claims for benefits by any and all such employees and any former employee.

4.17         Taxes.  All Taxes have been or will be paid by Seller for all periods (or portions thereof) prior to and including the Closing Date.  Seller and any other person required to file returns or reports of Taxes have duly and timely filed (or will file prior to the Closing Date) all returns and reports of Taxes required to be filed prior to such date, and all such returns and reports are true, correct, and complete.  There are no liens for Taxes on any of the Assets.  Seller has complied with all record keeping and tax reporting obligations relating to income and employment taxes due with respect to compensation paid to employees or independent contractors providing services to Seller in connection with the operation of the Assets.  Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code.  There are no pending or, to Seller’s knowledge, threatened proceedings with respect to Taxes, and there are no outstanding waivers or extensions of statutes of limitations with respect to assessments of Taxes.  No agreement or arrangement regarding compensation of any employee providing services to the operation of the Assets provides for any payments which could result in a nondeductible expense to the Buyer pursuant to Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code.

4.18         Compliance with Law.  The ownership, use, or operation of the Assets by Seller has been conducted in all material respects in accordance with all applicable laws, regulations and other requirements of Governmental Entities having jurisdiction over the same.

4.19         Environmental Matters.

(a)           Definitions.  For the purposes of this Agreement, the following terms shall have the meanings set forth below:

(i)            “Environmental Claim” shall mean any claim by Buyer against Seller for breach by Seller of any representation or warranty made in Section 4.19.

(ii)           “Environmental Conditions” shall mean any environmental contamination or pollution of, or the Release of Hazardous Materials into, the surface water, groundwater, surface soil, and subsurface soil.

(iii)          “Environmental Laws” shall mean all federal, state and local laws, ordinances, decisional law, rules, regulations, codes, orders, decrees, directives and judgments regulating worker safety, exposure of any individual to Hazardous Materials or industrial hygiene or environmental conditions, or protection of the environment, or Environmental Conditions, Releases or threatened Releases of Hazardous Materials, and includes, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. section 9601, et seq. (“CERCLA”), the Resource Conservation and Recovery Act, 42 U.S.C. section 6901, et seq. (“RCRA”), the Clean Water Act, 33 U.S.C. section 1251, et seq., the Hazardous Substance Account Act, California Health and Safety Code section 25300, et seq., the Hazardous Waste Control Law, California Health and Safety Code section 25100, et seq., the Medical Waste Management Act, California Health and Safety Code section 25015, et seq., and the Porter-Cologne Water Quality Control Act, California Water Code section 13000, et seq.

(iv)          “Environmental Permits” shall mean all permits, authorizations, registrations,

certificates, licenses, approvals or consents required under or issued by any Governmental Entity pursuant to Environmental Laws.

(v)           “Hazardous Materials” shall mean any substance or material that is described as a toxic or hazardous substance, waste or material or a pollutant or contaminant or infectious waste, or words of similar import, in any of the Environmental Laws, and includes, without limitation, asbestos, petroleum or petroleum products, polychlorinated byphenyls, urea formaldehyde, radon gas, radioactive matter, toluene, cadmium, arsenic, benzene, trichloroethylene, medical waste, and chemicals which may cause cancer or reproductive toxicity.

(vi)          “Release” shall mean any intentional or unintentional spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment, including continuing migration, of Hazardous Substances into or through soil, air, surface water or groundwater.

(b)           Seller represents and warrants:

(i)            Permits.  Seller possesses all Environmental Permits necessary to operate the Assets as currently operated.  Each Environmental Permit issued to Seller is in full force and effect.  Seller is in compliance in all material respects with all requirements, terms and provisions of the Environmental Permits issued to Seller and relating to the Assets, and to Seller’s knowledge, has filed on a timely basis (and updated as required) all reports, notices, applications or other documents required to be filed pursuant to the Environmental Permits.  Schedule 4.19 lists all of the Environmental Permits relating to the ownership or operation of the Assets which have been issued to or are held by Seller which by their terms or by operation of law will expire or otherwise become ineffective on or before the Closing Date or within sixty (60) days thereafter.

(ii)           Compliance With Environmental Laws.  Seller’s operation of the Assets is in compliance in all material respects with all Environmental Permits and Environmental Laws applicable to the Seller.

(iii)          Reports, Disclosures and Notifications.  To the knowledge of Seller, Seller has filed on a timely basis (and updated as required) all reports, disclosures, notifications, applications, pollution prevention, stormwater prevention or discharge prevention or response plans or other emergency or contingency plans required to be filed under Environmental Laws applicable to the ownership or operation of the Assets, including without limitation, Title III of the Superfund Amendments and Reauthorization Act, 42 U.S.C. §11001 et seq.

(iv)          Notices.  Seller has not received any written notice that any of the Assets or the Leased Facility: (i) are- in violation in any material respect of the requirements of any Environmental Permit or Environmental Laws; (ii) are the subject of any suit, claim, proceeding, demand, order, investigation or request or demand for information arising under any Environmental Permit or Environment Laws; (iii) or has been designated as “hazardous waste property” or “border zone property’’ pursuant to California Health and Safety Code section 25220 et seq., or been subject to actual or threatened proceedings for a determination as to whether they should be so designated.

(v)           No Reporting or Remediation Obligations.  To the knowledge of Seller there are no  Environmental Conditions existing at the Leased Facility in violation of Environmental Laws or in a manner reasonably likely to require any environmental cleanup or remediation.

(vi)          Liens and Encumbrance.  To the knowledge of Seller, no federal, state, local or municipal governmental agency or authority has obtained or asserted an encumbrance or lien upon the Assets or the Leased Facility.

4.20         Material Contracts.

(a)           Schedule 4.20 contains a list of all Contracts which are material to the Assets (“Material Contracts”).  Material Contracts shall include, without limitation, the following and shall be categorized in the Seller Disclosure Schedule as follows:

(i)            each Contract for the purchase of inventory, spare parts, other materials or personal property that are included in the Assets with any supplier or for the furnishing of services with respect to

the Assets under the terms of which Seller:  (A) paid or otherwise gave consideration of more than $10,000 in the aggregate during the fiscal year ended December 31, 2006, (B) is likely to pay or otherwise give consideration of more than $10,000 in the aggregate during the fiscal year ended December 31, 2007, (C) is likely to pay or otherwise give consideration of more than $10,000 in the aggregate over the remaining term of such contract or (D) cannot be canceled without penalty or further payment;

(ii)           all other Contracts (A) which are material to the Assets or (B) the absence of which would have a Material Adverse Effect on the Assets or Buyer’s ability to use or operate the Assets, or (C) which are believed by Seller to be of unique value even though not material to the Assets.

(b)           Except as would not, individually or in the aggregate, have a Material Adverse Effect on the Assets, each license, each Material Contract and each other material contract or agreement in connection with the ownership, use, or operation by Seller of the Assets which would not have been required to be disclosed in Schedule 4.20 had such contract or agreement been entered into prior to the date of this Agreement, is a legal, valid and binding agreement, and none of the Material Contracts is in default by its terms or has been canceled by the other party; Seller is not in receipt of any claim of default under any such agreement; and Seller does not anticipate any termination or change to, or receipt of a proposal with respect to, any such agreement as a result of the transactions contemplated hereby.  Seller has furnished Buyer with true and complete copies of all such agreements together with all amendments, waivers or other changes thereto.

4.21         Litigation; Other Claims.

(a)           There are no claims, actions, suits, inquiries, proceedings, or investigations against Seller, or any of its officers, directors or shareholders, relating to the Assets or Seller’s employees which are currently pending or threatened, at law or in equity or before or by any Governmental Entity, or which challenges or seeks to prevent, enjoin, alter or materially delay any of the transactions contemplated hereby, nor is Seller aware of any basis for such claims, actions, suits, inquiries, proceedings, or investigations; and no Governmental Entity has at any time challenged or questioned the legal right of Seller to the Assets.

(b)           There are no grievance or arbitration proceedings pending or threatened, and there are no actual or threatened strikes or work stoppages with respect to the Assets or Seller’s employees, nor is Seller aware of any basis for such proceedings or events.

4.22         Defaults.  Seller is not in default under or with respect to any judgment, order, writ, injunction or decree of any court or any Governmental Entity which could reasonably be expected to have a Material Adverse Effect on the Assets.  There does not exist any default by Seller or by any other Person, or event that, with notice or lapse of time, or both, would constitute a default under any agreement entered into by Seller as part of the Assets which could reasonably be expected to have a Material and Adverse Effect on the Assets, and no notices of breach thereof have been received by Seller.

4.23         Schedules.  The schedules describing the Assets are complete and accurate and describe the assets in the possession of, or used by Seller.  The property listed in such Schedules constitutes all of the tangible and intangible property included in the Agreement.

4.24         Brokers and Finders.  Neither Seller nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fee, commission or finder’s fee in connection with the transactions contemplated by this Agreement.

4.25         Fair Consideration; No Fraudulent Conveyance.  The sale of the Assets pursuant to this Agreement is made in exchange for fair and equivalent consideration.  Seller is not now insolvent and will not be rendered insolvent by the sale, transfer and assignment of the Assets pursuant to the terms of this Agreement.  Seller is not entering into this Agreement or any of the other agreements referenced in this Agreement with the intent to defraud, delay or hinder its creditors and the consummation of the transactions contemplated by this Agreement, and the other agreements referenced in this Agreement, will not have any such effect.  To Seller’s knowledge, the transactions contemplated in this Agreement or any agreements referenced in this Agreement will not constitute a fraudulent conveyance, or otherwise give rise to any right of any creditor of Seller to any of the Assets after the

Closing.

4.26         Insurance.  The Seller Disclosure Schedule lists all insurance policies and fidelity bonds covering the Assets.  There is no claim by Seller pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies and bonds.  All premiums due and payable under all such policies and bonds have been paid and Seller is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage).  There is no threatened termination of, or material premium increase with respect to, any of such policies.

5.             Representations and Warranties of Buyer.  Buyer represents and warrants to Seller as follows:

5.1           Organization.  Buyer is a corporation duly formed and validly existing under the laws of Delaware, and has full corporate power and authority and the legal right to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, and to consummate the transactions contemplated hereby and thereby.

5.2           Authority.  The execution and delivery of this Agreement (and all other agreements and instruments contemplated hereunder) by Buyer, the performance by Buyer of its obligations hereunder and thereunder, and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all necessary action by the Board of Directors of Buyer, and no other act or proceeding on the part of Buyer or its shareholders is necessary to approve the execution and delivery of this Agreement and such other agreements and instruments, the performance by Buyer of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby.  The signatory officers of Buyer have the power and authority to execute and deliver this Agreement and all of the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, to consummate the transactions hereby and thereby contemplated and to take all other actions required to be taken by Buyer pursuant to the provisions hereof and thereof.

5.3           Execution and Binding Effect.  This Agreement has been duly and validly executed and delivered by Buyer and constitutes, and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, upon their execution and delivery by Buyer, will constitute (assuming, in each case, the due and valid authorization, execution and delivery thereof by Seller), legal, valid and binding agreements of Buyer, enforceable against Buyer in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, or other laws affecting the enforcement of creditors’ rights generally or provisions limiting competition, and by equitable principles.

5.4           Consent and Approvals.  There is no requirement applicable to Buyer to make any filing, declaration or registration with, or to obtain any permit, authorization, consent or approval of, any Governmental Entity as a condition to the lawful consummation by Buyer of the transactions contemplated by this Agreement and the other agreements and instruments to be executed and delivered by Buyer pursuant hereto, except for filings (a) which are referred to in the Seller Disclosure Schedule or (b) the failure of making which would not have a Material Adverse Effect on the transactions contemplated hereby.

5.5           No Violation.  Neither the execution, delivery and performance of this Agreement and of all the other agreements and instruments to be executed and delivered pursuant hereto, nor the consummation of the transactions contemplated hereby or thereby, will, with or without the passage of time or the delivery of notice or both, (a) conflict with, violate or result in any breach of the terms, conditions or provisions of the Certificate of Incorporation or Bylaws of Buyer, (b) conflict with or result in a violation or breach of, or constitute a default or require consent of any Person (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any notice, bond, mortgage, indenture, license, franchise, permit, agreement, lease or other instrument or obligation to which Buyer is a party or by which Buyer or any of its properties or assets may be bound, or (c) violate any statute, ordinance or law or any rule, regulation, order, writ, injunction or decree of any Governmental Entity applicable to Buyer or by which any of its properties or assets may be bound.

5.6           Valid Issuance.  The warrant to be issued to Seller will be duly authorized, and the underlying shares of Common Stock are reserved for issuance under the Warrant and when issued in accordance with the terms of the Warrant will be duly authorized, validly issued, fully paid, non-assessable and free and clear of any liens or

encumbrances.

5.7           Employees.  Buyer will only approach selected employees of Seller as previously agreed by Seller and will not approach any other employee of Seller.

6.             Covenants.

6.1           Access to Information.

(a)  Prior and subsequent to the Closing, Seller will permit Buyer to make a full and complete investigation of the Assets and to receive from Seller all information of Seller relating to the Assets.  Without limiting this right, Seller will give to Buyer and its accountants, legal counsel, and other representatives full access, during normal business hours, at a mutually agreeable location arranged in advance, to all of the books, records, files, documents, properties, and contracts of Seller relating to the Assets and allow Buyer and any such representatives to make copies thereof, all of which shall be made available in an organized fashion and so as to facilitate an orderly review.  This Section 6.1 shall not affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the transactions contemplated by this Agreement.  Seller shall maintain and make available the information and records specified in this Section 6.1(a) in the ordinary course of Seller’s business and document retention policies, as if the transactions contemplated by this Agreement had not occurred.

(b)  At all times following the Closing, each party shall provide the other party (at such other party’s expense) with such reasonable assistance, including the provision of available relevant records or other information and reasonable access to and cooperation of any employees, as may be reasonably requested by either of them in connection with the preparation of any financial statement or tax return, any audit or examination by any taxing authority, or any judicial or administrative proceeding relating to liability for Taxes.

6.2           Third Party Consents.  Seller and Buyer shall use commercially reasonable efforts to obtain, within the applicable time periods required, all Required Consents, waivers, permits, consents and approvals and to effect all registrations, filings and notices with or to third parties or Governmental Entities which are necessary to consummate the transactions contemplated by this Agreement so as to preserve all rights of, and benefits to, the Buyer in the Assets.

6.3           Certain Notifications.  At all times prior to the Closing, Seller and Buyer shall promptly notify the other party in writing of the occurrence of any event which will result, or has a reasonable prospect of resulting, in the failure to satisfy any of the conditions specified in Section 8 or Section 9 of this Agreement.

6.4           Best Efforts.  The Seller shall use its best efforts (i) to cause to be fulfilled and satisfied all of the conditions to the Closing set forth in Section 8 below, (ii) to cause to be performed all of the matters required of it at the Closing and (iii) to cause the Contracts to be assigned to Buyer.

6.5           Seller’s Ownership and Operation of the Assets Prior to Closing.  Seller ceased using the Assets as a semiconductor manufacturing foundry on or about March 29, 2007, and the Assets have been substantially in an inactive state from that time until the time of the Closing.   During the period from March 29, 2007, to the Closing Date, Seller owned the Assets in its ordinary and usual course, consistent with past practice, and used reasonable efforts to preserve intact all rights, privileges, franchises and other authority necessary or desirable for ownership, use, or operation of the Assets, and to maintain favorable relationships with licensors, suppliers, contractors, and others associated with Seller’s operation of the Assets, provided that Seller may have ceased using such licensors, suppliers, contractors, and others due Seller ceasing to use the Assets.  Seller has terminated its workforce as shown in Exhibit D.  Seller shall promptly notify Buyer of any event or occurrence or emergency involving the Assets not in the ordinary course of business, and any material event involving the Assets.  Without limiting the generality of the foregoing, and except as approved in writing by Buyer in advance, prior to the Closing, Seller:

(a)  will not create, incur or assume (i) any borrowings under capital leases, or (ii) any obligation which would in any material way affect  the Assets or Buyer’s ability to use the Assets in substantially the same manner and condition as conducted by Seller on the date of this Agreement;

(b)  will maintain insurance coverage in amounts adequate to cover the reasonably anticipated risks of the Assets;

(c)  will not sell, dispose of or encumber any of the Assets or license any Assets to any Person;

(d)  will comply in all material respects with all laws and regulations applicable to the Assets;

(e)  will not enter into any agreement with any third party for the distribution of any of the Assets;

(f) will use reasonable efforts to assist Buyer in employing after the Closing Date those employees to whom offers of employment are made by Buyer, and will not (and will cause its Affiliates not to) solicit such employees to remain in the employ of Seller or any of its Affiliates after the Closing Date;

(g)  will not expand the use of the Assets within the organization of Seller;

(h)  will not violate, amend or otherwise change in any way the terms of any of the Contracts directly related to the Assets;

(i)  will not commence a lawsuit related to or involving the Assets other than (i) for the routine collection of bills; (ii) for injunctive relief on the grounds that Seller has suffered immediate and irreparable harm not compensable in money damages, provided that Seller has obtained the prior written consent of Buyer, such consent not to be unreasonably withheld; or (iii) for a breach of this Agreement;

6.6           No Other Bids.  Until the earlier to occur of (a) the Closing or (b) the termination of this Agreement pursuant to its terms, Seller shall not, and Seller shall not authorize any of its officers, directors, employees or other representatives to, directly or indirectly, (i) initiate, solicit or encourage (including by way of furnishing information regarding the Assets) any inquiries, or make any statements to third parties which may reasonably be expected to lead to any proposal concerning the sale of the Assets (whether by way of merger, purchase of capital shares, purchase of assets or otherwise), or (ii) negotiate, engage in any substantive discussions, or enter into any agreement, with any Person concerning the sale of the Assets (whether by way of merger, purchase of capital shares, purchase of assets or otherwise).

6.7           Tax Returns.  Seller shall, to the extent that failure to do so could adversely affect the Assets following Closing, (a) continue to file in a timely manner all returns and reports relating to Taxes, and such returns and reports shall be true, correct and complete and shall be subject to the review and consent of Buyer which consent shall not be unreasonably withheld, and (b) be responsible for and pay when due any and all Taxes.

6.8           Post-Closing Access to Information.  If, after the Closing Date, in order properly to operate the Assets it is necessary that Buyer obtain additional information within Seller’s possession relating to the Assets, Seller will furnish or cause its representatives to furnish such information to Buyer.  Such information shall include, without limitation, all agreements between Seller and any Person relating to the Assets. Seller shall maintain and make available the information and records specified in this Section 6.8 for a period of one (1) year after the Closing Date.

6.9           Post-Closing Cooperation.  Each Party agrees that, if reasonably requested by the other party, it will cooperate in enforcing the terms of any agreements between Seller and any third party involving the Assets, including without limitation terms relating to confidentiality and the protection of intellectual property rights.  In the event that Buyer is unable to enforce any intellectual property rights Buyer receives as a part of the Assets against a third party as a result of a rule or law barring enforcement of such rights by a transferee of such rights, Seller agrees to reasonably cooperate with Buyer by assigning to Buyer such rights as may be required by Buyer to enforce its intellectual property rights in its own name.  If such assignment still does not permit Buyer to enforce its intellectual property rights against the third party, Seller agrees to initiate proceedings against such third party in Seller’s name, provided that Buyer shall be entitled to participate in such proceedings and provided further that Buyer shall be responsible for the expenses of such proceedings.

6.10         Public Announcements.  On and prior to the Closing Date, Buyer and Seller shall advise and confer with each other prior to the issuance of any reports, statements or releases concerning this Agreement (including the exhibits and schedules hereto) and the transactions contemplated herein.  Neither Buyer nor Seller will make any public disclosure prior to the Closing or with respect to the Closing unless both parties agree on the text and timing of such public disclosure; provided, however, that nothing contained herein shall prevent either party at any time from furnishing any information to any Governmental Entity or complying with applicable law.  Immediately after this Agreement is signed, both parties will make public announcements to their respective share exchanges; the text of such public announcements will be reviewed by the parties prior to release.

6.11         Post-Closing Actions.  Subsequent to the Closing Date, Seller shall, from time to time, execute and deliver, upon the request of Buyer, all such other and further materials and documents and instruments of conveyance, transfer or assignment as may reasonably be requested by Buyer to effect, record or verify the transfer to, and vesting in Buyer, of Seller’s right, title and interest in and to the Assets, free and clear of all Liens, in accordance with the terms of this Agreement.

6.12         Future Agreements.  In the event Seller enters into any material agreement between the date of this Agreement and the Closing that relates primarily to the Assets, at the request of Buyer, Seller agrees to include any such agreement within the Contracts.

6.13         Permits.  Seller will assist Buyer in obtaining any licenses, permits or authorizations required for ownership, use, or operation of the Assets but which are not transferable.

6.14         Taxes. Buyer shall be responsible for paying, shall promptly discharge when due, and shall reimburse, indemnify and hold harmless Seller from, any sales or use, transfer, excise, stamp, or other similar axes arising from, imposed on or attributable to the transactions contemplated by this Agreement.

6.15         Environmental Closure.  Buyer agrees and acknowledges that Seller is not performing the Environmental Closure with respect to the Assets and the Leased Facility as a result of Buyer’s purchase of the Assets and lease of the Leased Facility for the purpose of continuing the existing operations on the Leased Facility after the Closing in substantially the same manner as Seller operated the operations and Leased Facility prior to the Closing.  As such, Buyer agrees and acknowledges that it is assuming and will perform the Environmental Closure.

6.16         Wafer Manufacturing and Supply Agreement.  At the Closing, Buyer and Seller will enter into a supply agreement in substantially the form attached as Exhibit E.

6.17         License Agreement.  At the Closing, Buyer and Seller will enter into a license agreement substantially in the form attached as Exhibit F to this Agreement with respect to the matters set forth in Section 4.11(a).

7.             Employee Matters.

7.1           Transferred Employees.

(a)           Offer of Employment.  Subject to and in accordance with the provisions of this Section 7, Buyer may offer employment to any or all of the Employees or recently terminated Employees listed on Exhibit D.  Seller agrees that it will cooperate with Buyer to identify those Employees or recently terminated Employees of Seller who are necessary for the operation of the Assets and the timing and method of contact by Buyer shall be as mutually agreed by the parties.  Prior to the Closing, Buyer, after notice to Seller as to the timing and method of contact, shall have the right to contact any or all of the Employees for the purposes of making offers of employment with Buyer (or any Affiliate designated by Buyer) after the Closing Date and receiving written acceptances of such employment (in each case contingent on consummation of the transactions contemplated by this Agreement).  Upon Closing, Buyer (or any Affiliates designated by Buyer) shall hire those Employees to whom it has made an offer in accordance with this Section 7.1 and who accept such offer in the manner and within the time frame reasonably established by Buyer.  Each such Employee who is employed by Seller on the Closing Date and who actually transfers to employment with Buyer (or any Affiliate designated by Buyer) at or after the Closing Date as a result of an offer of employment made by Buyer is hereafter referred to as a “Transferred Employee.”  Transferred

Employees shall not include any person on a disability leave of more than twenty-six (26) weeks.  On a periodic basis following the date of this Agreement and prior to the Closing, Buyer shall advise Seller of its intentions with respect to the employees it desires to extend or has extended offers to and the general status of discussions with such employees.  Notwithstanding such periodic disclosures made to Seller, Buyer shall not be obligated to hire any employee unless an offer of employment is subsequently made to, and accepted by, such employee; in addition, Buyer shall have no obligation to hire any employees of Seller after the Closing Date.

(b)           Transition.  The employment by Seller of the Transferred Employees shall end at the close of business on the Closing Date and the employment of the Transferred Employees by Buyer shall commence at 12:01 a.m. on the day after the Closing Date.  The terms of employment with Buyer (or Buyer’s Affiliates) shall be as mutually agreed to between each Transferred Employee and Buyer (or Buyer’s Affiliate, as the case may be), subject to the provisions of this Section 7.1.  Between the date of this Agreement and the Closing Date, Seller will provide each Transferred Employee with the same level of compensation as that currently provided by Seller.  Buyer shall have no obligation with respect to payments of salary, compensation, wages, health or similar benefits, commissions, bonuses (deferred or otherwise), severance, stock or stock options or any other sums due to any Transferred Employee that accrued before the Closing Date.  Seller will be fully responsible for all amounts payable to any employee, including (without limitation) all termination payments, redundancy compensation, severance pay, accrued vacation pay and other amounts payable in respect of the termination of employment of any employee in connection with the sale of the Assets to the Buyer.  In addition, Seller will be fully responsible for all amounts owing to Transferred Employees prior to Closing.

(c)           Retention of Employees Prior to Closing.  Seller agrees to assist Buyer in securing the employment after the Closing Date of those Employees to whom Buyer (or designated by Buyer) makes or intends to make offers of employment under subsection (a) above.  Seller shall not transfer any Employee on the Exhibit D to employment with Seller prior to the Closing or without the consent of Buyer.  Seller shall notify Buyer promptly if, notwithstanding the foregoing, any Employee terminates employment with Seller after the date of this Agreement but prior to the Closing.

7.2           Compensation and Benefits of Transferred Employees.  Coverage for Transferred Employees under Buyer’s compensation and benefit plans and other programs shall commence as of 12:01 a.m. on the day after the Closing Date.  Buyer shall be free to establish its own employee benefit plans; Buyer shall have no obligation to offer benefit plans of the same type or with terms similar to or better than the terms of Seller’s current employee benefit plans.  Buyer may, at its option, give each Transferred Employee credit for such Transferred Employee’s years of most recent continuous service with Seller for purposes of determining participation and benefit levels under all of Buyer’s vacation policies and benefit plans and programs.

7.3           Other Employees.  With respect to each employee listed on Exhibit D who is not a Transferred Employee (each a “Non-Transferred Employee”), Seller agrees to either terminate such Non-Transferred Employee’s employment with Seller, effective prior to the Closing or offer such Non-Transferred Employee continued employment with Seller other than in connection with the operation of the Assets.  Seller further acknowledges that the Non-Transferred Employees shall not be employees of Buyer after the Closing.

7.4           No Right to Continued Employment or Benefits.  No provision in this Agreement shall create any third party beneficiary or other right in any Person (including any beneficiary or dependent thereof) for any reason, including, without limitation, in respect of continued, resumed or new employment with Seller or Buyer (or any Affiliate of Seller or Buyer) or in respect of any benefits that may be provided, directly or indirectly, under any plan or arrangement maintained by Seller, Buyer or any Affiliate of Seller or Buyer.  Except as otherwise expressly provided in this Agreement, Buyer is under no obligation to hire any employee of Seller, provide any employee with any particular benefits, or make any payments or provide any benefits to those employees of Seller whom Buyer chooses not to employ.

7.5           No Solicitation or Hire.  For a period of one year after the Closing, Seller will not solicit any Transferred Employee for employment and Buyer will not solicit any other employee of Seller for employment.  For purposes of this Section 7.5, the term “solicit” shall not include the following activities by either party:  (i) advertising for employment in any bulletin board (including electronic bulletin boards), newspaper, trade journal or other publication available for general distribution to the public without specific reference to any particular

employees; (ii) participation in any hiring fair or similar event open to the public not targeted the other party’s employees; and (iii) use of recruiting or employee search firms that have been instructed by the party not to target any employee covered by this Agreement..

8.             Conditions to Buyer’s Obligations

The obligations of Buyer under this Agreement are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions, all or any of which may be waived by Buyer in writing, except as otherwise provided by law:

8.1           Representations and Warranties True; Performance; Certificate.

(a)           The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date;

(b)           Seller shall have performed and complied with all of its agreements, covenants and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date;

(c)           The conditions set forth in this Section 8 have been fulfilled or satisfied, unless otherwise waived in writing by Buyer; and

(d)           Buyer shall have received a certificate, dated as of the Closing Date, signed and verified by an officer of Seller on behalf of Seller certifying to the matters set forth in Sections 8.1(a) and 8.1(b) above.

8.2           Consents.  All Governmental Authorizations, Required Consents and consents required to transfer the Contracts to Buyer on the terms and conditions provided to Seller, without change as a result of the transfer to Buyer, shall have been obtained.

8.3           No Proceedings or Litigation.

(a)  No preliminary or permanent injunction or other order shall have been issued by any Governmental Entity, nor shall any statute, rule, regulation or executive order be promulgated or enacted by any Governmental Entity which prevents the consummation of the transactions contemplated by this Agreement.

(b)  No suit, action, claim, proceeding or investigation before any Governmental Entity shall have been commenced and be pending against any of the parties, or any of their respective Affiliates, associates, officers or directors, seeking to prevent transactions contemplated by this Agreement, including, without limitation, the sale of the Assets or asserting that the sale of the Assets would be illegal or create liability for damages or which may have a Material Adverse Effect on the Assets or ownership, use, or operation thereof.

8.4           Documents.  This Agreement, the exhibits and schedules attached hereto, and any other instruments of conveyance and transfer and all other documents to be delivered by Seller at the Closing and all actions of Seller required by this Agreement and the exhibit agreements, or incidental thereto, and all related matters, shall be in form and substance reasonably satisfactory to Buyer and Buyer’s counsel and shall be in full force and effect.

8.5           Governmental Filings.  The parties shall have made any required filing with Governmental Entities in connection with this Agreement and the exhibit agreements, and any approvals related thereto shall have been obtained or any applicable waiting periods shall have expired.  If a proceeding or review process by a Governmental Entity is pending in which a decision is expected, Buyer shall not be required to consummate the transactions contemplated by this Agreement until such decision is reached or rendered, notwithstanding Buyer’s legal ability to consummate the transactions contemplated by this Agreement prior to such decision being reached or rendered.

8.6           No Material Adverse Change.  There shall have been no material adverse change in the Assets on

the Closing Date as compared with the date of this Agreement.

8.7           Termination of Benefit Plans.  Seller shall have provided Buyer with evidence, reasonably satisfactory to Buyer as to the termination of all benefit plans and payments owing by Seller relating to all Employees and the termination of all Non-Transferred Employees’ benefit plans.

8.8           Wafer Manufacturing and Supply Agreement.  Buyer and Seller shall have entered into the Supply Agreement substantially in the form attached as Exhibit E to the Agreement.

8.9           License Agreement.  Buyer and Seller shall have entered into a License Agreement substantially in the form attached as Exhibit F to this Agreement.

8.10         Lease Agreement.  Buyer and the landlord of the Leased Facility shall have entered into a mutually acceptable lease agreement for lease of the Leased Facility.

9.             Conditions to Seller’s Obligations.  The obligations of Seller under this Agreement are subject to the fulfillment, prior to or on the Closing Date, of each of the following conditions, all or any of which may be waived in writing by Seller, except as otherwise provided by law:

9.1           Representations and Warranties True; Performance; Certificate.

(a)           The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects as of the Closing Date with the same effect as though such representations and warranties had been made or given again at and as of the Closing Date;

(b)           Buyer shall have performed and complied with all of its agreements, covenants and conditions required by this Agreement to be performed or complied with by them prior to or on the Closing Date;

(c)           Seller shall have received a certificate, dated as of the Closing Date, signed and verified by an officer of Buyer on behalf of Buyer certifying to the matters set forth in Sections 9.1(a) and 9.1(b) above.

9.2           No Proceeding or Litigation.

(a)  No preliminary or permanent injunction or other order shall have been issued by any Governmental Entity, nor shall any statute, rule, regulation or executive order be promulgated or enacted by any Governmental Entity which prevents the consummation of the transactions contemplated by this Agreement.

(b)  No suit, action, claim, proceeding or investigation before any Governmental Entity shall have been commenced and be pending against any of the parties, or any of their respective Affiliates, associates, officers or directors, seeking to prevent the sale of the Assets or asserting that the sale of the Assets would be illegal or create liability for damages.

9.3           Documents.  This Agreement, any other instruments of conveyance and transfer and all other documents to be delivered by Buyer to Seller at the Closing and all actions of Buyer required by this Agreement or incidental thereto, and all related matters, shall be in form and substance reasonably satisfactory to Seller and Seller’s counsel.

9.4           Governmental Filings.  The parties shall have made any filing required with Governmental Entities, and any approvals shall have been obtained or any applicable waiting periods shall have expired.  If a proceeding or review process by a Governmental Entity is pending in which a decision is expected, Seller shall not be required to consummate the transactions contemplated by this Agreement until such decision is reached or rendered, notwithstanding Seller’s legal ability to consummate the transactions contemplated by this Agreement prior to such decision being reached or rendered.

9.5           Wafer Manufacturing and Supply Agreement.  Buyer and Seller shall have entered into the Supply Agreement substantially in the form attached as Exhibit E to the Agreement.

9.6           License Agreement.  Buyer and Seller shall have entered into a License Agreement substantially in the form attached as Exhibit F to this Agreement.

10.           Indemnification

10.1         Survival of Representations and Warranties.  All covenants to be performed prior to the Closing Date, and all representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the consummation of the transactions contemplated hereby and continue until May 20, 2008 (the “Warranty Survival Date”); provided that if any claims for indemnification have been asserted with respect to any such representations, warranties and covenants prior to the Warranty Survival Date, the representations, warranties and covenants on which any such claims are based shall continue in effect until final resolution of any claims, and provided, further, that representations, warranties and covenants relating to Taxes and Section 5.6 Valid Issuance shall survive until 30 days after expiration of all applicable statutes of limitations relating to such Taxes and Section 5.6 Valid Issuance.

10.2         Indemnification by Seller.  Subject to the limitations set forth in this Section 10, from and after the Closing Date, Seller shall protect, defend, indemnify and hold harmless Buyer and Buyer’s Affiliates, officers, directors, employees, representatives and agents (each of the foregoing Persons is hereinafter referred to individually as an “Indemnified Person” and collectively as “Indemnified Persons”) from and against any and all losses, costs, damages, liabilities, fees (including without limitation attorneys’ fees) and expenses (collectively, the “Damages”), that any of the Indemnified Persons incurs or reasonably anticipates incurring by reason of or in connection with any claim, demand, action or cause of action alleging misrepresentation, breach of, or default in connection with, any of the representations, warranties, covenants or agreements of the Seller contained in this Agreement, including any exhibits or schedules attached hereto, known to Buyer within 12 months prior to the Warranty Survival Date.  Damages in each case shall be net of the amount of any insurance proceeds and indemnity and contribution actually recovered by Buyer.

10.3         Indemnification by Buyer.  From and after the Closing Date, Buyer shall protect, defend, indemnify and hold harmless Seller and Seller’s Affiliates, officers, directors, employees, representatives and agents (each of the foregoing Persons is hereinafter referred to individually as an “Indemnified Person” and collectively as “Indemnified Persons”) from and against any and all losses, costs damages, liabilities, fees (including without limitation attorney’s fees) and expenses (collectively, the “Damages”), that any of the Indemnified Persons incurs or reasonably anticipates incurring by reason of or in connection with any claim, demand, action or cause of action alleging misrepresentation, breach of, or default in connection with, any of the representations, warranties, covenants or agreements of the Buyer contained in this Agreement, including any exhibits or schedules attached hereto, known to Seller within 12 months prior to the Warranty Survival Date.  Damages in each case shall be net of the amount of any insurance proceeds and indemnity and contribution actually recovered by Seller.

10.4         Method of Asserting Claims.  All claims for indemnification by the Buyer, the Seller or any other Indemnified Person pursuant to this Section 10 shall be made in accordance with the notice provisions of this Agreement.

10.5         Limitation of Liability.  Notwithstanding anything to the contrary, in no event shall the aggregate indemnification obligation of Seller under this Section 10 exceed One Million Dollars ($1,000,000); provided, however, that such cap shall not apply to any claims based the intentional misconduct or fraud of the Seller.  Furthermore, notwithstanding anything to the contrary, Buyer shall not be entitled to indemnification pursuant to this Section 10 unless and until the aggregate amount of losses and other indemnifiable expenses to which the indemnity relates exceeds the sum of fifty thousand dollars ($50,000), after which amount Seller shall have liability for all losses and other indemnifiable expenses from the first dollar (subject to the cap set forth above); provided, however, that such “bucket” limitation shall not apply to any claims based upon intentional misconduct or fraud.

11.           Termination.

11.1         Termination of Agreement.  This Agreement may be terminated at any time prior to the Closing:

(a)  By mutual written consent of Buyer and Seller;

(b)  By either party, if the other party goes into liquidation, has an application or order made for its winding up or dissolution, has a resolution passed or steps taken to pass a resolution for its winding up or dissolution, becomes unable to pay its debts as and when they fall due, or has a receiver, receiver and manager, administrator, liquidator, provisional liquidator, official manager or administrator appointed to it or any of its assets; or

(c)  By Buyer or Seller if any Governmental Entity shall have issued an order, decree or ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement; or

(d)  By either party if the Closing does not occur by May 25,  2007.

11.2         Procedure and Effect of Termination.  In the event of termination of this Agreement by any or all of the parties pursuant to Section 11.1, written notice shall be given to each other party specifying the provision of Section 11.1, pursuant to which such termination is made and shall become void and there shall be no liability on the part of Buyer or Seller (or their respective officers, directors, partners or Affiliates), except as a result of any breach of this Agreement by such party or to the extent such a party is entitled to indemnification under Section 10 of this Agreement.

12.           Miscellaneous.

12.1         Amendments and Waivers.  Any term of this Agreement may be amended or waived with the written consent of the parties or their respective successors and assigns.  Any amendment or waiver effected in accordance with this Section 12.1 shall be binding upon the parties and their respective successors and assigns.

12.2         Successors and Assigns.  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties.  Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

12.3         Governing Law; Jurisdiction.  This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law.  Each of the parties to this Agreement consents to the exclusive jurisdiction and venue of the courts of the state and federal courts of Santa Clara County, California.

12.4         Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

12.5         Titles and Subtitles.  The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

12.6         Notices.  Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or forty-eight (48) hours after being deposited in the regular mail as certified or registered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified at such party’s address or facsimile number as set forth below, or as subsequently modified by written notice, and (a) if to Seller, with a copy to Darrell C. Smith, Shumaker, Loop & Kendrik, LLP, 101 E Kennedy Boulevard, Suite 2800, Tampa, Florida 33602 or (b) if to Buyer, with a copy to James Black, Orrick, Herrington & Sutcliffe LLP, 405 Howard Street, San Francisco, CA 94105.

12.7         Severability.  If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith, in order to maintain the economic position enjoyed by each party as close as possible to that under the provision rendered unenforceable.  In the event

that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms.

12.8         Entire Agreement.  This Agreement and the documents referred to herein are the product of both of the parties hereto, and constitute the entire agreement between such parties pertaining to the subject matter hereof and thereof, and merge all prior negotiations and drafts of the parties with regard to the transactions contemplated herein and therein.  Any and all other written or oral agreements existing between the parties hereto regarding such transactions are expressly canceled.

12.9         Advice of Legal Counsel.  Each party acknowledges and represents that, in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement.  This Agreement shall not be construed against any party by reason of the drafting or preparation thereof.

[Signature pages follow]

This Agreement has been duly executed and delivered by the duly authorized officers of Seller and Buyer as of the date first above written.

AMPTECH, INC.

By:

Name:

Title:

Address:

WJ COMMUNICATIONS, INC.

By:

Name:

Title:

Address:

EX-10.1

Exhibit 10.1

“CONFIDENTIAL TREATMENT OF CERTAIN INFORMATION CONTAINED IN THIS DOCUMENT HAS BEEN REQUESTED BY WJ COMMUNICATIONS, INC.  THE CONFIDENTIAL PORTIONS OF THIS DOCUMENT INDICATED WITH ASTERISKS (***) HAVE BEEN OMITTED AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.”

Wafer Manufacturing and Supply Agreement

This Wafer Manufacturing and Supply Agreement (“Agreement”) is made and entered into this      day of May, 2007, by and between Amptech, Inc., a Delaware corporation having its principal place of business at 5776-D Lindero Canyon Road, #431, Westlake Village, California 91362 (hereinafter “AMPTECH”) and WJ Communications, Inc., a Delaware corporation having its principal place of business at 401 River Oaks Parkway San Jose, CA 95134 (hereinafter  “WJ”). (WJ and AMPTECH shall also sometimes be referred to herein together as the “Parties” or individually as a “Party”).

WITNESSETH:

WHEREAS, AMPTECH is a semiconductor company;

WHEREAS, AMPTECH is acquiring certain assets of WJ pursuant to that certain Asset Purchase Agreement of even date (the “Asset Purchase Agreement”);

WHEREAS, subsequent to the closing under the Asset Purchase Agreement, WJ desires to pay AMPTECH to manufacture and supply WJ with wafers utilizing WJ’s wafer production processes;

WHEREAS, WJ has developed certain proprietary process technology associated with wafer production products, and desires to provide such technology to AMPTECH  for the purpose of manufacturing wafers for WJ and, under certain circumstances, as defined in the License Agreement between the Parties of even date (the “License Agreement”) will license AMPTECH to produce wafers using certain proprietary process technology for AMPTECH and other customers of AMPTECH;

 WHEREAS,  AMPTECH is willing to manufacture and supply wafers to WJ utilizing WJ’s wafer production processes; and

WHEREAS, the Parties desire to establish the terms and conditions for the manufacture of wafers by AMPTECH and the purchase of wafers by WJ.

NOW, THEREFORE, in consideration of the mutual promises and agreements of the Parties contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1.             DEFINITIONS

1.1           “Confidential Information means any and all information (in any and every form and media) not generally known in the relevant trade or industry, which was obtained from any Party in connection with this Agreement or the License Agreement, the respective rights and obligations of the Parties hereunder, including, without limitation, (a) information relating to trade secrets of such Party, (b) information relating to existing or contemplated products, services, technology, ideas, designs, processes, formulae, research and development (in any and all stages) of such Party, (c) information relating to the Wafers or any of the patents, trade secrets, know-how, and other technology and information relating to the Wafers and their design, and (d) information relating to forecasts, projections, sales, business plans, methods of doing business, sales or marketing methods, current and contemplated markets, current and potential customers, strategic partners, acquirers or  investors, customer lists, customer usages and/or requirements and supplier information of such Party.

1.2           “Copyrights” means: (a)  any rights in original works of authorship fixed in any tangible medium of expression as set forth in the United States Copyright Act, 17 U.S.C. § 101 et. seq.; (b)  all registrations and applications to register the foregoing anywhere in the world; (c)  all foreign counterparts and analogous rights anywhere in the world; and (d)  all rights in and to any of the foregoing.

 1.3“Die” means an individual integrated circuit or components which when completed create an integrated circuit.

 1.4“Embedded Third Party Technology” means third party software or hardware embedded as part of the WJ Technology and/or in Improvements thereto.

1.5           “Facilities” means AMPTECH’s physical fabrication facilities located at 5130 McCarthy Boulevard, Milpitas, California.

1.6           “AMPTECH Services” has the meaning set forth in Section  2.1.

1.7           “AMPTECH Technology” has the meaning set forth in Section 9.2

1.8           “Gross Die per Wafer” (“GDW”) means the total quantity of Die candidates on each Wafer, whether or not the Die is operational when the Wafer has completed the manufacturing process.

1.9           “Improvements” means with respect to any Technology, all discoveries, innovations, improvements, enhancements, derivative works, or modifications of or to such Technology.

1.10         “Intellectual Property Rights” means any and all: (a)  Copyrights, mask work rights, trademarks, and Patents; (b)  rights relating to innovations, know-how, trade secrets, and confidential, technical, and non-technical information; (c)  moral rights, author’s rights, and rights of publicity; and (d)  other industrial, proprietary and intellectual property related rights anywhere in the world, and all applications for, renewals and extensions of the foregoing now or hereafter filed, regardless of whether or not such rights have been registered with the appropriate authorities in such jurisdictions in accordance with the relevant legislation.

1.11         “Jointly Developed Technology” means Technology that is written, created, or otherwise made or acquired not solely by one or more employees of one Party, but is created jointly by employees or contractors of WJ together with employees or contractors of AMPTECH during and in the course of the transactions contemplated by this Agreement, provided that: (a)  with respect to copyrightable material, each contributing Party prepared the work with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole; (b)  with respect to inventions subject to patent protection, each contributing Party made some original contribution to the inventive thought and to the final solution; and (c)  with respect to matter subject to trade secret protection, each contributing Party made substantial contributions to such matter.

1.12         “Knowledge” shall mean the actual knowledge of the officers, directors, and director-level employees of AMPTECH.

1.13         “Lot” means a group of wafers which are processed simultaneously. Each Lot will be assigned a specific alpha/numeric identification that distinguishes it from any other group that contains the same type of Die so that each Lot can be separately identified.

1.14         “Minimum Yield” means, with respect to a particular  Wafer, the minimum acceptable Yield for such Wafer as per the Specifications.

1.15         “Net Die per Wafer” (“NDW”) means the net number of functional Die on each Wafer after the Wafer has completed the wafer probe testing.

1.16         “Patents” means: (a)  patents and patent applications, worldwide, including all divisions, continuations, continuing prosecution applications, continuations in part, reissues, renewals, reexaminations, and extensions

thereof and any counterparts worldwide claiming priority therefrom; utility models, design patents, patents of importation/confirmation, and certificates of invention and like statutory rights; and (b)  all rights in and to any of the foregoing.

1.17         “Process” the proprietary wafer manufacturing processes of WJ to be provided by WJ to AMPTECH for use by AMPTECH in its Facilities to manufacture wafers subject to the terms and conditions of the License Agreement.

1.18         “Process Control Monitor (PCM)” means a collection of test structures that are included on a wafer for the purpose of monitoring the Process and establishing that the Process was implemented correctly.

1.19         Purchase Order” has the meaning set forth in Section  7.1.

1.20         “Qualify” or “Qualification” means that the Process has been approved by WJ for volume manufacturing of the Wafers at the Facilities because the Wafers have been produced pursuant to the Process as evidenced by the PCM test results.

1.21         “Scrap” means any Wafer or Die, in any stage of completion, without regard to its ability to function, that is not in conformance with the requirements of the Specifications for Wafers to be sold to WJ.

1.22         “Specifications” mean the technical specifications provided by WJ for the Process and the manufacture of the Wafers by AMPTECH including the specifications described in Appendix A.

1.23         “Target Yield” means, with respect to a particular  Wafer, the Target Yield for such Wafer as set forth in Appendix B. Notwithstanding the foregoing, the Target Yield is subject to post qualification confirmation and adjustment pursuant to Section  3.5 and Appendix B.

1.24         “Technical Information” means the technical information and materials provided or to be provided by WJ to AMPTECH.

1.25         “Technology” means any and all technical information, specifications, drawings, records, documentation, works of authorship or other creative works, ideas, algorithms, models, databases, ciphers/keys, systems architecture, network protocols, research, development, and manufacturing information, software (including object code and source code), application programming interfaces (APIs), innovations, mask works, logic designs, circuit designs, technical data, processes and methods.

1.26         “Term” has the meaning set forth in Section  14.1.

1.27         “Verification Test Program” has the meaning set forth in Section 3.5(b).

1.28         “Wafers” means the GaAs (gallium arsenide) Wafers described in Appendix B which will be manufactured by AMPTECH for WJ using the Process.

1.29         “WJ Technology” has the meaning set forth in Section 9.1.

1.30         “Yield” means the percentage represented by Net Die per Wafer (NDW) divided by Gross Die per Wafer (GDW).

2.             AMPTECH SERVICES AND FACILITIES

2.1           AMPTECH Services. AMPTECH shall  manufacture the Wafers at its Facilities utilizing the Process provided by WJ, and  sell and deliver to WJ  the Wafers, all in accordance with the terms and conditions set forth in this Agreement (the “AMPTECH Services”).  AMPTECH shall not outsource or delegate to any third party the manufacture of the Wafers.

2.2           Facilities. All manufacturing of  Wafers shall take place at the Facilities. If AMPTECH desires to relocate the  manufacturing of the Wafers to another facility, it shall provide WJ with at least *** days prior notice of its intent to  relocate to a proposed new facility. If WJ notifies AMPTECH within ***  days of its objection to the new location, AMPTECH shall not transfer the manufacture of the Wafers to the new facility and shall continue to manufacture the Wafers at the Facilities, or AMPTECH will provide WJ with a *** month opportunity to make end of life purchases of Wafers before AMPTECH can terminate this Agreement and complete the relocation to the new facility. WJ will provide notice within *** days of AMPTECH’s notification to WJ of its intention to continue with the new facility. Approval to relocate shall not be unreasonably withheld.

3.             PRODUCTION, QUALITY, RELIABILITY AND CONTROL

3.1           Wafer Technical Information.

(a)              WJ will provide the Technical Information and assistance relating to the Wafers to AMPTECH in accordance with  Appendix D.

(b)              AMPTECH will not make any changes or modifications to the qualified process without WJ’s prior written approval, which may be granted or withheld in WJ’s sole and absolute discretion.

3.2WJ Technology Improvements by AMPTECH.  AMPTECH shall provide WJ with prompt written notice with respect to any Technology or Intellectual Property Rights conceived, developed, or reduced to practice by or on behalf of AMPTECH or any other person that constitutes an Improvement to any WJ Technology.  Thereafter, at WJ’s request, AMPTECH shall make available to WJ appropriate personnel with suitable knowledge and understanding of such Improvement to describe and explain such Improvement to designated WJ personnel and to otherwise provide such WJ personnel with sufficient information and materials satisfactory to WJ.

3.3           Baseline Modifications:

(a)The Process baseline may be further refined by mutual agreement. AMPTECH will obtain written approval of WJ before making any modifications to the baseline manufacturing Process, materials, or tooling. Approval shall not be unreasonably withheld.

(b)The Parties shall confirm the Target Yield and Minimum Yield for the Wafers is acceptable to WJ.

(c)AMPTECH will process and deliver wafers that meet the PCM test specifications.  If material does not meet the Target Yield, the Parties will work together to determine the root cause and corrective actions.

3.4           Quality Culture.  AMPTECH’s quality systems shall include Statistical Process Control (SPC) with statistically valid limits. AMPTECH will establish a culture which responds to established limits, and will stop the manufacturing line if these limits are found out of tolerance.

3.5           Specification Testing and Compliance.  AMPTECH will produce Wafers for WJ that meet the  Specifications. In that regard:

(a)           AMPTECH shall conduct in line process monitoring according to testing procedures and use test equipment reasonably acceptable to WJ. AMPTECH must have sufficient testing capability to handle testing requirements, including the provision of engineering analysis of test Wafers sufficient to (i)  identify potential product issues (i.e. any failure to fully meet Specifications or achieve Minimum Yields) at the earliest possible stage and (ii)  make necessary adjustments to the Wafers.

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

(b)           After Wafer completion, AMPTECH shall conduct testing in accordance with the Specifications (“PCM Test Program”), and inspect and confirm that the Wafers conform to the applicable Specifications.

AMPTECH shall neither ship nor bill WJ for any Wafer that  to the Knowledge of AMPTECH fails to meet the PCM Test requirements and the Quality and Reliability Standards unless specifically instructed in writing by WJ to

do so. AMPTECH shall notify WJ of any Wafer that is below the PCM Test requirements, and WJ may, at its discretion, agree to accept delivery of such Wafer at a mutually agreed upon price. AMPTECH must notify WJ in advance of shipment of those Wafers that do not comply with the foregoing criteria.

(c)           If AMPTECH or WJ detects any wafer fabrication related defects in any Wafers, AMPTECH shall promptly provide WJ with a corrective action plan to correct the failure mechanisms and/or defects. WJ may review AMPTECH’s quality measurement and control systems at any time, and AMPTECH shall comply with all commercially reasonable recommendations made by WJ as a result of any such review.

(d)           From time to time WJ may desire to update, revise, or modify the Specifications for the Wafers.  If AMPTECH and WJ mutually agree on the updates, revisions, and/or modifications,  then AMPTECH will use reasonable efforts to implement all revisions, updates, or modifications as soon as practicable. If such changes impact Wafer Yield, the Parties shall re-set Target Yields using the same procedure as initially used by WJ. AMPTECH shall advise WJ of any cost and schedule impact, and the date and Lot number of implementation of the revision, update, or modification, all of which shall be subject to WJ’s written approval. Any requalification required as a result of the revisions, updates, or modifications will be the responsibility of WJ.

(e)           The results from AMPTECH testing processes shall be accessible and available to WJ for review and download to WJ records at the conclusion of each test Lot.

3.6           Failure and Defect Reporting.  The Parties shall notify each other of any detected failure mechanisms and/or defects which are present, or which they suspect might be present, in completed Wafers. AMPTECH shall use reasonable efforts to correct such failure mechanisms and/or defects as promptly as possible within a time frame acceptable to WJ and reasonable to AMPTECH.

3.7           Reliability Records and Data.  Without limitation of any requirements in the Quality and Reliability Standards, AMPTECH agrees to provide the following information relating to the quality or reliability of the Wafers and the quality systems used to comply with these standards and specifications.

(a)           AMPTECH will maintain Lot history records for a period of five (5)  years. WJ shall have access to all Lot history records concerning all Wafers at any  time.

(b)           AMPTECH agrees to provide reliability data which demonstrates the ability of mutually agree on updates, revisions, and/or modifications to the Process used for Wafers to meet WJ’s Quality and Reliability Standards as set forth in Appendix E.  Any exceptions to these criteria will be reviewed on a product-by-product basis. WJ shall have the right to use reliability data concerning Wafers for the purposes of preparing sales and promotional information concerning Wafers. AMPTECH’s reliability testing methods and conditions shall be subject to the review of WJ, and shall be changed upon WJ’s request, and agreed to by AMPTECH, such agreement not to be unreasonably withheld.

(c)           WJ may conduct an on-site inspection and audit of the process and manufacturing records relevant to the Wafers during normal business hours upon twenty four (24) hours advance notice to AMPTECH.   Any inspection or audit will be conducted at WJ’s sole expense.

(d)           AMPTECH agrees to maintain sufficient documentation regarding all Wafers sold to WJ for five (5)  years after shipment. All Wafers shall be traceable to the assigned Lot. Lot traceability for Wafers shall be maintained throughout the entire process from fabrication through verification testing, packing, and shipment. Traceability and full history for Wafers shall include applicable wafer fabrication process recipes, substrate vendor identification and Lot number, quality control data, Process deviation notes and probe data as well as assembly records and deviations, verification test results, visual inspection results, burn-in conditions, and final test data. WJ

shall have the right to limit and approve substrate and other materials suppliers.  Supplier approval will not be unreasonably withheld, and rejection must be based on objective documented criteria showing how the substrate and material suppliers will cause AMPTECH to fail to meet the Specifications.

3.8           Process Control Information.  Upon WJ’s written request, AMPTECH shall provide WJ with Process control information as set forth in the Specifications. Such information may include: Process and electrical test yield results, calibration schedules and logs for equipment, environmental monitor information for air, gases, and DI water, documentation of operator qualification and training, documentation of traceability, process verification information, and trouble report currently available from AMPTECH’s document control center in a format pursuant to AMPTECH’s standard document retention policy.

3.9           Scrap Disposal.  AMPTECH shall return Scrap which cannot be reclaimed to WJ at WJ’s request, or otherwise destroy and properly dispose of all Scrap in order to prevent any unauthorized sale or other disposition of any  Wafers. AMPTECH will maintain Scrap procedures and will record all products scrapped including Lot history, reason for scrap, and WJ’s approval for scrap. WJ shall have the rights to audit the scrap procedures and to witness scrap of the  material.

3.10         Manufacturing Metrics.  AMPTECH agrees to provide pertinent manufacturing metrics to WJ, including but not limited to, data regarding process yield, cycle time and Process development.

3.11         Deficiency Expectations.  WJ expects consistent, high quality wafer fabrication processing and services from AMPTECH, such that a Die yield expectation can be predicted for WJ’s products based on the area of a particular Die. It is understood that WJ’s design and specifications also influence this metric. The functional test yields expected by WJ are equal to or greater than the yields that WJ has experienced in the past for their products of identical design to the products produced in this Agreement.  WJ shall provide AMPTECH data illustrating the yield performance and Die size for each device.   A Target Yield will be established on a per device basis using WJ’s historical data (see Appendix B).

                  WJ will inform AMPTECH of material exhibiting unexpectedly low Yields. AMPTECH is willing to assist WJ, to the limits of its existing capabilities, at no additional cost in the evaluation of the low Yield, and in identification of the necessary activities to correct such low Yields.

3.12         Shippable Wafer.  A good wafer is defined as one which passes the PCM tests appropriate for the version of the Process (i.e. MESFET, HFET, 5V or 28V), to the extent that such specific tests are defined in Attachment.  Wafers will be considered shippable based upon the PCM tests meeting acceptable parametric ranges.  For any and all wafers where the PCM data does not meet the mutually defined acceptable criteria, WJ and AMPTECH will determine a pro rated wafer price.

4.             PARTIES’ ACTIVITIES

4.1           Site Inspections.  WJ and its current employees, customers, strategic partners, investors, and acquirers shall have the right to visit AMPTECH’s Facilities to inspect the Facilities and fabrication of  the Wafers, as well as conduct other activities contemplated by this Agreement, after providing reasonable notice to AMPTECH, as long as such WJ personnel comply with AMPTECH’s security policies and sign a non-disclosure agreement acceptable to AMPTECH. Such visits shall be conducted during AMPTECH’s normal working hours and may be stopped by AMPTECH, if disruptive to AMPTECH operations. WJ may also assign WJ employees to work at the Facilities manufacturing the Wafers on an as needed or other mutually agreed basis. AMPTECH shall grant these employees full access to employee parking facilities and appropriate sections of the Facilities including the clean room where the Wafers are manufactured or placed. AMPTECH shall provide such WJ employees with secured office space and full access to conference room, food and break facilities. AMPTECH shall allow WJ employees to be full and active participants on problem solving teams with respect to the manufacturing of the Wafers.

4.2           Records Inspections.  In addition to WJ’s other inspection rights set forth elsewhere in this Agreement, WJ shall have the right to inspect the books and records (whether maintained in documentary form or as computer files) of AMPTECH related to this Agreement during normal business hours upon one week’s written advance notice to AMPTECH.

4.3           Financial Reports and Notification of Financial Impairment .  AMPTECH agrees, for so long as the Agreement remains in effect, to furnish to WJ:  (i) within 90 days after the end of each fiscal year, audited annual financial statements (if an audit is performed), setting forth in comparative form the figures for the previous year (or if not yet completed, then a draft thereof, followed by the final thereof as soon a available); (ii) within 45 days of each of the first three fiscal quarters of each year, the quarterly unaudited financial statements or such summaries that are provided to AMPTECH’s Board of Directors if unaudited financial statements have not been prepared; (iii) within 30 days after the end of each month, monthly financial summaries which shall be limited to the monthly cash balance and revenue for the period; (iv) within 30 days after the end of each quarter, a rolling six month forecast of cash flow; and (v) within 60 days after the first day of each fiscal year, an annual budget. AMPTECH further agrees to immediately notify WJ  if (i) based on AMPTECH’s then current three month forecast of cash flow, all or substantially all of AMPTECH’s available cash balance for working capital would be reasonably likely to be consumed or (ii) AMPTECH suffers any material adverse change in its financial condition that is reasonably likely to  impair AMPTECH’s ability to perform its obligations under this Agreement.

5.             PRICING AND PAYMENTS

5.1           Wafer Pricing.  The price for Wafers ordered and accepted by WJ and delivered by AMPTECH in accordance with this Agreement shall be as set forth in Appendix C.

5.2           Invoicing and Payment Terms.  AMPTECH shall invoice WJ upon shipment of the Wafers. AMPTECH’s invoices shall set forth the amounts due from WJ to AMPTECH for such shipment, and shall contain sufficient detail to allow WJ to determine the accuracy of the amount(s) billed. The invoice shall be dated and delivered as of the date of shipment and payments shall be on *** (***) days net terms. All payments will be in United States of America dollars. WJ shall have the right to offset any disputed claims or other amounts due from AMPTECH against WJ’s payment obligations under any invoice.   Upon resolution of any dispute, payment is due immediately from WJ.  If WJ pays invoices after *** (***) days from delivery, interest shall apply at the lesser of the Comerica Bank prime rate plus 2%, compounded annually, or the highest rate allowable by law.

5.3           Taxes.  WJ is responsible for all taxes related to the purchase of finished Wafers.

6.             CAPACITY PLANNING AND FORECASTING

6.1           Forecasts.  In order to allow AMPTECH to plan its foundry capacity and to order raw materials in due time, WJ shall give to AMPTECH a *** (***) month forecast for its estimated monthly Wafer requirements per product based on reasonable available information.  The first *** (***) months are in the form of firm, noncancellable obligation to place Purchase Orders pursuant to section 7.1 (“Firm Order Quantities”).  The second *** months of purchase orders maybe rescheduled one time up to ***% of the total (***) month quantity.  The issuance of purchase orders under section 7.1 establishes the legal obligation and not the forecast provided under this section 6.1.  The trailing six months are treated as a nonbinding forecast.

6.2           Capacity Commitment.

(a)           AMPTECH shall reserve the capacity and agrees to maintain the ability to manufacture, at the stated lead times, the minimum volume of Wafers per period for the last forecast under Section 6.1 accepted by AMPTECH plus 15% additional capacity in reserve per Section 6.2 (b).

(b)           Within ten (10)  days after receipt of WJ’s forecast, AMPTECH shall provide WJ with a written plan detailing AMPTECH’s manufacturing capacity commitments for the forecast period. AMPTECH shall, consistent with and subject to the limitations of the maximum staffed capacity of the wafer fabrication facility, use commercially reasonable effort to allocate sufficient capacity to be able to provide up to *** (***) of the forecast and shall use commercially reasonable efforts to provide additional capacity as requested.

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

(c)           AMPTECH shall provide current-quarter weekly wafer output updates to the forecast. This weekly update would comprehend anticipated changes to forecast related to deviations from planned cycle-time. WJ will use the weekly updates to direct AMPTECH activities, including the disposition of Wafers for shipping.

(d)           AMPTECH shall provide WJ prompt written notice if AMPTECH becomes aware of any circumstance which may constrain its capacity to manufacture Wafers in accordance with the then current forecast.

7.             ORDER, DELIVERY AND ACCEPTANCE

7.1           Order Placement and Firm Orders.  WJ shall place written orders for the Wafers to be purchased under this Agreement via a purchase order in a form acceptable to AMPTECH (each, a “Purchase Order”).  WJ shall place Purchase Orders for quantities of Wafers at least as high as the Firm Order Quantities set forth in the Forecasts.  The Purchase Order shall include delivery instructions included thereon or issued in connection with the written order that reference the applicable written order and provide detail regarding the mix, quantities, and requested delivery date for the Wafers. Firm Purchase Orders will be placed monthly, no later than *** (***) business days prior to the end of each calendar month. WJ may adjust the device mix prior to AMPTECH starting material, but the total volume of Wafers cannot be decreased without the consent of AMPTECH after the Purchase Order has been accepted. Modifications to the mix and quantity of Wafers to be started in any given week may be requested in writing by WJ no later than Thursday of the previous week. AMPTECH shall use commercially reasonable efforts to accept any Purchase Order that is within the volume of the most recent *** (***) month forecast or up to ***% greater.

7.2           Order Acceptance.

(a)           AMPTECH shall acknowledge all Purchase Orders and confirm all delivery schedules and instructions therein within two (2)  business days following its receipt of Purchase Order. AMPTECH may not reject Purchase Orders based on ordering instructions that conform to the terms of this Agreement and AMPTECH may not reject the Purchase Order based on the quantity of Wafers ordered unless, either the quantity is less than the Firm Order Quantities or, and then only to the extent that, the quantity is more than ***% over the Form Order Quantity most recent six (6) months forecast.

(b)           AMPTECH shall deliver the quantity of Wafers stipulated in the relevant Purchase Order and delivery shall be considered timely only if on or before the scheduled delivery date. In the event delivery is more than seven (7) days after the scheduled delivery date, WJ shall be entitled to a reduction in the price of the delayed Wafers in the amount of ***% per week up to a maximum reduction of ***%. WJ agrees to accept deliveries of *** percent (***%) above the Purchase Order quantities.  WJ also agrees to allow Purchase Orders to be delivered short provided the deliveries are within *** (***) of the Purchase Order Quantity.

7.3           Cancellations and Schedule Changes.

(a)           WJ may, in its discretion, cancel, suspend, or modify any Purchase Order, even if AMPTECH has begun manufacture of the Wafers so ordered within the stated lead time up to *** (***) percent of the current quarter’s committed purchase order quantity. Upon cancellation of the complete or partial Purchase Order for which AMPTECH has begun manufacturing Wafers, WJ agrees to pay AMPTECH a percentage of the applicable selling price set forth in the applicable Purchase Order based on the stage of completion of the applicable Wafer Lot.  AMPTECH may not terminate any accepted Purchase Order, unless AMPTECH terminates this Agreement for default by WJ.  If WJ desires to cancel, suspend, or modify Purchase Orders in excess of *** (***) percent of the current quarter’s committed purchase order quantity, WJ and AMPTECH will meet to review the circumstances and determine if a mutually agreeable solution can be reached.

(b)           AMPTECH shall use commercially reasonable efforts to accommodate WJ’s requested changes. AMPTECH will notify WJ at the earliest indication of any interruption in supply of the Wafers or other Facility difficulty that may affect the availability of  Wafers under this Agreement.

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

(c)           WJ may, in its discretion, cancel any Purchase Order if AMPTECH either does not deliver or projects that it will not deliver Wafers pursuant to such Purchase Order within *** (***) days of its originally committed delivery date as adjusted for any holds that WJ may have requested of AMPTECH with respect to the Purchase Order.  WJ will notify AMPTECH in writing of its decision to cancel a Purchase Order under this Section 7.3(c).

7.4           Wafer Shipment.  AMPTECH shall deliver free on board (FOB) at their Facility in Milpitas, California.

7.5           Wafer Acceptance Testing.  Acceptance testing of the Wafers delivered to WJ will be performed within *** (***) days of receipt.  If WJ identifies an issue with the Wafers, WJ will notify AMPTECH and provide to AMPTECH the incoming inspection data and other data in its possession related to the wafers.  AMPTECH, will review the information within *** (***) hours and meet with WJ to mutually address the issue.  AMPTECH shall immediately exercise its reasonable efforts to develop and implement a corrective action plan for any errors, including manufacturing errors or defects identified in its systems.  If the engineering evaluation, identifies the source of the problem to be wafer fabrication related, AMPTECH will issue a return material authorization for the return of the material and credit of the purchase price or, at WJ’s option, may be retained by WJ subject to an agreed upon credit being issued by AMPTECH.  For such properly rejected Wafers that WJ returns to AMPTECH for a refund of the purchase price, title and risk of loss or damage of returns will pass to AMPTECH at WJ’s docks.  Rejected Wafers shall be subject to the Scrap disposal procedures set forth in Section 3.9 herein.

8.             PRODUCT WARRANTIES AND FAILURES

8.1           Product Warranty. AMPTECH warrants that, at the time of delivery to WJ, all Wafers will comply with the Specifications and the Quality and Reliability Standards and be free of liens, encumbrances, and defects. WJ shall advise AMPTECH in writing of any claims involving failure to meet the Specifications or Quality and Reliability Standards.

8.2           Persistent Failure. In the event repeated field failures occur with respect to Wafers, or a significant field failure occurs which requires immediate attention, AMPTECH shall take all commercially reasonable action required to promptly resolve the matter.

8.3           Product Failure. In the event that any Wafer fails to pass WJ’s inspection, or WJ otherwise determines that any Wafer fails to meet the Wafer Standards, WJ will give AMPTECH notice of the defective Wafer and AMPTECH shall use commercially reasonable efforts to resolve the matter.  WJ shall have no financial responsibility for defective Wafers.

9.             PROTECTION OF TECHNOLOGY AND INTELLECTUAL PROPERTY

9.1           Protection of WJ Technology. AMPTECH will take steps to avoid benefit to WJ’s competitors from WJ Technology (as defined in the License Agreement), as follows:

(a)           AMPTECH will create a firewall between (i)  products, processes, and other activities on behalf of WJ, and (ii)  all personnel, products, and processes of (1)  competitors of WJ and (2)  other  product customers of AMPTECH unless AMPTECH is using WJ Technology under its License Agreement, in which case it will conform to the License Agreement.

(b)           The Parties will cooperate to prevent the unauthorized distribution, use, or access, or the unauthorized disclosure of WJ’s Intellectual Property by AMPTECH.

(c)           If a security compromise related to the WJ Technology is caused by or results primarily from the acts or omissions of AMPTECH or any of its subsidiaries, vendors, employees, or sublicensees or their failure to comply with the agreed security procedures, AMPTECH will be responsible for responding to and containing such security compromise.

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

9.2           Know-How Preservation. AMPTECH will not use any Intellectual Property of WJ (including without limitation Confidential Information), for any purpose inside or outside AMPTECH, except as permitted by the License Agreement.

10.          INDEMNIFICATION AND INSURANCE

10.1         Intellectual Property Indemnification by AMPTECH.

(a)           AMPTECH agrees to defend at its expense any suits brought by a third party against WJ based upon a claim that the process used by AMPTECH to manufacture Wafers and the AMPTECH Technology used in such process infringes any Intellectual Property Rights, and to pay costs, including attorneys fees and expenses, and damages finally awarded in any such suit against WJ. AMPTECH has no obligations under this Section to the extent arising from  AMPTECH’s use of the Process.  WJ will promptly notify AMPTECH in writing of any claim or suit. AMPTECH will have control of such claim or suit to defend or settle at its expense so long as settlement does not involve any admission of liability or payment by WJ. WJ will provide reasonable assistance for AMPTECH’s defense of such claim or suit.

(b)           If the use and sale of any of the Wafers  is prohibited by court order as a result of a suit within the scope of Section  10.1(a), AMPTECH, at its option and at no expense to WJ, will obtain for WJ the right to use and sell the Wafers or will substitute an equivalent method for performing the AMPTECH Services which are acceptable to and qualified by WJ.

10.2         Intellectual Property Indemnification by WJ. In addition to and without limiting WJ’s indemnity obligations in the License Agreement, WJ agrees to defend at its expense any suit brought against AMPTECH by a third party based upon a claim that the Wafers  produced by AMPTECH for WJ infringe any Intellectual Property Rights, if such infringement arises from  AMPTECH’s use of the Process,  WJ Technology, or WJ’s instruction in connection with the manufacture of the Wafers and to pay costs, including attorneys fees, and damages finally awarded in such suit against AMPTECH, provided that WJ is notified within thirty (30) days in writing of the suit and at WJ’s request and at its expense is given and opportunity to control of said suit and all requested reasonable assistance for defense of such claim.

10.3         Damage Mitigation. If a third party notifies either party that the Technology, processes, specifications, or formula of a Party infringes or violates the rights of such third party, then the Parties will cooperate to assure that their actions will respect properly asserted third party Intellectual Property Rights and address such allegations of infringement or other claims in a reasonable manner.

10.4         SOLE INFRINGEMENT LIABILITY. THE FOREGOING PROVISIONS STATE THE ENTIRE LIABILITY OF EITHER PARTY TO THE OTHER WITH RESPECT TO THIRD PARTY INFRINGEMENT CLAIMS OF ANY TYPE BROUGHT AGAINST A PARTY REGARDING PERFORMANCE OF THIS AGREEMENT. WITHOUT LIMITING THE OBLIGATIONS OF EITHER PARTY UNDER SUCH FOREGOING PROVISIONS OR THE PROVISIONS OF THE LICENSE AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, LOST PROFITS) ARISING FROM INFRINGEMENT OR ALLEGED INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS.

10.5         Insurance.  AMPTECH shall acquire and maintain at its sole cost and expense (i) statutory workers’ compensation insurance and employer’s liability insurance, (ii) all risk insurance coverage for physical loss or damage to Wafers while at the Facility or under its control, and until title passes to WJ, and to the tangible personal property provided to AMPTECH in connection with the Process and (iii) product liability, bodily injury, business interruption, casualty and property damage insurance, in a form reasonably acceptable to WJ with a reputable insurance company reasonably acceptable to WJ. The insurance policy shall provide for combined single limit

coverage of not less than $***, and WJ shall be named as an additional insured and loss payee. AMPTECH shall submit certificates of such insurance to WJ (which shall include an agreement by the insurer not to cancel such coverage except upon thirty (30) days prior written notice to WJ) for its approval. AMPTECH shall maintain such insurance coverage in effect for WJ’s benefit throughout the term of this Agreement and for a period of one (1) year from the date of the last delivery of wafers to WJ hereunder. If AMPTECH fails to furnish such certificates of insurance or any required insurance is cancelled for any reason, WJ may, at its option, immediately terminate this Agreement.

11.          CONFIDENTIALITY

11.1         Confidentiality Obligations. The Parties recognize that the Confidential Information of one another constitutes valuable confidential and proprietary information. Accordingly, the Parties agree on behalf of themselves and their respective officers, directors, employees and agents that they shall hold in confidence all Confidential Information of the other party (including the existence of this Agreement and the terms hereof) and not use the same for any purpose other than as set forth in this Agreement nor disclose the same to any other person except to the extent that it is necessary for a Party to enforce its rights under this Agreement or if required by law or any governmental authority at the discretion of a Party (including, without limitation, the Securities and Exchange Commission and any stock exchange or quotation system upon which a Party’s shares or other equity securities may be traded); provided, however, if a Party shall be required by law to disclose any such Confidential Information to any other person, such Party shall give prompt written notice thereof to the other Party and shall minimize such disclosure to the amount required. The Parties acknowledge that violation of this Section 13.1 could cause the other Party irreparable harm and as such each Party agrees and acknowledges that remedies at law for any breach of its obligations under this Section 11.1 are inadequate and that in addition thereto the other party shall be entitled to seek equitable relief, including injunction and specific performance, in the event of any such breach, without the necessity of demonstrating the inadequacy of monetary damages. Processes, data, and other information provided, created, or discovered prior to or during the Term relating to the Wafers and/or the Process(es) or methods for the manufacture of the Wafers whether provided, created, or discovered solely by WJ or AMPTECH or jointly by the parties shall, for purposes of this Agreement, be deemed Confidential Information solely owned by WJ and furnished by WJ to AMPTECH hereunder, and AMPTECH further agrees that such specific Confidential Information shall be accessible on a “need to know” basis only to those AMPTECH employees working on the manufacture of the Wafers.  AMPTECH warrants and represents to WJ that no Confidential Information of WJ will be disclosed to any director of AMPTECH who is a commercial competitor of WJ,, the director’s employee, officer, agent, or any of its affiliates or subsidiaries. The board members of AMPTECH agree to be bound by the confidentiality provisions of this Agreement. Any AMPTECH board member who is a competitor of WJ agrees to recuse themselves from any meeting where Confidential Information is discussed as long as it is not in conflict with their fiduciary responsibility as a board member.

11.2         Excluded Information. The obligations of a Party under  Section 11.1 shall not apply to any information which (a) at the time of disclosure, is generally known to the public, (b) after disclosure, becomes part of the public knowledge (by publication or otherwise) other than by breach of this Agreement by the receiving party, (c) the receiving Party can verify by written documentation was in its possession at the time of disclosure and which was not obtained, directly or indirectly, from the other Party, (d) the receiving Party can verify by written documentation results from research and development by the receiving Party thereof independent of disclosures by the other Party thereof or (e) the receiving Party can prove was obtained from any person who had the legal right to disclose such information, provided that such information was not obtained to the knowledge of the receiving Party thereof by such person, directly or indirectly, from the other Party thereof on a confidential basis. Notwithstanding the foregoing, a Party may disclose Confidential Information of the other Party (a) to its attorneys, accountants, and other professional advisors under an obligation of confidentiality to the other Party, (b) to banks or other financial institutions or venture capital sources for the purpose of raising capital or borrowing money or maintaining compliance with agreements, arrangements, and understandings relating thereto under an obligation of confidentiality to the other Party, and (c) to any person who proposes to purchase or otherwise succeed (by merger, operation of law or otherwise) to all of a Party’s right, title and interest in, to and under this Agreement, if such

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

person is specifically identified to the other Party in advance and such person agrees in writing to maintain the confidentiality of such Confidential Information. The Party disclosing Confidential Information to any third party as permitted by this Agreement shall also be responsible for any failure of such third party to maintain the confidentiality of such Confidential Information. The standard of care required to be observed hereunder shall be not less than the degree of care which a Party uses to protect its own information of a confidential nature.

12.          TERM AND TERMINATION

12.1         Term of Agreement. The term of this Agreement shall be one (1) year from the date of this Agreement unless earlier terminated pursuant to the provisions of this Agreement (the “Term”). The Term is renewable annually by both parties and is to negotiated in good faith 180 days prior to its termination.    If the agreement is not renewed in writing, any activity between the parties after the termination date will be conducted on purchase order terms.

12.2         Termination.

(a)           This Agreement may be terminated immediately by a Party on written notice to the other Party if the other Party defaults on any of its material obligations or conditions of this Agreement which remain uncured for thirty (30)  calendar days, if capable of being cured, after written notice to the defaulting Party specifying the nature of the default.

(b)           A Party shall  have the right to immediately terminate this Agreement by giving written notice of termination to the other Party at any time upon or after: (i)  the filing by the other Party of a petition in bankruptcy or insolvency; (ii)  any adjudication that the other Party is bankrupt or insolvent; (iii)  the filing by the other Party under any law relating to bankruptcy or insolvency; (iv)  the appointment of a receiver for all or substantially all of the property of the other Party; (v)  the making by the other Party of any assignment or attempted assignment for the benefit of creditors; or (vi)  the institution of any proceedings for the liquidation or winding up of the other Party’s business or for the termination of its corporate existence.

(c)           This Agreement may, upon sixty (60) days notice, be terminated by WJ if (i)AMPTECH engages in fraudulent or material intentional misconduct, (ii) the lease of the Leased Facility is terminated, or (ii) WJ is otherwise specifically entitled to immediately terminate this Agreement under any term or provision of this Agreement.

12.3         Effect of Termination.

(a)           If WJ terminates this Agreement, WJ may, at WJ’s sole discretion, terminate delivery of all undelivered, and delivered but unaccepted, Wafers. WJ must compensate AMPTECH for all costs and expenses incurred for work-in-process Wafers.

(b)           In the event of termination or cancellation of this Agreement for any reason, AMPTECH shall promptly return to WJ  any Confidential Information, WJ Technology, and photomasks, equipment, tools, and other property of WJ used to manufacture the Wafers, immediately cease the use thereof and certify to WJ in writing that the same are no longer in use, provided, however, in the event of termination or cancellation of this Agreement for any reason, WJ may require AMPTECH to continue to honor the terms of this Agreement for up to nine (9), ]additional months to allow WJ and AMPTECH to effect an efficient transition of the  photomasks, equipment, tools, and other property to WJ or a third party designated by WJ, provided that if AMPTECH terminates this Agreement for cause, AMPTECH shall not be obligated to provide post termination  services unless WJ cures the default and prepays for each new Purchase Order in advance.

(c)           If WJ terminates this Agreement pursuant to Section 14.2(ii) (fraud) or Section 14.2(iii)(loss of lease), AMPTECH shall be liable to WJ for any reasonable covered costs incurred by WJ in re-procuring the Wafers which shall include all direct costs incurred by WJ to procure the Wafers  from another supplier, including all  non-recurring expenses. AMPTECH shall also be responsible for any indirect costs incurred by WJ.

AMPTECH’s liability under this Section 14.3 shall be limited to $***.  WJ must exercise commercially reasonable efforts to  mitigate damages.

12.4         Survival. The provisions of this Section and Sections  1, 3.7(a) and (d), 4.2, or 9, 10, 11, 13, 14,  and 15.1, 15.5, 15.6, 15.7, 15.11 shall survive any expiration or termination of this Agreement.

13.          DISPUTE RESOLUTION

13.1         Mediation. WJ and AMPTECH shall attempt to settle any claim or controversy, except those related to intellectual property, through consultation and negotiation in good faith and a spirit of mutual cooperation. If those attempts fail, then the dispute will be mediated by a mutually acceptable mediator to be chosen by WJ and AMPTECH within twenty (20) days after written notice by a Party demanding mediation.  Neither Party may unreasonably withhold consent to the selection of a mediator, and WJ and AMPTECH will share the cost of the mediation equally.

13.2         Arbitration. Any dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate, that is not resolved through negotiation or mediation within thirty (30) days of the date of the initial demand by either Party, shall be determined by arbitration in San Jose, California before one arbitrator. The arbitration shall be administered by JAMS pursuant to its Streamlined Arbitration Rules and Procedures. Judgment on the Award may be entered in any court having jurisdiction. This clause shall not preclude parties from seeking provisional remedies in aid of arbitration from a court of appropriate jurisdiction.  The arbitrator may, in the Award, allocate all or part of the costs of the arbitration, including the fees of the arbitrator and the reasonable attorneys’ fees of the prevailing party.

14.          LIMITATION OF LIABILITY

14.1         DISCLAIMER. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY ADDITIONAL WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, ARISING FROM COURSE OF DEALING OR USAGE OF TRADE. IN PARTICULAR, ANY AND ALL WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT ARE HEREBY EXPRESSLY DISCLAIMED.

14.2         LIMITATION OF LIABILITY. EXCEPT FOR BREACH OF OBLIGATIONS RELATING TO FAILURE TO RETURN THE PROCESS OR WJ TECHNOLOGY TO WJ UNDER THE TERMS OF THIS AGREEMENT, INFRINGEMENT, OR VIOLATION OF A PARTY’S INTELLECTUAL PROPERTY RIGHTS ON A BREACH OF OBLIGATIONS RELATING TO CONFIDENTIAL INFORMATION, (1)  IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER PARTY, CUSTOMERS, OR ANY THIRD PARTIES FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, CONSEQUENTIAL, OR SIMILAR DAMAGE OF ANY KIND OR CHARACTER, REGARDLESS OF WHETHER EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND (2)  THE AGGREGATE LIABILITY OF A PARTY FOR ALL CLAIMS HEREUNDER SHALL NOT EXCEED *** DOLLARS ($***).   THIS IS AN ABSOLUTE LIMITATION ON DAMAGES AND MAY NOT BE  INCREASED BY ANY OTHER SECTION OF THIS AGREEMENT, INCLUDING, BUT NOT LIMITED TO SECTION 14.

15.          MISCELLANEOUS

15.1         Applicable Law. The law of the state of California  shall govern this Agreement without regard to choice of law provisions. The Parties agree that the UN Convention for the International Sale of Goods shall not apply. Jurisdiction and venue for litigation of any dispute, controversy, or claim arising out of or in connection with this Agreement will be only in a United States federal court for the Northern District of California or a California state

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

court having subject matter jurisdiction located in San Jose, California or San Francisco, California. Each of the Parties hereby expressly submits to the personal jurisdiction of the foregoing courts located in California, and waives any objection or defense based on personal jurisdiction or venue that might otherwise be asserted to proceedings in such courts.

15.2         Assignment. AMPTECH shall not  assign, sublicense, or otherwise transfer this Agreement or any rights or obligations arising under this Agreement without the prior written approval of WJ, and AMPTECH shall not delegate or subcontract its performance of this Agreement to any third party without the prior written approval of WJ which approval may be granted or withheld in WJ’s sole and absolute discretion.  WJ may assign or transfer this Agreement with the prior written consent of AMPTECH, provided that the assignee or transferee is bound by law or written agreement to WJ’s obligations under this Agreement.

Notification. All notices specifically required to be given under the terms of this Agreement will be in writing and sent to the addresses stated below or to such other address, which is designated in writing by the Party to receive notice. All notices will be deemed to have been given when received by the addressee.

As to AMPTECH:

Name:	Ray Milano	James Black
Function:	President	Orrick, Herrington & Sutcliffe LLP
Tel. no.:	(818) 879-0061	(415) 773-5700
Fax no.:	(818) 865-0917	(415) 773-5759
Address:	5776-D Lindero Canyon Road, #431,	415 Howard Street, 10th Floor
	Westlake Village, California 91362	San Francisco, California 94105
E-mail	rmilano@amptechdesign.com	jblack@orrick.com

Such persons listed above shall be subject to change at any time by AMPTECH with prior written notification to WJ.

As to WJ:

Name:	Mark Knoch	Bruce Diamond	Darrell C. Smith
Function:	VP of Operations	CEO & President	Counsel
Tel. no.:	(408) 577-6229	(408) 577-6222	(813) 229-7600
Fax no.:	(408) 577-6229	(408) 577-6229	(813) 229-1660
Address:	401 River Oaks Parkway	401 River Oaks Parkway	101 East Kennedy Blvd, Suite 2800
	San Jose, CA 95134	San Jose, CA 95134	Tampa, FL 33602
E-mail	Mark.knoch@wj.com	Bruce.diamond@wj.com	dsmith@slk-law.com

15.4         Entire Agreement/Superseded Agreements. This Agreement, which includes the appendixes and other exhibits and attachments hereto, supersedes all prior discussions and writings and constitutes the entire and only contract between the Parties relating to the activities to be performed hereunder.

15.5         No Modification. This Agreement may not be changed, altered, or amended except in writing and signed by duly authorized representatives of all of the Parties

15.6         Environmental Matters. AMPTECH will indemnify and hold WJ harmless from and against any liability, claim, damage, injury, expense, suit, or cause of action, including, but not limited to, reasonable attorneys fees, arising from or caused by any toxic or hazardous substances or chemicals, as those terms are defined by applicable environmental health or safety laws or regulations, which are used in performance of this Agreement by AMPTECH, present in Scrap disposed of or destroyed by AMPTECH, or present on any of the Facilities in or during AMPTECH’s performance of this Agreement, except to the extent present at the time that AMPTECH obtained possession from WJ. AMPTECH will maintain compliance of the Facility with all applicable laws and

have all necessary permits, operating licenses, or authorizations necessary to operate its Facilities under applicable environmental safety or health laws or regulations.  WJ is solely responsible for environment compliance on its facilities.

15.7         Waiver. The failure of any Party to enforce, at any time, or for any period of time, any provision of this Agreement, to exercise any election or option provided herein, or to require, at any time, performance of any of the provisions hereof, will not be construed to be a waiver of such provision, or in any way affect the validity of this Agreement, or any part thereof, or the right of any Party thereafter to enforce each and every such provision.

15.8         Compliance with Laws. AMPTECH agrees to comply with all applicable and reasonable local, state, and federal laws and executive orders and regulations and agrees to defend, indemnify, and hold WJ harmless against any loss, cost, damage, expense (including attorney’s fees), or liability by reason of AMPTECH’s violation.

15.9         Independent Contractor. It is agreed that AMPTECH is an independent contractor for the performance of services under this Agreement, and that for accomplishment of the desired result WJ is to have no control over the methods and means of accomplishment thereof, except as specifically set forth in this Agreement. There is no relationship of agency, partnership, joint venture, employment, or franchise between the Parties.

15.10       Export Control and Governmental Approval.

(a)           The Parties acknowledge that each must comply with all applicable rules and laws in the performance of their respective duties and obligations, including, but not limited to, those relating to restrictions on export and to approval of agreements. AMPTECH will be responsible for obtaining and maintaining all approvals and licenses, including export licenses, permits, and governmental authorizations from the appropriate governmental authorities as may be required, to enable such AMPTECH to fulfill its obligations under this Agreement.

(b)           Each Party agrees that, unless prior written authorization is obtained from the United States Bureau of Industry and Security, it will not export, re-export, or transship, directly or indirectly, any products or technical information that would be in contravention of the Export Administration Regulations then in effect as published by the United States Department of Commerce.

15.11       Non-Solicitation of Employees.   Except as otherwise provided in the Asset Purchase Agreement, during the term of this Agreement, and for a period of six (6) months following expiration or termination, neither WJ nor AMPTECH shall solicit any employee of the other who is or was employed by any organizational unit of the other Party involved with the performance of this Agreement for employment, either directly through any of its employees, or indirectly through any agent or third party such as an recruiting agency or headhunter.

15.12       Force Majeure. Notwithstanding the insurance requirements under Section 12.6 of this Agreement, neither Party shall be liable to pay damages during the Term for any delay or failure in performance, provided such delay or non-performance is due to circumstances outside its reasonable control, including, but not limited to, decrees or restraints of government, acts of God or nature, strikes or other labor disturbances, war, riot, sabotage, fire, earthquake, flooding, power failures or any other cause which cannot reasonably be controlled by such Party (a “Force Majeure Event”). However, the aforesaid shall apply with the restriction that the Party not claiming the Force Majeure Event shall be entitled to terminate this Agreement in writing if the delay or non-performance of the other Party as a result of the Force Majeure Event should last for more than 3 months.  For a Party to claim a Force Majeure Event hereunder, it must notify the other Party within five (5) days of commencement of the Force Majeure Event specifying the nature of the Force Majeure Event and the anticipated length of the Force Majeure Event.  The Party claiming a Force Majeure Event shall use commercially reasonable efforts to investigate, eliminate, avoid or prevent the Force Majeure Event so as to continue performing its obligations under this Agreement.  Under no circumstances shall a Force Majeure event delay WJ’s obligation to pay AMPTECH.

15.13       Section Titles. Section titles as to the subject matter of particular sections herein are for convenience only and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular Sections to which they refer.

15.14       Counterparts and Facsimiles.  This Agreement may be executed in several counterparts and by facsimile, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by duly authorized representations on the date first set forth above.

AMPTECH, INC.	WJ COMMUNICATIONS, INC.
BY:		BY:
TITLE:	TITLE:

APPENDIXES

APPENDIX A- WJ PROCESSES TO BE PROVIDED TO AMPTECH
APPENDIX B- LIST OF PRODUCTS (WAFERS)
APPENDIX C- VOLUMES AND PRICES FOR WAFERS
APPENDIX D- PROCESS RESPONSIBILITIES

Appendix A

WJ Processes to be Provided to AMPTECH

The table below contains the valid WJ Process Specifications. Each modification or change of a parameter leads to a new release of the Process Specification.  This change must be performed in written form and signed by AMPTECH and WJ, respectively.

Description	Process
MESFET ***	X
MESFET ***	X
HFET ***	X
HBT ***	X
HBT ***	X

PCM Measurement Conditions, Pass/Fail-Selection

AMPTECH will perform a PCM test at all lots, each wafer, performed on the process control monitor structure (PCM) located in the scribe line or special test inserts.

A wafer will be classified as having passed if each individual pass/fail parameter listed in the process specification passes on ***% of the mutually agreed upon number of test sites. The pass/fail limits for electrical tests performed on the PCM for each wafer are listed in the relevant process documentation.

If a Wafer fails the acceptance criteria, the Wafer may not be shipped to WJ unless WJ requests that it be shipped.

WJ and AMPTECH shall mutually agree on all applicable PCM tests within *** (***) days following the Effective Date.  If such agreement is not reached within thirty days following the Effective Date, either party may request mediation and arbitration of the issue, in which case each party shall submit its proposed tests to mediation and, if necessary, arbitration as set forth in Section 13.  If the proposals are submitted to arbitration, the arbitrator shall be instructed to select one of the two proposals.

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Appendix B

List of Products (Wafers)

Products	Process	Die X(um)	Die Y(um)	Area(mm^2)	Target Yield
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	MESFET	***	***	***	***
***	HFET	***	***	***	***
***	HFET	***	***	***	***
***	HFET	***	***	***	***
***	Passive	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***
***	HBT 5V	***	***	***	***

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Appendix C

Volumes and Prices for Wafers

All prices under this agreement are to be quoted, billed, and paid for in U.S. Dollars. USD ($).

Prices listed below are quoted per Wafer and include the raw Wafer cost and all other costs, but not IC probing.

Price/Wafer by Process Technology
MESFET	HFET	5V HBT	28V HBT
***	***	***	***

WJ will during the initial term of this Agreement, provide AMPTECH with a purchase order for a minimum of *** per week beginning with the first week that AMPTECH is able to consistently deliver wafers.  This commitment will be reduced by any cancellations under section 7.3.

Wafer probing and or scribe and break prices shall be negotiated in good faith and agreed by the AMPTECH and WJ within *** days following the Effective Date.  If agreement is not reached on such pricing within *** (***) days following the Effective Date, the parties shall submit pricing determination to mediation and, if necessary,  arbitration as set forth in Section 13. The mediator and arbitrators shall be instructed to determine fair market pricing.

AMPTECH and WJ shall confer and prepare a mutually agreed plan (including pricing) for AMPTECH to provide WJ with metalized processing of wafers until such time as WJ can fully qualify an alternative source.  The volume of metalized wafers on a weekly basis shall not exceed a volume that would constrain AMPTECH’s production for other requirements.  If agreement is not reached on such plan and pricing within *** (***) days following the Effective Date, the parties shall submit determination of a plan and proper pricing to mediation and, if necessary,  arbitration as set forth in Section 13.  The mediator and arbitrators shall be instructed to determine fair market pricing.

Lead-Times

Process lead-times from AMPTECH will be established after sixty days of fab operation at   .   days/level.  Device mix releases will be started in the week following receipt.

Hot lots (if lots in-line exceed ***) have a *** cost factor.  Cycle time on hot lots is (—   .     days/level to be established after sixty days of fab operation)

Hand-Carry lots require written acceptance of the wafer fab, and have a *** cost factor.  Cycle time on hand-carry lots is (—   .    days/level to be established after sixty days of fab operation)

Priority lots are subject to acceptance by AMPTECH according to their internal limits.

***         CONFIDENTIAL MATERIAL REDACTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Appendix D

WJ is responsible to provide all documentation and engineering support to enable AMPTECH to use WJ’s Processes in its manufacture of the Wafers.

WJ is responsible for reliability and qualification test costs for all WJ’s products.

  Any future photomask replacement due to damage caused by AMPTECH’s negligence is the responsibility of AMPTECH.  AmpTech and WJ shall review the condition of the photomasks within thirty (30) days following the Effective Date, and shall equitably determine the allocation of costs for the replacement of masks due to normal wear.  If agreement is not reached on such allocation within thirty (30) days following the Effective Date, the parties shall submit the cost allocation determination to mediation and, if necessary,  arbitration as set forth in Section 13.

AMPTECH is responsible for all internal process development costs.

AMPTECH is responsible for processing Wafers and supporting tools to  manufacture of the Wafers.

 AMPTECH is responsible for tool installation, government permits, and Facility costs.

AMPTECH is responsible for tools ongoing maintenance and operating costs.

AMPTECH is responsible for any tools needed strictly for capacity expansion associated with the manufacture of the Wafers.

By the signing of this agreement. AMPTECH shall be responsible for the costs of preparing and filing any  UCC statements required by WJ.

Appendix E

1.1          Appendix E— Qualification Requirements

Process Qualification requirements:  each process technology has specific failure modes unique to that technology and/or methodology.  Other failure modes are generic to materials & structures common in all semiconductor processes.   Process Qualification requires evaluation of the following:

Failure modes specific to the individual technology
Three-temperature DC life test
RF operational endurance test
Passive element tests
Mechanical integrity tests

Documents containing very detailed requirements for MESFET, HFET, and 5V HBT processes have been previously provided to AMPTECH.

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 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:	August 14, 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:	August 14, 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 July 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)

August 14, 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 July 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)

August 14, 2007