**SECURITIES AND EXCHANGE COMMISSION**
 **** **WASHINGTON, D.C. 20549**
 ****
 **FORM 10-K**
 
 (Mark one)
 
 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004.
 
 OR
 
 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission File No. 0-25662
 
 ANADIGICS, Inc.
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 (Exact name of registrant as specified in its charter)
 
 Delaware 22-2582106
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 (State or other jurisdiction of (I.R.S. Employer Identification No.)
 incorporation or organization)
  141 Mt. Bethel Road
 Warren, New Jersey 07059
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 (Address of principal executive offices) (Zip Code)
 
 (908) 668-5000
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 (Registrant's telephone number, including area code)
 
 Securities registered pursuant to Section 12(b) of the Act: None
 
 Securities registered pursuant to Section 12(g) of the Act:
 Common Stock, $0.01 par value
 
 The above securities are registered on the NASDAQ National Market
 
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /
 
 
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated in Part III of this Form 10-K or any amendment to this Form 10-K. /X/
 
 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes /X/ No / /
 
 The aggregate market value of the voting stock held by non-affiliates of the Registrant as of July 3, 2004 was approximately $151 million, based upon the closing sales price of the Registrants common stock as quoted on the NASDAQ National Market on such date.
 
 The number of shares outstanding of the Registrant's common stock as of December 31, 2004 was 33,072,438.
  Documents incorporated by reference: Definitive proxy statement for the Registrant's 2005 annual meeting of shareholders (Part III).
 
  **TABLE OF CONTENTS**
 
 PagePART IItem 1:
Business
3Item 2:
Properties
16Item 3:
Legal Proceedings
17Item 4:
Submission of Matters to a Vote of Security Holders
17PART IIItem 5:
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17Item 6:
Selected Financial Data
17Item 7:
Managements Discussion and Analysis of Financial Condition and
Results of Operations
18Item 7A:
Quantitative and Qualitative Disclosures About Market Risk
24Item 8:
Financial Statements and Supplementary Data
25Item 9:
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
411tem 9A:
Controls and Procedures
41Item 9B:
Other Information
42PART IIIItem 10:
Directors and Executive Officers of the Registrant
43Item 11:
Executive Compensation
43Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
43Item 13:
Certain Relationships and Related Transactions
43Item 14:
Principal Accountant Fees and Services
43PART IVItem 15:
Exhibits, Financial Statement Schedules
43 
 PART 1
 
 ITEM 1. BUSINESS.
  **Background**
 
 **** ANADIGICS, Inc. ("we" or the "Company") was incorporated in Delaware in 1984. Our corporate headquarters are located at 141 Mt. Bethel Road, Warren, New Jersey 07059, and our telephone number at that address is 908-668-5000.
 
 We design and manufacture radio frequency integrated circuit (RFIC) solutions for the wireless and broadband communications markets. Our high frequency RFIC products enable manufacturers of communications equipment to enhance overall system performance and reduce manufacturing cost and time to market. Our products are primarily included in cellular and personal communications service (PCS) phones and base stations, wireless local area networks (WLANs), and cable television infrastructure and set-top boxes. We offer a broad array of products including amplifiers, switches, tuner integrated circuits, photodiodes and integrated RF modules. These integrated circuits perform the transmit and receive functions that are critical to the performance of wireless and broadband communication systems.
 
 In the wireless market, we focus on RFIC solutions for wireless communication handset applications operating over various air interface standards, including Code Division Multiple Access (CDMA), Global System for Mobile communication (GSM), Wideband CDMA (WCDMA), General Packet Radio Service (GPRS) and Enhanced Data rate for GSM Evolution (EDGE). In the broadband markets, our focus is on applications for WLAN systems, cable television (CATV) subscriber products, CATV infrastructure systems, and fiber optic communications systems. We believe we have a competitive advantage in the markets we serve due to our design, development and applications expertise, our superior compound semiconductor technologies, our high-volume, low-cost state-of-the-art manufacturing processes and expertise, and our strong working relationships with leading original equipment manufacturers (OEMs), original design manufacturers (ODMs) and reference design houses (collectively our "market customers").
 
 We design, develop and manufacture RFICs primarily using Gallium Arsenide (GaAs) compound semiconductor substrates with various process technologies, Metal Semiconductor Field Effect Transistors (MESFET), Pseudomorphic High Electron Mobility Transistors (pHEMT), and Heterojunction Bipolar Transistors (HBT).
 
 The quality and reliability of our products results from a comprehensive design, characterization, qualification, and robust manufacturing process. In addition to the manufacturing facility and design team located at our corporate headquarters in Warren, New Jersey, we operate a development center and manufacturing facility in Camarillo, California and development centers in Richardson, Texas; Atlanta, Georgia; Aalborg, Denmark; Taipei, Taiwan; Seoul, Korea and Shanghai, China.
 
 Our design and applications engineering staff is strategically active and engaged with customers during all phases of design and production. This strategy helps our customers streamline their design process and time to market, achieve cost-effective and manufacturable designs, and ensure a smooth transition into high-volume production.
 
 We have two company-owned fabrication facilities (fabs): a state-of-the-art six-inch diameter analog GaAs fab located at our corporate headquarters in Warren, New Jersey, and a two-inch diameter indium phosphide (InP) fab located in Camarillo, California. Our six-inch wafer fab allows us to produce, at a small incremental cost, more than twice the RF die per wafer compared with a four-inch wafer, still used by some of our competition. We believe our strong manufacturing fabrication capability, combined with logistics expertise and innovative product designs, allow us to quickly develop and manufacture products in line with market and customer requirements.
 
 **Industry Background**
 
 Over the last decade, there have been remarkable developments in electronic communications, as evidenced by the emergence of wireless communications, Internet services and digital television services. Radio frequency/microwave and integrated circuit technologies have enabled increases in communications capacity and significant reductions in systems costs. The wireless and broadband communications markets are beneficiaries of current technological trends, including higher frequencies, digital modulation and higher levels of electronic integration.
 
 Wireless communications are growing rapidly and replacing landline telephone services in mature markets and are being built in lieu of landline services in other emerging markets. Worldwide unit sales of cellular/PCS wireless handsets were approximately 610 million in 2004.
 
 Broadband markets are also benefiting from technological changes. Cable television systems are moving from one-way analog signal distribution systems to interactive digital systems offering increased and new video content, Internet connection services and telephony. We estimate that approximately 10 million digital CATV set-top boxes were produced in 2004. The continued build out and upgrading of the cable infrastructure network required a production of approximately 2.8 million amplifier components for line extenders, systems amplifiers and fiber nodes. Additionally, the WLAN market continues to be a bright spot in the worldwide chip marketplace. The demand for increased mobility, seamless communications, internet browsing, and streaming video/audio is driving the need for increased throughput and gaining even greater momentum provided by WLAN modems for the enterprise and home markets. New standards, such as 802.11g, 802.11 b/g as well as dual-band combo products, are accelerating the adoption and expanding the use of WLANs globally. We estimate that approximately 75 million WLAN chipsets, primarily wireless notebooks and access points, were shipped in 2004.
 
 Activity in broadband fiber optic networks is being driven by demand from Internet and corporate users for high-speed data transfer capability resulting in increased deployment of Fiber to the Home (FTTH), Local Area Networks (LAN), Metropolitan Area Networks (MAN), and Storage Area Networks (SAN).
 
 Given these developments, our customers are facing the following challenges and need the following solutions from their suppliers:
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*Shorter cycle times.*In both the wireless and broadband communications markets, manufacturers must bring new subscriber products to market quickly in order to maintain their market position. The development of multi-chip modules, using advanced packaging techniques, and the development of relationships with providers of RF reference designs is imperative;
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*Need for low-cost products.*Wireless handsets and cable set-top boxes are increasingly becoming consumer-driven, commodity products. Component suppliers must be cost effective in order for their market customers to stay competitive; and 
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*Stronger supplier relationships.*The digital, wireless, cable and fiber optic industries are standards-driven. Companies in the communications industry must work very closely with their suppliers in order to develop new products. Companies therefore limit themselves to a small number of suppliers in order to keep their competitive advantages.
 **The GaAs Advantage**
 
 Through our research and development efforts, we have developed expertise in producing cost-effective GaAs-based RFICs for high-volume commercial applications. These circuits offer the performance attributes required for radio frequency/microwave applications that are not easily obtained with silicon-based integrated circuits. GaAs transistors can operate at frequencies greater than silicon transistors, and therefore can handle the requirements of radio frequency/microwave applications. GaAs RFICs have a lower noise figure than silicon-based integrated circuits, providing increased sensitivity, less distortion and interference and better dynamic range, thereby enabling systems to handle a wide range of signal strengths. GaAs is a semi-insulating material that facilitates integration of the passive components required in radio frequency/microwave applications. Finally, GaAs RFICs used in transmitter applications are more power-efficient than silicon-based circuits, allowing for longer battery life or use of smaller batteries.
 
 **The InGaP Advantage**
 
 In the industry, there are two predominant commercially viable types of HBT process technologies. Earlier generations use either beryllium or carbon doping in the base layer and Aluminum Gallium Arsenide (AlGaAs) in the emitter layer. The state-of-the-art for HBT uses carbon doping in the base layer and Indium Gallium Phosphide (InGaP) in the emitter layer.
 
 There are several significant advantages to InGaP. One advantage is stability over a range of temperatures. An InGaP HBT device will experience only an approximate 10% drop in gain over a range of 0 to 100 degrees Celsius, while the gain loss in an AlGaAs device approximates 50%. An InGaP device has much higher reliability than an AlGaAs device, giving the option to run the InGaP device at higher temperatures. These advantages lead to smaller chip sizes and thus lower cost. Finally, InGaP allows for more robust manufacturing because the material has the advantage of a selective etch process not possible with AlGaAs.
 
 The InGaP advantages of performance, reliability and manufacturability led to our decision to develop the worlds first commercially viable 6-inch InGaP HBT process, which was completed in 2000 and complements our GaAs MESFET technology.
 
 **ANADIGICS Strategy**
 
 Our objective is to be a leading supplier of RFICs for the wireless and broadband communications markets. The cornerstone of our strategy is to capitalize on opportunities in the wireless and broadband communications markets by addressing applications that leverage our RFIC design and manufacturing expertise and longstanding relationships with leading companies in these markets. The key elements of this strategy include:
 
 ***Be First-to-Market with Proprietary Value-Added Products***
 
 We intend to continue to design timely, cost-effective RFIC solutions for our target markets. In developing prototypes, the combination of an experienced engineering staff, a "quick-turn" wafer fabrication facility, the flexibility of using both in-house and contracted product assembly, and a world class product testing process generally allow us to develop parts and be ready for customer evaluation in less than one month. This design efficiency contributes to customer satisfaction and allows us to improve product designs rapidly for manufacturing efficiency. We will continue to apply our "best-of-breed" product differentiation strategy, which focuses on developing high-performance and integrated products.
 
 
 ***Capitalize on World Class Manufacturing Capabilities, while Reducing Costs***
 
 We will continue to focus on improving manufacturing performance and customer service, while reducing costs. We believe we can effectively control the critical phases of the production process in order to realize high manufacturing yields, product quality and customer satisfaction. Our six-inch wafer fab provides increased manufacturing capacities and shorter cycle times at a lower incremental cost than four-inch wafer fabs. We believe our strong working relationship with overseas manufacturing subcontractors will allow us to continue to deliver low-cost products to our customers.
 
 ***Forge Strong Customer Relationships***
 
 We have developed strong working relationships with our customers, many of whom are leading manufacturers in their markets. Because our target markets are standards-driven, customer relationships are important. These relationships provide us with product development opportunities and the ability to anticipate future market trends. The rapid feedback received from our customers during the product design phase increases the likelihood that our designs will meet our customers' cost and performance requirements. We believe strengthening our relationships with reference design companies will continue to contribute market share gains within each of the wireless and broadband communications markets.
 
 
 ***Pursue Strategic Alliances and Investments***
 
 We will continue to pursue strategic alliances and investments to expand and improve upon our technologies, industry expertise, products and market share. We expect that these alliances and investments will be complementary to current activities and will enhance our ability to work with leading companies to develop next generation solutions. As new strategic opportunities to increase shareholder value arise, we will continue to monitor and selectively pursue them.
  **Target Markets and Products**
 
 The Company classifies its revenues based upon the end application of the product in which its integrated circuits are used. For the years ended December 31, 2002, 2003 and 2004, wireless applications accounted for approximately 54%, 55% and 50% of total net sales, while broadband applications accounted for approximately 46%, 45% and 50% of total net sales.
 
 ***Wireless Communications***
 
 The wireless communications market is a growing, dynamic market as a result of increasing demand for:
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Portable voice, video and data communications;
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Smaller, lighter handsets offering increased functionality;
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Reliable access and voice quality comparable to land lines;
*
Longer talk-time and standby time; and
*
Wireless access to the Internet. Our RFIC products are used in handsets where small size, multi-band operation and low power consumption are key features. Currently in the United States, the primary digital air interface communications standard is CDMA. Another standard, GSM, is the most widely deployed digital standard on a worldwide basis. We currently offer and continue to bring to market an array of products for both the handset and infrastructure markets for these major air interface standards.
 
 We have developed multiband/multimode InGaP HBT power amplifier (PA) modules for the CDMA and GSM standards. InGaP HBT module technology offers high efficiency, low power consumption and stability over a range of temperatures, as well as a lower total solution cost. This combination allows our customers to build the transmitter section of the wireless handset more efficiently by reducing design complexity and component counts.
 
 Our principal customers in the wireless market include LG Electronics and Kyocera. Of our total net sales in the year ended December 31, 2004, LG Electronics accounted for 15% and Kyocera accounted for 11%, while no other customer in this market accounted for 10% or more of total net sales during 2004.
 
 The following table sets forth information regarding our principal products in the wireless communications market:
 
 **Product**
**Application***Handset Products*Power Amplifier (PA)
Used in RF transmit chain of wireless handset to amplify signal to base station.Single-band PA module
Encapsulates InGaP HBT PA die and certain passive components in multi-layer laminate module. Used primarily in CDMA handsets.Quad-band PA module
Encapsulates InGaP HBT PA die, CMOS bias control chip, and certain passive components in multi-layer laminate module. Used primarily in GSM handsets.PowerPlexerTM
Encapsulates two InGaP HBT PA die, CMOS, bias and power control chip, antenna switch, coupler, harmonic filter and passives in multi-layer laminate module. Used in GSM handsets.RF Switches
Used in wireless handsets and other wireless applications to switch between receive and transmit modes and multiple frequency bands.*Infrastructure Products*Driver Amplifiers
Used in cellular base stations in the transmit chain.Gain Blocks
Used in cellular base stations in the transmit chain. 
 ***Broadband***
 
 The Broadband segment of our business encompasses our key markets in video and data telecommunications systems, primarily consisting of cable television, WLAN and fiber optic applications.
 
 Cable television systems traditionally delivered one-way analog television programming, limited to a few entertainment channels, via a coaxial cable. However, upgraded coaxial cable and hybrid fiber-coax systems are increasingly used to deliver digital content as well as a wide array of interactive video and other services, such as high speed Internet access and telephony. These market trends require system operators to upgrade the bandwidth, quality and functionality of both the system infrastructure and terminal equipment.
 
 Consumer preferences for digital programming, watch-and-record capability and video-on-demand (VoD) has resulted in an increased demand for CATV set-top boxes with advanced features and multiple tuners. Our double conversion tuner RFICs support these enhanced features, and our new active splitter RFICs facilitate the use of multiple tuners per box. Both product lines enable our customers to accelerate and simplify the design of their set-top boxes.
 
 Our CATV line amplifier RFICs are used in infrastructure equipment such as line extenders, distribution amplifiers, system amplifiers and fiber nodes. Including products that operate from power supplies as high as 24 volts, our line amplifier product line supports the stringent performance requirements of the latest high-bandwidth CATV systems. We also provide amplifier RFICs for drop amplifier applications, which provide the final stage of amplification in the CATV system at individual subscriber locations.
 
 Hybrid fiber-coax CATV systems utilize fiber optic lines to a fiber node or subscriber location, at which point the signal is converted from an optical signal to an RF signal. We manufacture photodetector diodes that are used to perform the optical to RF translation. Typically, a photodetector diode will interface to an RF amplifier, like one of our line amplifiers, to drive the local coaxial network.
 
 The following table sets outlines our principal CATV products and their applications:
 
 **Product**
**Application***CATV Set-top Boxes Products*Tuner Upconverters and Downconverters
Used to perform signal amplification and frequency conversion in double-conversion video and data tuners.Active Splitters
Used to split an incoming signal to feed multiple tuners.*CATV Infrastructure Products*Line Amplifiers
Used to distribute RF signals from headends to subscribers.Drop Amplifiers
Used to amplify RF signals at individual subscriber locations.Photodetector Diodes
Used to convert from optical to RF signals. 
 Our principal customers in the cable and broadcast markets are Motorola, Inc. and Scientific Atlanta, which each represented 10% of total net sales in 2004. No other customer in this market accounted for 10% or more of our total net sales in 2004.
 
 In March 2003, we acquired the WLAN power amplifier product line from RF Solutions, headquartered in Atlanta, Georgia as an entrance into the growing WLAN market. The WLAN market is being driven by:
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Demand for wireless data access and portability of wireless access devices; 
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Emergence of several wireless data networking mediums, primarily via personal computers; and 
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New market applications such as consumer electronics and wireless voice over Internet protocol (VoIP).
 Adoption of wireless data networking has been enabled by the introduction of a family of industry standards for WLAN technology that have substantially increased capacity and data rates. The introduction of the 802.11g standard allows the existing 2.4 GHz spectrum to be operated more efficiently with a substantial increase in data rates from the previous one or two megabits per second (Mbps) now up to 54 Mbps. The introduction of the 802.11a standard has enabled the use of the 5 GHz spectrum and substantially increased the available channel capacity. The wireless networking market is further transitioning from products that operate using a single standard to products that support all of the standards using the 2.4 GHz and 5 GHz bands in a variety of combinations. These 802.11a/g dual band products will support the continued growth of the market while substantially diminishing or avoiding frequency interference and network congestion.
 
 The wireless capabilities of WLAN networking products are provided primarily by a semiconductor chipset. A wireless chipset typically contains a radio transceiver, a digital media access controller (MAC), baseband processor and power amplifier to boost the transmit signal, thereby improving range and data throughput. Traditionally, a single power amplifier supported a chipset. However, the market has begun seeking both dual band power amplifiers and power amplifiers with higher levels of integration. This increased integration will provide for smaller size, higher reliability and faster time to market for WLAN systems.
 
 No single customer in the WLAN market was responsible for 10% or more of our total net sales in 2004. The following table sets forth information regarding our principal products in the WLAN market:
 
 **Product**
**Application***Single band Products*2.4 GHz power amplifiers
Used in wireless network interface cards (NIC), embedded PC notebook (mini-PCI) and access point (AP) applications to boost the transmit signal for increased range and data throughput.5 GHz power amplifiers
Used in wireless rich-media applications, such as streaming audio/video, to boost the transmit signal for increased range and data throughput.Dual band power amplifiers
Used in wireless network systems that require seamless transition between frequencies to mitigate interference and congestion. 
 **Marketing, Sales, Distribution and Customer Support**
 
 We primarily sell our products to our direct customers worldwide. We have developed close working relationships with leading companies in the broadband and wireless communications markets. Additionally, we selectively use independent manufacturers' representatives and distributors to complement our direct sales and customer support efforts. In 2004 we continued to evaluate, upgrade and expand our sales representative organization. We believe this is critical to our objective of expanding our customer base, especially as we expand our product portfolio. In addition to our field sales applications support centers in both Taipei, Taiwan and Seoul, South Korea established in 2003, we opened a new office in Shanghai, China in 2004. Our support centers position our resources in close proximity to our existing and potential customers enabling real-time service.
 
 We believe that the technical nature of our products and markets demands an extraordinary commitment to building and maintaining close relationships with our customers. The sales and marketing staff, assisted by the technical staff and senior management, visit prospective and existing customers worldwide on a regular basis. We believe that these contacts are vital to the development of close, long-term working relationships with our customers, and in obtaining regular forecasts, market updates and information regarding technical and market trends.
 
 Our design and applications engineering staff actively communicate with customers during all phases of design and production. We provide our customers with engineering data and up-to-date product application notes, and communicate with our customers' engineers on a regular basis to assist in resolving technical problems on and off site. In most cases the design and applications engineers obtain prototypes from our customers in order to troubleshoot and identify potential improvements to the design in parallel with our customers' efforts. This strategy helps our customers accelerate their design process, achieve cost-effective and manufacturable designs, and ensure a smooth transition into high-volume production.
 
 We believe that reference-design manufacturers in the wireless and broadband market will continue to play an ever-increasing role in the future of these markets. Therefore, we believe it is essential that we maintain strong relationships in partnering with these companies to penetrate these market opportunities.
 
 **Manufacturing, Assembly and Testing**
 
 ***Manufacturing***
 
 We fabricate substantially all of our integrated circuits in our six-inch diameter GaAs wafer fab in Warren, New Jersey and in our two-inch diameter InP fab in Camarillo, California.
 
 Our Warren facility has a 19,000 square foot fab, including 10,000 square feet of Class 100 "clean room" space. Based on physical floor space, weekly production capacity at the Warren facility is approximately 1,200 equivalent six-inch HBT wafers. Based on equipment currently installed, present weekly capacity is 600 equivalent six-inch HBT wafers, although this space can be equipped to expand capacity as market conditions require. On the basis of equivalent four-inch HBT wafers, which is the industry norm, present weekly capacity is 1,350 wafers per week. See "Risk Factors - We may face constraints on our manufacturing capacity which would limit our ability to increase sales volumes."
 
 Our InP fab in Camarillo is a 22,000 square foot facility with 2,000 and 6,000 square feet of fab and assembly clean room, respectively. Production capacity is currently 50 InP wafers per week per shift.
 Our six-inch diameter InGaP HBT process, including a backside VIA hole process, was among the first  in the industry and is the technology platform for our newer-generation PA module wireless applications. The advantages of better performance over a range of temperatures and higher reliability lead to smaller chip sizes and thus lower cost. InGaP also allows for more robust manufacturing because the material has the advantage of a selective etch process not possible with AlGaAs.
 Our wafer processing technologies have been developed for low cost, high yield, rapid throughput and short cycle-time manufacturing. Our GaAs MESFET process uses ion implant variations to optimize performance and yield, allowing us to produce high-linearity, low-noise, receiver integrated circuits or transmitter integrated circuits with high power and efficiency. MESFET is the technology platform underlying the majority of our broadband products.
 
 Our GaAs pHEMT manufacturing process achieves extremely high electron mobility. Devices manufactured using this process have better sensitivity and bandwidth than conventional MESFET devices, and offer better stability at higher frequencies. The pHEMT process is an enabling technology for our wireless switch products.
 
 Our Warren manufacturing processes were first certified as ISO 9001 compliant in December 1993. Since that time, we have updated our compliance to the ISO 9001:2000 upgrade of this standard. In 2004, we also received ISO 14001 certification.
 
 Our manufacturing process technology includes our two-inch InP process in Camarillo. InP applications for discrete active devices are widespread in communications networking, making it the natural starting place for wholesale integration of passive devices for a complete system on a chip. As a semiconductor material, InP can provide all-in-one integrated functionality that includes light generation, detection, amplification, high-speed modulation and switching, as well as passive splitting, combining and routing. The same material can be used to make high-speed modulators, switches, amplifiers and detectors, or just passive waveguides for interconnecting these diverse devices.
 
 ***Assembly***
 
 Fabricated GaAs wafers are shipped to contractors in Asia for packaging into monolithic microwave integrated circuits (MMICs) or for assembly into standard plastic lead frame-based packaging or modules.
 
 The components within mobile phones have become increasingly integrated, enabling the development of ever smaller, lighter, and more efficient phones. However, integration in the RF subsystem at the IC level is considerably more challenging, given that various components require different manufacturing processes for optimal performance. Typical RF processes include pHEMT, MESFET, HBT, and RF CMOS. The choice of process for various RFICs is typically based on the relative weight given to performance (often measured by efficiency and linearity) versus cost. In low-end phones, cost will dominate, and less-efficient, less-costly components will be used. On the other hand, in high-end phones, the emphasis will shift to better performance.
 
 Since the processes cannot be easily or economically integrated onto a single die, multi-chip modules that combine multiple die within a single package have taken hold, enabling the selection of the optimal process technology for each IC within the package, while providing enhanced integration at the system level. These solutions generate significant size and weight reductions in handset component circuitry, while simultaneously increasing the reliability of the components.
 
 A number of challenges, outlined below, are being overcome as we become a fully integrated module manufacturer:
 
 **Design complexity:** Within a cellphone, the RF section arguably represents the greatest design challenge for engineers. Modules place the burden of designing and optimizing RF front-end subsystems on RFIC manufacturers. These manufacturers must focus on providing the optimal IC process (e.g., InGaP HBT for PAs) and then integrate the technology into a well-designed module that also incorporates additional passive and control circuitry. The quality of the RF module design ultimately drives the devices performance and manufacturability.
 
 **Increased cost:** Modules can be substantially more expensive to produce than individual IC components. Modules often require extensive design and engineering expertise, new production processes, and additional assembly costs. In many cases, the necessary components (e.g., discretes and passives) must be purchased from outside vendors. Consequently, the gross margin is generally lower for modules than for discrete RF MMICs.
 
 **Manufacturing challenges:** In addition to the increased costs of designing modules, achieving sufficient yields on new products can be problematic. Previously, RFIC companies had little or no experience in manufacturing modules. As a result, our gross margins were under pressure as we progressed on the learning curve. In order to attain high "final test" yields, the challenge continues to be to achieve high yields in the fab, in assembly, and in test.
 
 
 Modules allow our customers to get their product to market more rapidly at a lower overall end product cost due largely to the reduced parts count and reduction in required engineering effort. We believe we are well positioned to address the shift toward multi-chip modules because we possess both extensive process breadth (a key advantage, as modules typically incorporate numerous process technologies) and a large portfolio of RF expertise (e.g., PAs, switches, transceivers, filters, and discretes).
 
 ***Final Test***
 
 After assembly, packaged integrated circuits are tested prior to shipment to our customers. Increasingly, these test activities are being performed by third-party contractors in Asia.
 
 We outsource a majority of our production RF testing operations, which are performed nearby our module assembly contractors in Asia.  This adds considerable efficiencies to the device manufacturing process in reducing product cycle times and manufacturing costs and supports our initiative to reduce manufacturing costs by lowering test cost per unit.
 
 See "Risk Factors - We depend on foreign semiconductor assembly contractors and a loss of an assembly contractor could result in delays or reductions in product shipment," "The manufacturing of our products could be delayed as a result of the outsourcing of our test operations" and "We may face constraints on our manufacturing capacity which would limit our ability to increase sales volumes."
 
 **Raw Materials**
 
 GaAs wafers, InP wafers, HBT/pHEMT epitaxial wafers, passive components, other raw materials, and equipment used in the production of our integrated circuits are available from a limited number of sources. See "Risk Factors - Sources for certain components, materials and equipment are limited which could result in delays or reductions in product shipments."
 
 **Research and Development**
 
 We have made significant investments in our proprietary processes, including product design, wafer fabrication and integrated circuit testing, which we believe gives us a competitive advantage. Research and development expenses were $29.7 million, $32.1 million, and $33.3 million in 2002, 2003, and 2004, respectively. Our research and development efforts in 2002 and 2003 were primarily focused on improving performance relative to the size of our CDMA products and developing products to compete in the GSM market. In 2003 and 2004, our activities included the continued development and expansion of products offered to the GSM and WLAN markets.
 
 As of December 31, 2004, we had approximately 121 engineers assigned primarily to research and development.
 
 Our wireless power amplifier capability has expanded from plastic-packaged GaAs RF integrated circuit products to RF modules incorporating multiple technologies. This capability is critical to encapsulating RF intellectual property and know-how into a module that may be used to shrink the time-to-market for cellular phone manufacturers. Our RF power amplifier modules use a multi-layer laminate substrate to combine our proprietary InGaP HBT power amplifier integrated circuits with custom-designed CMOS controllers and passive components.
 
 Module integration capability required extending our design tools in several dimensions. Electromagnetic simulation of laminate substrates to design embedded passive components and model parasitic effects were added to our RF design tool set. In addition, the ability to simulate at the module level was greatly enhanced through our partnership with a leading manufacturer of electronic design automation tools.
 
 Additionally, several silicon CMOS components were developed to support our module efforts. We currently do not intend to manufacture this technology in-house, as we believe there will be adequate external foundry capacity available. See "Risk Factors - Sources for certain components, materials and equipment are limited, which could result in delays or reductions in product shipments."
 
 **Customers**
 
 We receive most of our revenues from a few significant customers. See "Risk Factors - We depend on a small number of customers; a loss of or a decrease in purchases and/or change in purchasing patterns by one of these customers would materially and adversely affect our revenues and our ability to forecast revenue."
 
 **Employees**
 
 As of December 31, 2004, we had 424 employees, including five employees in Denmark who were members of the Danish Engineering Union. We believe our labor relations to be good and we have never experienced a work stoppage. During 2004 our workforce decreased by 56 employees, primarily as a result of staff reductions in operations and research and development.
 
 **Competition**
 
 Competition in all of the markets for our current products is intense; competition is on the basis of performance, price and delivery. Our competitors in the wireless market are suppliers of both discrete devices and integrated circuits, and include Hitachi, Ltd., RF Micro Devices, Inc., Skyworks Solutions, Inc. and certain of our customers who design and fabricate their own in-house solutions.
 
 Within the Broadband markets, which include the cable television, WLAN and fiber optic markets, our competitors are also primarily manufacturers of both discrete components and integrated circuits. Our competitors include Analog Devices, Inc., Applied Micro Circuits Corp., Conexant Systems, Inc., Maxim Integrated Products, Inc., Microsemi Corp. and Microtune, Inc., as well as certain of our customers who design and fabricate their own in-house solutions.
 
 
 Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources. Increased competition could adversely affect our revenue and profitability through price reductions or reduced demand for our products. See "Risk Factors - We face intense competition, which could result in a decrease in our products prices and sales."
 
 **Patents, Licenses and Proprietary Rights**
 
 It is our practice to seek U.S. and foreign patent and copyright protection on our products and developments where appropriate and to protect our valuable technology under U.S. and foreign laws affording protection for trade secrets and for semiconductor chip designs. We own 47 U.S. patents and have twelve pending U.S. patent applications in addition to one pending foreign patent application filed under the Patent Cooperation Treaty. The U.S. patents were issued between 1992 and 2004 and will expire between 2009 and 2023.
 
 We rely primarily upon trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities. To protect our trade secrets, technical know-how and other proprietary information, our employees are required to enter into agreements providing for maintenance of confidentiality and the assignment of rights to inventions made by them while in our employ. We have also entered into non-disclosure agreements to protect our confidential information delivered to third parties in conjunction with possible corporate collaborations and for other purposes. See "Risk Factors - We may not be successful in protecting our intellectual property rights or in avoiding claims that we infringed on the intellectual property rights of others."
 
 **Environmental Matters**
 
 Our operations are subject to federal, state and local environmental laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. These laws, regulations or ordinances may impose liability for the cost of remediating, and for certain damages resulting from, sites of past releases of hazardous materials. We believe that we currently conduct, and have conducted, our activities and operations in substantial compliance with applicable environmental laws, and that costs arising from existing environmental laws will not have a material adverse effect on our results of operations. We cannot assure you, however, that the environmental laws will not become more stringent in the future or that we will not incur significant costs in the future in order to comply with these laws. See "Risk Factors - We are subject to stringent environmental regulation both domestically and abroad."
 
 **Available Information**
 
 Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website ( www.anadigic s .com ) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.
  RISK FACTORS
 
 CERTAIN STATEMENTS IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS (AS THAT TERM IS DEFINED IN THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) THAT INVOLVE RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT WILL INCLUDE WORDS SUCH AS WE "BELIEVE", "ANTICIPATE", "EXPECT" OR WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE OUR FUTURE PLANS, OBJECTIVES, ESTIMATES OR GOALS ARE FORWARD-LOOKING STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS AND DEVELOPMENTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS PRESENTED HEREIN INCLUDE THE RISK FACTORS DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
  IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN ANADIGICS, INC. AND IN ANALYZING OUR FORWARD-LOOKING STATEMENTS.
 
 **Risks Related to ANADIGICS**
 
 **We have a history of recent losses, and expect to continue to incur losses.**
 
 We have incurred operating and net losses in each of the three years in the period ended December 31, 2004 and expect to continue to incur losses in 2005. The markets for our products weakened substantially in 2001. The downturn from 2000 levels reflected a reduction in capital spending by many of our customers and lower end consumer demand.
 
 Although the company has gained increased market acceptance for certain of its products in 2004, the market for our products remains weak. We cannot assure you as to whether or when we will become profitable again. If the recent trend in our net losses does not reverse, either because the economy does not improve or because we underperform, our ability to compete in a very difficult market may be materially and adversely affected.
 
 **Our results of operations can vary significantly.**
 
 The semiconductor industry has been cyclical, seasonal and subject to significant downturns. Since the beginning of 2001, the industry has experienced market weaknesses that have created lower order demand, production overcapacity, high inventory levels, and accelerated declines in average selling prices for our products, which is expected to continue in the future. These elements have continued to negatively affect our operating results.
 
 Our results of operations have been subject to significant quarterly fluctuations. As a result, we may experience substantial period-to-period fluctuations in future operating results. Investors should not rely on our results of operations for any previous period as an indicator of what results may be for any future period.
  **Our decline in revenue and underutilized manufacturing capacity have adversely affected our gross margins and profitability.**
 
 Our manufacturing infrastructure and capacity were designed to address significantly higher volume levels and consequently we have underutilized manufacturing capacity. Many of our expenses, particularly those relating to capital equipment and manufacturing overhead, are fixed. Accordingly, our fixed production costs increase as a percentage of revenues during a period of declining revenues, which adversely affects our gross margin and profitability. In the future, improved utilization of our manufacturing capacity will primarily depend on continued growth in demand for our wireless products. Our ability to reduce expenses is further constrained because we must continue to invest in research and development in order to maintain our competitive position.
 
 **We depend on a small number of customers; a loss of or a decrease in purchases and/or change in purchasing patterns by one of these customers would materially and adversely affect our revenues and our ability to forecast revenue.**
 
 We receive most of our revenues from a few significant customers and their subcontractors. Sales to LG Electronics, Kyocera, Motorola, Inc. and Scientific Atlanta accounted for 15%, 11%, 10% and 10%, respectively, of total net sales during 2004. Sales to our greater than 10% customers have exceeded 45% of total revenues in each of the last three years. Our operating results have been materially and adversely affected in the past by the failure of anticipated orders to be realized and by deferrals or cancellations of orders as a result of changes in customer requirements. If we were to lose LG Electronics, Kyocera, Motorola, Scientific Atlanta or another major customer, or if sales to these customers were to decrease materially, results of operations would be materially and adversely affected.
 
 Several of our customers have reduced the lead times on orders placed with us for our products. While this trend has enabled us to reduce our inventories, it also restricts our ability to forecast future revenues. We cannot predict whether a change in order demand patterns or lead times from customers will take place.
 
 **We will need to keep pace with rapid product and process development and technological changes as well as product cost reductions to be competitive.**
 
 Rapid changes in both product and process technologies characterize the markets for our products. Because these technologies are continually evolving, we believe that our future success will depend, in part, upon our ability to continue to improve the efficiencies of our product and process technologies and rapidly develop new products and process technologies. If a competing technology emerges that is, or is perceived to be, superior to our existing technology and we are unable to develop and/or implement the new technology successfully or to develop and implement a competitive and economic alternative technology, our results of operations would be materially and adversely affected. We will need to make substantial investments to develop these enhancements and technologies, and we cannot assure investors that funds for these investments will be available or that these enhancements and technologies will be successful.
 
 **Our products have experienced rapidly declining unit prices.**
 
 In each of the markets where we compete, prices of established products tend to decline significantly over time. Accordingly, in order to remain competitive, we believe that we must continue to develop product enhancements and new technologies that will either slow the price declines of our products or reduce the cost of producing and delivering our products. If we fail to do so, our results of operations and financial condition would be materially and adversely affected.
 
 **The variability of our manufacturing yields may affect our gross margins.**
 
 Our manufacturing yields vary significantly among products, depending on the complexity of a particular integrated circuits design and our experience in manufacturing that type of integrated circuit. We have experienced difficulties in achieving planned yields in the past, particularly in pre-production and upon initial commencement of full production volumes, which have adversely affected our gross margins.
 
 Regardless of the process technology used, the fabrication of integrated circuits is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous integrated circuits on each wafer to be nonfunctional, thereby reducing yields. These difficulties can include:
 
 ·
defects in masks, which are used to transfer circuit patterns onto our wafers; ·
impurities in the materials used; ·
contamination of the manufacturing environment; and ·
equipment failure. 
 Many of our manufacturing costs are relatively fixed and average selling prices for our products tend to decline over time. Therefore, it is critical for us to improve the number of shippable integrated circuits per wafer and increase the production volume of wafers in order to maintain and improve our results of operations. Yield decreases can result in substantially higher unit costs, which could materially and adversely affect our operating results and have done so in the past. We cannot assure you that we will not suffer periodic yield problems, particularly during the early production of new products or introduction of new process technologies. In either case, our results of operations and financial condition could be materially and adversely affected.
 
 **We depend on foreign semiconductor assembly contractors and a loss of an assembly contractor could result in delays or reductions in product shipment.**
 
 We do not assemble our integrated circuits or multi-chip modules. Instead, we provide the integrated circuit die and, in some cases, packaging and other components to assembly vendors located primarily in Asia. We maintain two qualified service suppliers for each assembly process. If we are unable to obtain sufficient high quality and timely assembly service, or if we lose one of our current assembly vendors, or if we experience delays in transferring our production between assembly vendors, or if means of transportation to our vendors are interrupted, we would experience delays or reductions in product shipment, and/or reduced product yields, that could materially and adversely affect our results of operations and financial condition.
 
 **The manufacturing of our products could be delayed as a result of the outsourcing of our test operations.**
 
 We outsource most of the testing of certain of our products to test houses or vendors overseas, primarily in Asia. The failure of these test houses or other third parties to maintain our standards of testing or complete the testing process of our products in a timely manner, could subject us to delays in manufacturing and in the delivery of products to customers, which could have a material adverse effect on our results of operations and financial condition. In addition to the test houses, we also test some of our products internally.
 
 **The short life cycles of some of our products may leave us with obsolete or excess inventories.**
 
 The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed. For example, we estimate that current life cycles for cellular and PCS telephone handsets, and in turn our cellular and PCS products, are approximately 12 to 24 months. Products with short life cycles require us to manage production and inventory levels closely. We cannot assure investors that obsolete or excess inventories, which may result from unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed, will not affect us beyond the inventory charges taken in the past.
 
 **Our announced restructuring plans may have insufficiently addressed market conditions.**
 
 In 2002 and 2003, we announced restructuring plans in response to a sharp downturn in our industry. Under our restructuring plans, we have incurred charges relating to reductions in our workforce, impairments of certain manufacturing and research fixed assets, and the consolidation of facilities. From January 1, 2001 to December 31, 2004, our workforce was reduced by over 25%, primarily through restructuring and cost reduction initiatives. We may have incorrectly anticipated the extent of the long-term market decline for our products and services and we may be forced to restructure further or may incur further operating charges due to poor business conditions.
 
 **We face intense competition, which could result in a decrease in our products prices and sales.**
 
 The semiconductor industry is intensely competitive and is characterized by rapid technological change. We compete primarily with manufacturers of discrete gallium arsenide and silicon semiconductors and with manufacturers of gallium arsenide and silicon integrated circuits. We expect increased competition from:
 
 ·
other gallium arsenide integrated circuit manufacturers who may replace us as a supplier to our market customers or otherwise dilute our sales to them; ·
silicon analog integrated circuit manufacturers; and ·
companies which may penetrate the radio frequency/microwave integrated circuit communications market with other breakthrough technologies. 
 Increased competition could result in:
 
 ·
decreased prices of our integrated circuits; ·
reduced demand for our products; and ·
a reduction in our ability to recover development engineering costs. 
 Any of these developments could materially and adversely affect our results of operations and financial condition.
 
 Most of our current and potential competitors, including Hitachi Ltd., Maxim Integrated Products Inc., Microtune Inc., Motorola, RF Micro Devices Inc. and Skyworks Solutions, Inc. have significantly greater financial, technical, manufacturing and marketing resources than we do. We cannot assure investors that we will be able to compete successfully with existing or new competitors.
 
 **We may not have sufficient cash flow to make payments on our convertible senior unsecured notes and any other debt we may incur.**
 
 Our ability to pay principal and interest on our $84.7 million in outstanding convertible senior unsecured notes, $46.7 million of which are due in November of 2006 and the remainder of which are due in October of 2009, and our other debt and to fund our planned capital expenditures depends on our future operating performance. Our future operating performance is subject to a number of risks and uncertainties that are often beyond our control, including general economic conditions and financial, competitive and regulatory factors. Consequently, we cannot assure investors that we will have sufficient cash flow to meet our liquidity needs.
 
 **We face a risk that capital needed for our business will not be available when we need it.**
 
 ****
 In the future, we may need to access sources of financing to fund our growth. Taking into consideration our cash balance including marketable securities of $104.1 million at December 31, 2004 and our $84.7 million in outstanding convertible senior notes, $46.7 million of which are due in November of 2006 and the remainder of which are due in October of 2009, we believe that our existing sources of liquidity, together with cash expected to be generated from operations, will be sufficient to fund our research and development, capital expenditure, working capital and other financing requirements for at least the next twelve months.
 
 However, there is no assurance that the capital required to fund these expenses will be available in the future. Conditions existing in the U.S. capital markets when we seek financing, as well as the then current condition of the Company will affect our ability to raise capital, as well as the terms of any financing. We may not be able to raise enough capital to meet our capital needs on a timely basis or at all. Failure to obtain capital when required would have a material adverse effect on the Company.
 
 In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital resources. We cannot assure you that the capital required to fund these investments and acquisitions will be available in the future.
 
 **We may pursue selective acquisitions and alliances and the management and integration of additional operations could be expensive and could divert management time and acquisitions may dilute the ownership of our current shareholders.**
 
 As part of our strategy, we will selectively pursue acquisitions and alliances. Our ability to complete acquisitions or alliances is dependent upon, and may be limited by, the availability of suitable candidates and capital. In addition, acquisitions and alliances involve risks that could materially adversely affect our operating results, including the management time that may be diverted from operations in order to pursue and complete such transactions and difficulties in integrating and managing the additional operations and personnel of acquired companies. We cannot assure investors that we will be able to obtain the capital necessary to consummate acquisitions or alliances on satisfactory terms, if at all. Further, any businesses that we acquire will likely have their own capital needs, which may be significant, which we could be called upon to satisfy independent of the acquisition price. Future acquisitions or alliances could result in additional debt, equity, costs and contingent liabilities, all of which could materially adversely affect our results of operations and financial condition. Any such additional debt could subject us to substantial and burdensome covenants and any such equity could be materially dilutive to existing stockholders. The growth that may result from future acquisitions or alliances may place significant strains on our resources, systems and management. If we are unable to effectively manage such growth by implementing systems, expanding our infrastructure and hiring, training and managing employees, our ability to offer our products could be materially harmed.
 
 **We depend heavily on key personnel.**
 
 Our success depends in part on keeping key technical, marketing, sales and management personnel. We must also continue to attract qualified personnel. The competition for qualified personnel is intense, and the number of people with experience, particularly in radio frequency engineering, integrated circuit design, and technical marketing and support, is limited. We cannot be sure that we will be able to attract and retain other skilled personnel in the future.
 
 **Our international sales and operations involve foreign exchange risks.**
 
 Sales to customers located outside North America (based on shipping addresses and not on the locations of ultimate end users) accounted for 46%, 49% and 61% of our net sales for the years ended December 31, 2002, 2003, and 2004 respectively. We expect that revenues derived from international sales will continue to represent a significant portion of our net sales.
 
 In addition, independent third parties located in Asia supply a substantial portion of the starting wafers and packaging components that we use in the production of gallium arsenide integrated circuits, and assemble and test nearly all of our products.
 
 Due to our reliance on international sales and foreign suppliers, assemblers and test houses, we are subject to risks of conducting business outside of the United States, including primarily those arising from currency fluctuations, which could affect the price of our products and/or the cost of producing them.
 
 **Sources for certain components, materials and equipment are limited, which could result in delays or reductions in product shipments.**
 
 We do not manufacture any of the starting wafers, packaging or passive components used in the production of our gallium arsenide integrated circuits. Wafers and packaging components are available from a limited number of sources. If we are unable to obtain these wafers or components in the required quantities and quality, we could experience delays or reductions in product shipments, which would materially and adversely affect our results of operations and financial condition.
 
 We depend on a limited number of vendors to supply equipment used in our manufacturing processes. When demand for semiconductor manufacturing equipment is high, lead times for delivery of such equipment can be substantial. We cannot assure investors that we would not lose potential sales if required manufacturing equipment is unavailable and, as a result, we are unable to maintain or increase our production levels.
 
 **We may face constraints on our manufacturing capacity which would limit our ability to increase sales volumes.**
 
 We believe that our six-inch wafer fabrication facility, the expansion of which was completed in June of 2002, should be able to satisfy our forecasted production needs. However, if production volumes were to increase significantly from expected levels, we might be required to hire, train and manage additional production personnel in order to successfully increase production capacity at our facility. We cannot assure investors that we would be able to implement these changes successfully. A delay for any reason in increasing capacity would limit our ability to increase sales volumes. In addition, if we fail to increase production and do not have sufficient capacity to satisfy the demand for our products, our relationships with customers could be harmed.
 
 **We may face interruptions in our manufacturing processes.** ****
  Our manufacturing operations are complex and subject to disruption, including for causes beyond our control. The fabrication of integrated circuits is an extremely complex and precise process consisting of multiple steps. It requires production in a highly controlled, clean environment. Minor impurities, contamination of the clean room environment, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, defects in equipment or materials, human error, or a number of other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to malfunction. Because our operating results are highly dependent upon our ability to produce integrated circuits at acceptable manufacturing yields, these factors could have a material adverse effect on our business. In addition, we may discover from time to time defects in our products after they have been shipped, which may require us to replace such products.
 
 Additionally, our operations may be affected by lengthy or recurring disruptions of operations at any of our production facilities or those of our subcontractors. These disruptions may include electrical power outages, fire, earthquake, flooding, war, acts of terrorism, or other natural or man-made disasters. Disruptions of our manufacturing operations could cause significant delays in shipments until we are able to shift the products from an affected facility or subcontractor to another facility or subcontractor. In the event of such delays, we cannot assure investors that the required alternative capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternative wafer production or assembly and test capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through external manufacturing or similar arrangements with others.
 
 Due to the highly specialized nature of the gallium arsenide integrated circuit manufacturing process, in the event of a disruption at the Warren, New Jersey semiconductor wafer fabrication facility, alternative gallium arsenide production capacity would not be immediately available from third-party sources. These disruptions could have a material adverse effect on our business, financial condition and results of operations.
 
 **We are subject to stringent environmental regulation both domestically and abroad.**
 
 We are subject to a variety of federal, state and local requirements governing the protection of the environment. These environmental regulations include those related to the use, storage, handling, discharge and disposal of toxic or otherwise hazardous materials used in or resulting from our manufacturing processes. Failure to comply with environmental laws could subject us to substantial liability or force us to significantly change our manufacturing operations. In addition, under some of these laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated, even if we did not cause the contamination.  Although we are aware of contamination resulting from historical third-party operations at one of our facilities, a prior owner has been performing, and paying for the costs associated with, remediation of this property pursuant to an agreement with the state environmental regulatory authority. However, we cannot assure you that such prior owner will continue to do so or that we will not incur any material costs or liabilities associated with compliance with environmental laws in the future.
 
 **We may not be successful in protecting our intellectual property rights or in avoiding claims that we infringed on the intellectual property rights of others.**
 
 Our success depends in part on our ability to obtain patents and copyrights, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. As is typical in the semiconductor industry, we have been notified, and may be notified in the future, that we may be infringing on certain patent and/or other intellectual property rights of others. We cannot assure investors that we will not be subject to patent litigation to defend our products or processes against claims of patent infringement or other intellectual property claims. Any such litigation could result in substantial costs and diversion of our resources. If we determine that we have infringed on the intellectual property rights of others, we cannot assure investors that we would be able to obtain any required licenses on commercially reasonable terms.
 
 In addition to patent and copyright protection, we also rely on trade secrets, technical know-how and other non-patented proprietary information relating to our product development and manufacturing activities, which we seek to protect, in part, by confidentiality agreements with our collaborators and employees. We cannot assure investors that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.
 
 **Provisions in our governing documents and our shareholders rights agreement could discourage takeovers and prevent shareholders from realizing an investment premium.**
 
 ****
 Certain provisions of our articles of incorporation and by-laws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our Company. These provisions include the ability of the board of directors to designate the rights and preferences of preferred stock and issue such shares without shareholder approval, our staggered board of directors, and our advance notice requirements for stockholder proposals and director nominations. In addition, the Company has adopted a shareholders rights agreement that may make it more difficult and expensive for a third party to acquire the Company. Any of the foregoing could limit the price that certain investors might be willing to pay in the future for shares of our common stock.
 
 **We have had significant volatility in our stock price and it may fluctuate in the future. Therefore, the ability to sell shares of common stock at or above the price paid for them may be difficult.**
 
 The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including:
 
  our performance and prospects;
 the performance and prospects of our major customers;
 the depth and liquidity of the market for our common stock;
 investor perception of us and the industry in which we operate;
 changes in earnings estimates or buy/sell recommendations by analysts;
 general financial and other market conditions; and
 domestic and international economic conditions. 
 Public stock markets have experienced, and are currently experiencing, extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may materially and adversely affect the market price of our common stock.
 
 In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.
 
 ITEM 2. PROPERTIES.
 
 Our executive offices and primary fabrication facility are located at 141 Mt. Bethel Road, Warren, New Jersey 07059. We currently lease space in several buildings in Warren, New Jersey, all of which are located in the same industrial park. Approximately 150,000 square feet of manufacturing and office space is occupied in a building located at 141 Mt. Bethel Road in Warren, New Jersey under a twenty-year lease expiring on December 31, 2016. Approximately 92,500 square feet of office and laboratory space is leased at 35 Technology Drive in Warren, New Jersey under a twelve-year lease, which expires on May 1, 2005. We have moved out of this space and over half of the space at 35 Technology Drive has been sublet in order to reduce costs. Additionally, we lease an approximately 22,000 square foot building in Camarillo, California. The lease expires on July 31, 2005; however the term may be extended up to two times for additional two-year periods.
 
 
 We also lease approximately 36,700 square feet of office space in the following locations: Richardson, Texas; Atlanta, Georgia; San Jose California; Aalborg, Denmark; Rehovot, Israel; Taipei, Taiwan; Shanghai, China; and Seoul, South Korea under lease agreements with remaining terms ranging from seven months to two years that can be extended, at our option. The space in Rehovot, Israel has been sublet in order to reduce costs.
 
 ITEM 3. LEGAL PROCEEDINGS.
 
 The Company is a party to litigation arising out of the operation of its business. We believe that the ultimate resolution of such litigation should not have a material adverse effect on our financial condition, results of operation or liquidity.
 
 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
 
 No matters were submitted to a vote of the Companys security holders during the fourth quarter of 2004.
 
 
 PART II
 
 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
 Our $0.01 par value Common Stock, ("Common Stock") has been quoted on the NASDAQ National Market under the symbol "ANAD" since the commencement of trading on April 21, 1995 following our initial public offering of our Common Stock. The following table sets forth for the periods indicated the high and low sale prices for our Common Stock.
 
 High

LowCalendar 2004Fourth Quarter

$3.92

$2.65Third Quarter


5.15


3.21Second Quarter


7.04


4.17First Quarter


9.11


5.65Calendar 2003Fourth Quarter

$
7.38

$
4.52Third Quarter


5.65


2.98Second Quarter


3.72


1.81First Quarter


2.95


1.69 
 As of December 31, 2004, there were 33,072,438 shares of Common Stock outstanding and 568 holders of record of the Common Stock.
 
 We have never paid cash dividends on our capital stock. We currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future.
 
 See also "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" under Part III, Item 12 of this report.
 
 ITEM 6. SELECTED FINANCIAL DATA.
 
 The selected financial data set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and our financial statements, related notes and other financial information included herein. The selected consolidated financial data set forth below as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003, and 2002 have been derived from our audited financial statements included herein. The selected consolidated financial data set forth below as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 have been derived from our audited financial statements that are not included herein or incorporated by reference herein. Our historical results are not necessarily indicative of the results that may be expected for any future period.
 2000

2001

2002

2003

2004RESULTS OF OPERATIONSNet sales

$
172,268

$
84,765

$
82,564

$
75,212

$
91,350Gross profit (loss)


82,797


(2,932
)

7,262


3,285


13,995Operating income (loss)


16,796


(85,986
)

(65,565
)

(50,998
)

(41,822
)Income (loss) before income taxes


28,596


(82,782
)

(52,183
)

(51,139
)

(43,082
)Net income (loss)


18,892


(107,120
)

(55,886
)

(50,757
)

(43,082
)Earnings (loss) per share:Basic

$
0.64

$
(3.54
)
$
(1.83
)
$
(1.65
)
$
(1.33
)Diluted

$
0.60

$
(3.54
)
$
(1.83
)
$
(1.65
)
$
(1.33
)BALANCE SHEET DATA:Total cash and marketable securities

$
166,161

$
200,095

$
155,518

$
121,630

$
104,051Working capital


179,987


132,062


110,151


81,100


89,517Total assets


352,473


346,914


255,671


207,898


185,895Total capital lease obligations


250


94


-


90


18Long-term debt, including current portion


3,000


100,244


66,700


66,700


84,700Total stockholders equity


328,832


226,636


171,088


121,046


84,615   ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
 OVERVIEW
 
 We were organized in 1984 and initially focused on the development and manufacture of GaAs integrated circuits for low-volume defense and aerospace applications. In 1988 we began shifting our strategy to focus on radio frequency/microwave communications systems for high-volume applications, and began production for these applications in 1989. In 1992 we introduced integrated circuits for the cable television market. In late 1994 we entered the wireless communications market with the introduction of cellular telephone integrated circuits. In 2001 we introduced our InGaP HBT power amplifier modules to the wireless communications market and in 2003 expanded into the WLAN power amplifier marketplace.
 
 We strive to achieve market advantage through the application of our radio frequency/microwave design and application knowledge. With our design expertise we have led the industry with the introduction of innovative products. Recent examples include quad-band GSM/GPRS power amplifiers with integrated power control, high efficiency low power (HELP  ) 3mm x 3mm CDMA PA modules, wideband CDMA power amplifier modules, PowerPlexer  integrated GSM front end modules, active splitter integrated circuits for cable infrastructure and set-top box applications and high output 802.11 b/g WLAN power amplifier modules, all of which offer greater levels of product performance and reduce manufacturers' production costs.
 
 We aim to achieve cost advantages through the scale and efficiency of our manufacturing operations. During 1999 we began production in our six-inch analog GaAs wafer fabrication facility, which we believe was among the first six-inch analog GaAs wafer fabrication facility in our industry. Using a six-inch wafer allows us to produce, at a small incremental cost, more than twice the integrated circuit dice per wafer than can be produced from the industry norm four-inch wafer.
 
 We have fixed expenses particularly relating to capital equipment and manufacturing overhead. Accordingly, decreases in revenue result in our fixed production costs increasing as a percentage of revenue, which adversely affects our gross margin and profitability. We will continue to invest in selected strategic research and development programs to maintain our competitive position.
 
 We resumed revenue growth in 2004 primarily due to increased demand for our broadband products for the Wireless LAN (WLAN) market consisting of our power amplifiers and for the cable subscriber and infrastructure markets consisting of our newer broadband RF integrated circuits. We also experienced increased demand for our wireless products, while at a lesser degree than the stronger revenue growth in broadband, consisted of our newer and smaller power amplifier modules having lower average selling prices than those offered in the prior year.
 
 We believe our markets are, and will continue to remain, competitive, which could result in continued quarterly volatility to our revenue stream and therefore cause continued fluctuations in our profitability. The ongoing market shift to newer and smaller power amplifier modules will continue to influence average selling prices to trend downward, which could adversely affect our gross margin and profitability.
 
 We have only one reportable segment. For financial information related to such segment and certain geographic areas, see Note 5 to the accompanying financial statements.
 
 CRITICAL ACCOUNTING POLICIES
 
 GENERAL
 
 We believe the following accounting policies are critical to our business operations and the understanding of our results of operations. Such accounting policies may require management to exercise a higher degree of judgment and make estimates used in the preparation of our consolidated financial statements.
 
 REVENUE RECOGNITION
 
 Production revenue is recorded when products are shipped to customers pursuant to a purchase order. We charge customers for the costs of certain contractually-committed inventories that remain at the end of a product's life. Cancellation revenue is recognized when cash is received. The value of the inventory related to cancellation revenue may, in some instances, have been reserved during prior periods in accordance with our inventory obsolescence policy.
 
 WARRANTY COSTS
 
 We provide for potential warranty claims by recording a current charge to income. We estimate potential claims by examining historical returns and other information deemed critical and provide for an amount which we believe will cover future warranty obligations for products sold during the year. The accrued liability for warranty costs is included in accrued liabilities in the consolidated balance sheets.
 
 LONG-LIVED ASSETS
 
 Long-lived assets include fixed assets, goodwill and other intangible assets. We regularly review these assets for indicators of impairment and assess the carrying value of the assets against market values. When an impairment exists, we record an expense to the extent that the carrying value exceeds fair market value.
 
 Goodwill and intangibles impairment
 We have intangible assets related to goodwill and other acquired intangibles. Significant judgements are involved in the determination of the estimated useful lives for our other intangibles and whether the goodwill or other intangible assets are impaired. In assessing the recoverability of goodwill and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets.
 
 Impairment of long-lived assets
 We record impairment losses on long-lived assets used in operations or expected to be disposed of when events and circumstances indicate that the undiscounted cash flows estimated to be generated by these assets is less than the carrying amounts of those assets. Management considers sensitivities to capacity, utilization and technological developments in making its assumptions.
 
 DEFERRED TAXES
 
 We record a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. During 2001, we determined that it was no longer more likely than not that we would be able to realize all or part of our net deferred tax asset in the future, and an adjustment to provide a valuation allowance against the deferred tax asset was charged to income. We continue to maintain a full valuation allowance on our deferred tax assets.
 
 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, an adjustment to the deferred tax asset would increase income in the period such determination was made.
 
 INVENTORY
 
 Inventories are valued at the lower of cost or market ("LCM"), using the first-in, first-out method. In addition to LCM limitations, we reserve against inventory items for estimated obsolescence or unmarketable inventory. Our reserve for excess and obsolete inventory is primarily based upon forecasted short-term demand for the product and any change to the reserve arising from forecast revisions is reflected in cost of sales in the period the revision is made.
 
 ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
 We maintain an allowance for doubtful accounts for estimated losses resulting from customers' failure to make payments. If the financial condition of our customers were to erode, making them unable to make payments, additional allowances may be required.
 
 RESULTS OF OPERATIONS
 
 The following table sets forth statements of operations data as a percentage of net sales for the periods indicated:
 2002

2003

2004Net sales


100.0
%

100.0
%

100.0
%Cost of sales


91.2


95.6


84.7Gross profit


8.8


4.4


15.3Research and development expense


36.0


42.7


36.5Selling and administrative expenses


25.9


25.8


24.6Restructuring and other charges


6.1


1.2


-Asset impairment charges


10.5


-


-Goodwill impairment charge


9.7


-


-Purchased in-process R & D


-


2.5


-Operating loss


(79.4
)

(67.8
)

(45.8
)Interest income


7.7


4.4


2.4Interest expense


(6.2
)

(5.0
)

(4.5
)Impairment of investments


(0.5
)

-


-Gain on repurchase of Convertible notes


15.2


-


0.4Other income


-


0.4


0.3Loss before income taxes


(63.2
)

(68.0
)

(47.2
)Benefit from income taxes


(5.2
)

(0.5
)

-Loss before cumulative effect of accounting change


(58.0
)

(67.5
)

(47.2
)Cumulative effect of accounting change


(9.7
)

-


-Net loss


(67.7
%)

(67.5
%)

(47.2
%)
   2004 COMPARED TO 2003
 
 NET SALES. Net sales during 2004 increased 21.5% to $91.3 million, compared to $75.2 million for 2003. The sales improvement was primarily due to an increase in demand for Broadband products, particularly our Wireless LAN (WLAN) power amplifiers used in wireless PC access and RF integrated circuits used in both cable subscriber and infrastructure applications and the remainder to demand for our GSM power amplifiers used in wireless handsets and hand-held devices.
 
 
 Sales during 2004 of RF integrated circuits used for broadband applications increased 36.5% to $46.0 million from $33.7 million in 2003. The increase was primarily due to increased volumes of our power amplifiers used for Wireless LAN (WLAN) applications and products used for both cable and subscriber and infrastructure applications.
 
 Specifically, net sales of RF integrated circuits used for cellular and PCS applications increased 9.2% during 2004 to $45.4 million from $41.5 million in 2003. The increase was due to our expanded product presence and volumes for our GSM power amplifiers.
 
 Generally, selling prices for same product sales were lower during 2004 as compared to 2003.
 
 GROSS MARGIN. Gross margin for 2004 improved to 15.3% of net sales, compared with 4.4% of net sales in the prior year. The increase in gross margin from the prior year is the result of the increase in revenue, improved production throughput in our facilities, lower depreciation expense and lower product costs.
 
 RESEARCH & DEVELOPMENT. Company sponsored research and development expense increased 3.8% during 2004 to $33.3 million from $32.1 million during 2003 primarily due to the incremental year-over-year operating costs of the companys acquisitions of RFS and Tavanza.
 
 PURCHASED IN-PROCESS R&D. In 2003, the Company expensed purchased in-process research and development costs of $1.9 million resulting from the acquisitions of RFS and Tavanza. The charge represented the fair value of certain acquired research and development projects that were determined to have not reached technological feasibility and did not have alternative future uses. No acquisitions or in-process R&D applied in 2004.
 
 SELLING AND ADMINISTRATIVE. Selling and administrative expenses increased 15.9% during 2004 to $22.5 million from $19.4 million in 2003. The increase was primarily due to increased headcount and sales-related costs associated with our sales expansion efforts, including application centers in Taiwan and South Korea.
 
 ASSET AND INVESTMENT IMPAIRMENT CHARGES AND RESTRUCTURING AND OTHER CHARGES. During 2003, we recorded charges of $0.9 million for restructuring and other charges related to severance and related employee benefits in connection with workforce reductions of approximately 19 operations and administrative positions and lease-related costs.
 
 Activity and liability balances related to the restructuring and other charges for the years ended December 31, 2003 and 2004 are as follows (in millions):
 
 Lease Related

Workforce Reductions

TotalYear ended December 31, 2003Beginning balance

$
2.8

$
0.2

$
3.0Restructuring and other expenses


0.3


0.6


0.9Deductions


(1.1
)

(0.8
)

(1.9
)December 31, 2003 restructuring balance


2.0


-


2.0Year ended December 31, 2004Deductions


(1.3
)

-


(1.3
)December 31, 2004 restructuring balance

$
0.7

$
-

$
0.7 
 INTEREST INCOME. ****** Interest income decreased 34.1% to $2.2 million during 2004 from $3.3 million in 2003. The decrease was due to lower average invested funds and was compounded by lower interest rates.
 
 INTEREST EXPENSE. Interest expense increased to $4.1 million in 2004 from $3.8 million in 2003. Interest expense arises from obligations under our 5% Convertible Senior Notes due in 2006 ("2006 Notes") and our 5% Convertible Senior Notes due in 2009 ("2009 Notes"). In September, 2004, we repurchased $20.0 million aggregate principal amount of our 2006 Notes and consequently reduced the outstanding principal balance to $46.7 million, and concurrently issued $38 million aggregate principal amount of our 2009 Notes.
 
 GAIN ON REPURCHASE OF CONVERTIBLE NOTES. During 2004, we recognized a gain of $0.3 million, on the repurchase of $20.0 million aggregate principal amount of our 2006 Notes, after adjusting for accrued interest and the write-off of a proportionate share of unamortized offering costs.
 
 BENEFIT FROM INCOME TAXES. In 2004, the Company received no benefit from income taxes and recorded a full valuation allowance for its deferred tax balance.
 
 2003 COMPARED TO 2002
 
 NET SALES. Net sales during 2003 decreased 8.9% to $75.2 million, compared to $82.6 million for 2002. The sales decline was due to a decrease in demand of TDMA power amplifiers used in cellular handsets resulting from a market shift in the U.S. from the TDMA air interface standard to the emergence and deployment of the CDMA-1X telecommunication standard. Additionally, demand was lower for ICs used in set-top boxes attributed to overall market softness for set-top boxes.
 
 
 Specifically, net sales of integrated circuits for cellular and PCS applications decreased 7.1% during 2003 to $41.5 million from $44.7 million in 2002. Net sales for TDMA power amplifiers declined to zero in 2003 from $3.5 million in 2002.
 
 Sales during 2003 of integrated circuits for broadband applications decreased 11.1% to $33.7 million from $37.9 million in 2002. The decline was partially offset by sales of our power amplifiers used in Wireless LAN (WLAN) applications. On March 31, 2003, we purchased the power amplifier business of RF Solutions (RFS) providing the Company an entrance into the growing WLAN power amplifier market.
 
 Generally, selling prices for same product sales were lower during 2003 as compared to 2002.
 
 GROSS MARGIN. Gross margin for 2003 decreased to 4.4% of net sales, compared with 8.8% of net sales in the prior year. The decline in gross margin from the prior year is the result of the decrease in revenue, lower production throughput in our facilities due to outsourcing and consequent lower absorption of fixed costs. The aforementioned lower pricing was largely offset by savings related to lower test, assembly and raw material costs.
 
 RESEARCH & DEVELOPMENT. Company sponsored research and development expense increased 7.8% during 2003 to $32.1 million from $29.7 million during 2002 primarily due to the acquisition of the RFS power amplifier business on March 31, 2003 and the acquisition of the Tavanza CDMA wireless handset business from Celeritek on October 14, 2003.
 
 PURCHASED IN-PROCESS R&D. The Company expensed purchased in-process research and development costs of $1.9 million resulting from the acquisitions of RFS and Tavanza. The charge represented the fair value of certain acquired research and development projects that were determined to have not reached technological feasibility and did not have alternative future uses. No acquisitions or in-process R&D applied in 2002.
 
 SELLING AND ADMINISTRATIVE. Selling and administrative expenses decreased 9.3% during 2003 to $19.4 million from $21.4 million in 2002. The decrease was primarily due to the elimination of intangibles amortization as a result of the write-off of intangibles in the fourth quarter of 2002 and savings realized from the administrative headcount reductions resulting from our restructuring activities. The expense reductions were partially offset by increased expenses from the RFS acquisition and the establishment of new application centers in Taiwan and South Korea.
 
 ASSET AND INVESTMENT IMPAIRMENT CHARGES AND RESTRUCTURING AND OTHER CHARGES. During 2003, we recorded charges of $0.9 million for restructuring and other charges related to severance and related employee benefits in connection with workforce reductions involving approximately 19 operations and administrative positions and lease-related costs. During 2002, we recorded charges of $8.6 million for asset impairments, $0.4 million for impairment on investments and $5.0 million for restructuring and other charges.
 
 Activity and liability balances related to the restructuring and other charges for the years ended December 31, 2002 and 2003 were as follows (in millions):
 Lease Related


Workforce Reductions


TotalYear ended December 31, 2002Beginning balance

$
1.1

$
0.8

$
1.9Restructuring and other expenses


3.4


1.6


5.0Deductions


(1.7
)

(2.2
)

(3.9
)December 31, 2002 restructuring balance


2.8


0.2


3.0Year ended December 31, 2003Restructuring and other expenses


0.3


0.6


0.9Deductions


(1.1
)

(0.8
)

(1.9
)December 31, 2003 restructuring balance

$
2.0

$
-

$
2.0 GOODWILL IMPAIRMENT CHARGE. During 2002, we monitored fiber market conditions in light of additional job cuts and difficult prospects announced by several of our end-market customers. In view of these weaker market conditions during the third quarter of 2002, we evaluated our goodwill and intangible assets for potential impairment. As a result of that evaluation, we recorded a goodwill impairment charge of $8.0 million. Also see cumulative effect of accounting change below. There was no impairment of goodwill in 2003.
 
 INTEREST INCOME. ****** Interest income decreased 47.0% to $3.3 million during 2003 from $6.3 million in 2002. The decrease was due to lower average invested funds and was compounded by lower interest rates.
 
 INTEREST EXPENSE. Interest expense decreased to $3.8 million in 2003 from $5.1 million in 2002. Our interest expense arose from obligations under our 2006 Notes, issued on November 27, 2001. In September 2002, we repurchased $33.3 million in face value of the 2006 Notes and consequently reduced the outstanding principal balance to $66.7 million.
 
 GAIN ON REPURCHASE OF CONVERTIBLE NOTES. During 2002, we recognized a gain of $12.6 million, on the repurchase of $33.3 million in principal of our 2006 Notes, after adjusting for accrued interest and the write-off of a proportionate share of unamortized offering costs.
 
 BENEFIT FROM INCOME TAXES. In December 2002, the Company received a $4.3 million refund pursuant to a carryback claim under the Job Creation and Workers Assistance Tax Act of 2002. The refund represented taxes paid in 1996 and 1997.
 
 CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In 2002, we adopted the provisions of Statement of Financial Accounting Standards ("FAS") No 142, "Goodwill and Other Intangible Assets". Under the new rules, goodwill is no longer subject to amortization but is reviewed for potential impairment, upon adoption and thereafter annually or upon the occurrence of an impairment indicator. The annual amortization of goodwill which would have approximated $2.6 million was no longer required. As a result of completing the required test, we recorded a charge for the cumulative effect of the accounting change in the amount of $8.0 million representing the excess of the carrying value of a reporting unit as compared to its estimated fair value. In 2003, there was no charge for an accounting change.
 
 LIQUIDITY AND SOURCES OF CAPITAL
 
 At December 31, 2004 we had $11.2 million of cash and cash equivalents on hand and $92.9 million in marketable securities. We had $38.0 million aggregate principal amount of our 2009 Notes and $46.7 million aggregate principal amount of our 2006 Notes outstanding as of December 31, 2004.
 
 Operations required the use of $29.7 million in cash during 2004. Investing activities provided $4.1 million of cash during 2004, consisting principally of net sales of marketable securities of $7.5 million, partially offset by purchases of equipment of $3.4 million. Financing activities provided $18.2 million of cash in 2004, primarily consisting of proceeds received from our issuance of $38.0 million aggregate principal amount of our 2009 Notes, net of offering costs and further reduced by our repurchase of $20.0 million aggregate principal amount of our 2006 notes.
 
 We believe that our existing sources of capital, including our existing cash and marketable securities, will be adequate to satisfy operational needs and anticipated capital needs for the next twelve months as well as the repayment of our debt prinicipal obligation due in November, 2006. Our anticipated capital needs may include acquisitions of complimentary businesses or technologies, investments in other companies or repurchases of our outstanding debt or equity. However, we may elect to finance all or part of our future capital requirements through additional equity or debt financing. There can be no assurance that such additional financing would be available on satisfactory terms.  Our ability to pay principal and interest on our $84.7 million in outstanding convertible senior unsecured notes, $46.7 million of which are due in November of 2006 and the remainder of which are due in October of 2009, and our other debt and to fund our planned capital expenditures depends on our future operating performance.
 
 The table below summarizes required cash payments as of December 31, 2004:
  CONTRACTUAL OBLIGATIONS

PAYMENTS DUE BY PERIOD (in thousands)Total


1 year and less


1 - 3 years


4 - 5 years


After 5 yearsLong-term debt, including interest

$
98,182

$
4,235

$
52,543

$
41,404

$
-Operating leases


23,628


2,641


3,392


3,480


14,115Capital leases


18


18


-


-


-Unconditional purchase obligations


2,445


2,445


-


-


-Total contractual cash obligations

$
124,273

$
9,339

$
55,935

$
44,884

$
14,115 
 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
  In December 2004, the Financial Accounting Standards Board issued Statement No. 123(R) (FAS 123R), Share-Based Payment, amending FAS 123 and requiring that all share-based payments to employees be recognized in the financial statements. Generally, the approach to accounting for share-based payments in FAS 123R is similar to the approach described in FAS 123, however, pro forma footnote disclosure will no longer be an alternative to financial statement recognition. This statement becomes effective in the first interim or annual period beginning after June 15, 2005. The Company expects to adopt the new statement effective January 1, 2005, using the modified-prospective transition method described in the statement. Under this method, the Company will be required to recognize compensation expense over the remaining vesting period for all awards that remain unvested as of January 1, 2005. As permitted by FAS 123, the Company currently accounts for share-based payments to employees using APB 25's intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. The Company believes based on the level of share-based payments previously granted and unvested, that the adoption of FAS 123R will not have a material effect on its financial position, results of operations or cashflows, however, the level of future equity based compensation grants could have a material effect on amounts recorded in our statement of operations. On December 22, 2004, the Company authorized an immediate vesting of eligible employees unvested share options with an exercise price greater than $5.00 per share. Directors were not eligible. In total, 1,772,289 options with an average exercise price of $7.26 immediately vested and have an average remaining contractual life of 9.1 years. The unamortized fair value associated with these accelerated-vest shares of approximately $2.65 million amortized immediately. In addition to its employee-retention value, the Companys decision to accelerate the vesting of these "out-of-the-money" options was based upon the accounting of such costs moving from disclosure-only in 2004 to being included in the Companys statement of operations in 2005.
 
 In November 2004, the Financial Accounting Standards Board issued Statement No. 151 (FAS 151), Inventory costs, an amendment of ARB No. 43, Chapter 4. FAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges. In addition, FAS 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company currently believes that the adoption of FAS 151 will not have a material impact on its consolidated financial statements.
 
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 We are exposed to changes in interest rates primarily from our investments in certain available-for-sale securities. Our available-for-sale securities consist primarily of fixed income investments, including corporate bonds, commercial paper and U.S. Treasury and agency securities. We continually monitor our exposure to changes in interest rates and the credit ratings of issuers with respect to our available-for-sale securities. Accordingly, we believe that the effects of changes in interest rates and the credit ratings of these issuers are limited and would not have a material impact on our financial condition or results of operations. However, it is possible that we are at risk if interest rates or credit ratings of issuers change in an unfavorable direction. The magnitude of any gain or loss will be a function of the difference between the fixed rate of the financial instrument and the market rate and our financial condition and results of operations could be materially affected.
 
 At December 31, 2004, we held marketable securities with an estimated fair value of $92.9 million. Our primary interest rate exposure results from changes in short-term interest rates. We do not purchase financial instruments for trading or speculative purposes. All of our marketable securities are classified as available-for-sale securities. The following table provides information about our marketable securities at December 31, 2004:
 
 Estimated Principal Amount and Weighted Average Stated Rate by Expected Maturity Value

Fair Value($s 000)


2005


2006


2007


Total


($s 000
)Principal

$
63,240

$
28,839


-

$
92,079

$
92,880Weighted Average Stated Rates


3.79
%

4.43
%

-


3.99
%

-  The stated rates of interest expressed in the above table may not approximate the actual yield of the securities which we currently hold since we have purchased some of our marketable securities at other than face value. Additionally, some of the securities represented in the above table may be called or redeemed, at the option of the issuer, prior to their expected due dates. If such early redemptions occur, we may reinvest the proceeds realized on such calls or redemptions in marketable securities with stated rates of interest or yields that are lower than those of current holdings, affecting both future cash interest streams and future earnings. In addition to investments in marketable securities, we place some of our cash in money market funds in order to keep cash available to fund operations and to hold cash pending investments in marketable securities. Fluctuations in short term interest rates will affect the yield on monies invested in such money market funds. Such fluctuations can have an impact on our future cash interest streams and future earnings, but the impact of such fluctuations are not expected to be material.
 
 Each of our 2006 Notes and 2009 Notes are convertible notes that bear a fixed rate of interest of 5%. A change in interest rates on long-term debt is assumed to impact fair value but not earnings or cash flow because the interest rate is fixed. At December 31, 2004, the fair value of the outstanding Convertible notes, estimated based upon dealer quotes, was approximately $86.1 million.