**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K/A**

----

**AmendmentNo. 1**

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

**Forthe fiscal year ended December 31, 2006**

**OR**

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

**Forthe transition periodfrom                   to                    **

**Commissionfile number 000-31337**

**WJCOMMUNICATIONS, INC.**

**(Exact name of registrant asspecified in its charter)**

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

 

**(408) 577-6200**

(Registrant’s telephonenumber, including area code)

Securities registeredpursuant to Section 12(b) of the Act:

| **Title of Each Class**        |   | **Name of  Each Exchange on which Registered** |
|--------------------------------|--------|------------------------------------------------|
| Common Stock,  $0.01 par value |   | NASDAQ Global  Market                          |

 

Securities registeredpursuant to Section 12(g) of the Act:  None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes o   No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o   No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes x   No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of the Form 10-K/Aor any amendment to the Form 10-K/A. o

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

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

 

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

As of July 2, 2006,the last business day of the registrant’s most recently completed second fiscalquarter, the aggregate market value of voting stock held by non-affiliates ofthe registrant was approximately $45,662,172 (based upon the $1.53 closingprice of the common stock as reported by the NASDAQ Global Market on July 3,2006). Shares of the registrant’s common stock held by each officer anddirector and each person known to the registrant to own 10% or more of theoutstanding voting power of the registrant have been excluded in that suchpersons may be deemed to be affiliates. This determination of affiliate statusis not a determination for other purposes.

As of March 15, 2007there were 68,354,373 shares outstanding of the registrant’s common stock,$0.01 par value.

DOCUMENTSINCORPORATED BY REFERENCE: None

 

----

**EXPLANATORY NOTE**

The sole purpose of this Amendment No. 1 on Form 10-K/Ais to amend our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2006, which was filed with the Securities and ExchangeCommission on March 28, 2007 to timely provide the information required byPart III, Items 10 through 14.

This report also contains new certifications asrequired by Rule 12b-15 under the Securities Exchange Act of 1934for amendments. Except as otherwise expressly stated herein, this Amendment No. 1on Form 10-K/A does not reflect events occurring after the filing ofthe original 10-K, or modify or update in any way disclosures containedin the original Form 10-K.

We are also concurrently filing a Current Report onForm 8-K on this date to report that we intend to correct and restate ourpreviously issued financial statements for the fiscal year ended December 31,2006 and related disclosures which were contained in our original Annual Reporton Form 10-K filed with the Securities and Exchange Commission onMarch 28, 2007. For this reason, the consolidated financial statements andrelated financial information for the affected periods contained in such Form10-K should no longer be relied upon. Additional information regarding thedecision to restate can be found in our Form 8-K filed with theSecurities and Exchange Commission concurrently with this Amendment No. 1on Form 10-K/A.

----

**PART III**

**Item 10.**                 DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Thefollowing table sets forth information about our directors and executiveofficers (ages are as of March 21, 2007):

| **Name**                   | ** ** | ** ** | ** ** | **Age**                                          | ** ** | **Position** | ** ** |
|----------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------|------------|
| W. Dexter  Paine, III |       | 46         |       | Chairman  of the Board                           |       |
| Bruce W. Diamond           |       | 47         |       | President,  Chief Executive Officer and Director |       |
| Patrice M.  Daniels        |       | 46         |       | Director                                         |       |
| Michael E.  Holmstrom      |       | 64         |       | Director                                         |       |
| Catherine P. Lego          |       | 50         |       | Director                                         |       |
| Jack G. Levin              |       | 59         |       | Director                                         |       |
| Liane J.  Pelletier        |       | 49         |       | Director                                         |       |
| Robert Whelton             |       | 67         |       | Director                                         |       |
| R. Gregory Miller          |       | 55         |       | Vice  President, Chief Financial Officer         |       |
| Rainer N. Growitz          |       | 51         |       | Vice  President, Finance and Secretary           |       |
| Mark S. Knoch              |       | 43         |       | Vice  President, Operations                      |       |
| Haresh P. Patel            |       | 45         |       | Senior  Vice President, Sales and Marketing      |       |
| Morteza Saidi              |       | 54         |       | Vice President, Engineering                      |       |

 

**Directors of theCompany**

***W. Dexter Paine, III,***the Chairman of the Board of Directors and adirector since January 2000, is the co-founder of Fox Paine &Company, LLC and has been its President since its inception in 1997. Mr. Painealso serves as a director of  ByramHealthcare Centers, Inc, Wire Rope Corporation of America and ParadigmGeotechnology B.B. From 1994 until founding Fox Paine, Mr. Paine served asa senior partner of Kohlberg & Company. Prior to joining Kohlberg &Company, Mr. Paine served as a general partner at Robertson Stephens &Company. Mr. Paine has a B.A. in economics from Williams College.

***Bruce W. Diamond***wasappointed President, Chief Executive Officer of WJ Communications in June 2005and has served as a director since July 2003. Mr. Diamond has thestrategic and overall operating responsibility for WJ Communications. From November 2002to June 2005, Mr. Diamond served as Chief Operating Officer and ExecutiveVice President for ZiLOG, Inc., a provider of integrated 8-bitmicrocontrollers (MCU) and universal remote control solutions. From January 2001through October 2002 he served as President and Chief Operating Officerfor Sipex, Inc., an analog semiconductor company, where he was responsiblefor day-to-day operations including development of the optical storage, powerand interface products. From October 1997 to December 2000, Mr. Diamondserved as Senior Vice President of Operations for ANADIGICS, Inc., an RFbased semiconductor integrated circuit company, where he was responsible forbuilding an industry leading GaAs (Gallium Arsenide) wafer fabricationfacility. He also held various senior positions within National SemiconductorCorporation. Mr. Diamond received his B.S. degree in electricalengineering from the University of Illinois at Champaign-Urbana.

***Patrice M. Daniels,***a director since May 2006, has been SeniorVice President, Originations, for GE Capital since June 2006. From November 2005until June 2006, she served as Chief Operating Officer of InternationalEducation Corporation, a private post-secondary education company. From itsfounding in 2001 until 2005, Ms. Daniels was a partner of Onyx CapitalVentures, L.P., a private equity investment firm. She previously served asManaging Director, Corporate and Leveraged Finance for CIBC World Markets andBankers Trust Company, investment-banking firms. Ms. Daniels is a memberof the board of directors of Cenveo, Inc. (NYSE:CVO) and serves as a memberof the board of directors of CB Richard 

3

----

Ellis Group, Inc.(NYSE:CBG). She holds a B.S. from the University of California, Berkeley and anM.B.A. from the University of Chicago Graduate School of Business.

***Michael E.Holmstrom,***a director since July 2004, hasover 35 years financial experience in the telecommunications industry and hasbeen providing financial consulting services since March 2002. Previously,Mr. Holmstrom was at Elektryon Inc. where he served as President until March 2002.Prior to joining Elektryon as Chief Financial Officer in 2000, Mr. Holmstromserved as Senior Vice President and Chief Financial Officer at AlaskaCommunications Systems Group beginning in 1999. From 1998 to 1999 Mr. Holmstromwas Chief Financial Officer for Atlantic Tele-Network in the U.S. VirginIslands. From 1996 to 1998 he was the Chief Operating Officer for SpectrumNetwork Systems, Ltd. in Sydney, Australia. Prior to 1996, Mr. Holmstromheld numerous senior management and consulting positions including Vice Presidentof Unregulated Operations, Chief Financial Officer and then President of CPNational Corporation, Executive-in-Residence professor of business strategy atTexas A&M University, Vice President of Financial and Business Planning atPacific Telecom, and Vice President of Finance at Alascom, Inc. Mr. Holmstromhas a B.S. in Business Administration from Gannon University.

***Catherine P. Lego,***adirector since October 2004, is currently Managing Partner of ThePhotonics Fund which is focused on investing in early stage component, moduleand systems companies in the fiber optic telecommunications market since December 1999.Ms. Lego also serves on the Board of Directors of SanDisk Corporation(NasdaqGS:SNDK) and LAM Research Corporation (NasdaqGS:LRCX). Prior to formingThe Photonics Fund, Ms. Lego provided consulting services to early stageelectronic companies at Lego Ventures and was a General Partner at OakInvestment Partners. Prior to Oak Investment Partners, Ms. Lego was a CPAwith Coopers and Lybrand. She received her M.S. from NY University School ofBusiness and her B.A. from Williams College.

***Jack G. Levin,***adirector since July 2004, was previously the Chief Operating Officer withFox Paine and Company from February 2004 through March 2005. Prior tojoining Fox Paine, Mr. Levin was a founder and served as a managing memberof Kalkhoven, Pettit and Levin Ventures, LLC, a venture capital firm focused onthe fiber optic and telecommunications industry since 2001. Previously, Mr. Levinwas a partner of, and Director of Legal and Regulatory Affairs for MontgomerySecurities. During his 17 years at Montgomery Securities (and it’s successorfirm, Banc of America Securities, LLC), Mr. Levin was an active member ofthe investment banking commitment committee, the investment committees of thefirm’s venture capital partnerships and the managing partner of MontWestCapital Partners, a joint venture of Montgomery Securities and WestinghouseFinancial Corporation, established to do leveraged buyouts. Mr. Levin attendedAmherst College (A.B., Political Science, Cum Laude, John Woodruff SimpsonFellowship Award, 1969) and the Columbia University School of Law, (J.D.,Harlan Fiske Stone Scholar, 1973). Mr. Levin is a retired member of theBar of the State of New York.

***Liane J. Pelletier,***a director since October 2003, serves asChairwoman, Chief Executive Officer and President of Alaska CommunicationsSystems Group Inc. (NasdaqGM: ALSK). Prior to joining Alaska CommunicationsSystems Group in October 2003, Ms. Pelletier was with SprintCorporation for 17 years, where she served in numerous capacities includingChief Integration Officer and Senior Vice President, Corporate Strategy &Business Development. Ms. Pelletier also served as a Vice President in awide variety of departments, including corporate strategy, customer acquisitionand retention, and marketing positions to both business and consumer customers.Before joining Sprint, Ms. Pelletier worked as a consultant at Touche Rossand Temple, Barker, Sloane. Ms. Pelletier has an M.B.A from M.I.T. andB.A. from Wellesley College.

***Robert Whelton,***adirector since February 2006, is currently Executive Vice President ofOperations for Micrel, Inc. (NasdaqGS:MCRL), a leading manufacturer ofintegrated circuit solutions for the worldwide analog, ethernet and highbandwidth markets. Prior to joining Micrel in January 1998, Mr. Wheltonwas the Executive Vice President of Operations for Micro Linear Corp., afabless semiconductor company 

4

----

specializing inwireless integrated circuits. Prior to joining Micro Linear Corp., he wasemployed by National Semiconductor Corp., where he served as Vice President ofthe Analog division. Mr. Whelton received his B.S.E.E. from the Universityof California, Berkeley and his M.S.E.E. from the University of Santa Clara.

**Executive Officersof the Company**

***Bruce W. Diamond***wasappointed President and Chief Executive Officer of WJ Communications in June 2005.Mr. Diamond’s previous work experience is described above.

***R. Gregory Miller***wasappointed Vice President and Chief Financial Officer of WJ Communications in April 2006.Mr. Miller is responsible for finance and accounting, investor relationsand corporate development. Mr. Miller served most recently as VicePresident and Chief Financial Officer of California Micro Devices Corporation(NasdaqGM:CAMD), a leading supplier of application-specific analogsemiconductor products. Prior to that, he served as Chief Financial Officer atSummit Microelectronics, Inc. He has also held senior financial positionsat LSI Logic Corporation (NYSE:LSI), National Semiconductor Corporation(NYSE:NSM), and Texas Instruments, Inc. (NYSE:TXN). Mr. Millerreceived his B.S.E. degree from the University of Michigan. He holds two Master’sdegrees, one in Business Administration from Duke University and another inEngineering from the University of Michigan. He is also a certified publicaccountant.

***Rainer N. Growitz***servedas our Interim Chief Financial Officer from August 2005 until April 2006.Mr. Growitz was appointed Vice President Finance and Secretary followingour recapitalization merger in January 2000 and is responsible forcorporate financial planning and forecasting for WJ Communications. From 1997until January 2000, Mr. Growitz served as Director of Finance. Hejoined WJ Communications in 1978 and has held a variety of finance, contractsand managerial positions. Mr. Growitz received a B.S. in Accounting fromSan Jose State University.

***Mark S. Knoch***wasappointed Vice President of Operations of WJ Communications in August of2005 and is responsible for overseeing the manufacturing of RF semiconductorand RFID products. Prior to joining WJ Communications, Mr. Knoch was Vice Presidentof Operations at ZiLOG, Inc. (“ZiLOG”) where he was responsible for allmanufacturing and supply chain activities for the company. While at ZiLOG, healso served as President of ZiLOG’s manufacturing facility in the Philippines.Prior to joining ZiLOG in 2004, he served as Vice President, Supply Chain forSipex, Inc., an analog semiconductor company, where he managed the supplychain and order fulfillment from 2001 to 2004. Mr. Knoch also held seniorplanning and operations positions at ANADIGICS, Inc., AmericanMicrosystems Incorporated, and Advanced Micro Devices. Mr. Knoch receivedhis B.S. in Electrical Engineering from Kansas State University.

***Haresh P. Patel***wasappointed Senior Vice President of Sales and Marketing of WJ Communications in October 2005.Previously, Mr. Patel served as Vice President of Worldwide Sales andMarketing at Agilent Technology’s Semiconductor Division. Prior to joining Agilent Technology in 2000, Mr. Patelwas with PMC-Sierra Inc. a leader in datacom, telecom and storage semiconductorproducts where he served as Vice President of Worldwide Sales beginning in1997. Mr. Patel has also held various sales and product managementpositions at Hyundai, Fujitsu, and Texas Instruments. He received his B.S.degree in Electrical Engineering from the University of Notre Dame.

***Morteza Saidi***wasappointed Vice President of Engineering of WJ Communications in January 2006.Mr. Saidi is responsible for directing and managing the engineering groupswithin the Company including developing new technologies and new products forthe wireless and RFID markets. From 2004 to 2006 he served as founder and ChiefExecutive Officer of S-Communications, a fabless semiconductor company. Priorto that Mr. Saidi served as a consultant for PCI Communications from 2003to 2004. Previously, Mr. Saidi co-founded Resonext Communications in 2000and where he served as Chief Technology Officer 

5

----

and Vice Presidentof RF and Analog until the company was acquired by RF Micro Devices in December 2002.Previously, he was the director of RF development at VLSI Technology. Inaddition, Mr. Saidi has held a number of management positions with PhilipsSemiconductor, has published a number of articles in the technical journals,and has assisted in filing 30 patents. Mr. Saidi received both hisBachelor of Science degree and Masters of Science in Electrical Engineeringfrom the University of Michigan.

**Audit Committee andAudit Committee Financial Expert**

The Audit Committee iscurrently composed of directors Holmstrom, Daniels and Lego. The Board ofDirectors has determined that Mr. Holmstrom, Ms. Daniels and Ms. Legoare “independent directors” as that term is defined in Rule 4200(15) ofthe Nasdaq Marketplace Rules. Our Board of Directors has determined that Mr. Holmstromqualifies as an “audit committee financial expert” as such term is defined inItem 401(h) of Regulation S-K. Shareholders should understand that thisdesignation is a disclosure requirement of the SEC related to Mr. Holmstrom’sexperience and understanding with respect to certain accounting and auditingmatters. The designation does not impose on Mr. Holmstrom any duties,obligations or liability that are greater than are generally imposed on him asa member of the Audit Committee and Board of Directors, and his designation asan audit committee financial expert pursuant to this SEC requirement does notaffect the duties, obligations or liability of any other member of the AuditCommittee or Board of Directors.

**Section 16(a) BeneficialOwnership Reporting Compliance**

For the fiscal year ended December 31,2006, we believe, based solely on a review of Forms 3, 4 and 5 (includingamendments) with which it has been furnished, that all filings requiredpursuant to Section 16(a) of the Securities Exchange Act of 1934, asamended, relating to us were timely made.

**Code of Ethics**

We have adopted a writtencode of ethics that applies to our principal executive officer, principalfinancial officer, principal accounting officer and controller, responsive to Section 406of the Sarbanes-Oxley Act of 2002 and the rules of the SEC. A copy of ourcode of ethics which is captioned “Senior Financial Officer Code of BusinessConduct and Ethics Policy” is posted and publicly available on our internetwebsite at* www.wj.com* . This website address is intended to be aninactive, textual reference only; none of the material on this website is partof this report. If there are any amendments to or waivers, of the code ofethics, we intend to promptly disclose within four business days the nature ofany such amendment or waiver on our website.

**Item 11. EXECUTIVECOMPENSATION**

**COMPENSATIONDISCUSSION AND ANALYSIS**

This section discusses the principles underlying ourexecutive compensation policies and decisions and the most important factorsrelevant to an analysis of these policies and decisions. It providesqualitative information regarding the manner and content in which compensationis awarded to and earned by our executive officers and places in perspectivethe data presented in the tables and narrative that follow.

The Compensation Committee (the “Committee”) of theBoard of Directors (the “Board”) has principal responsibility to evaluate,recommend, approve and review executive officer compensation arrangements,plans, policies and programs maintained by the Company, and to administer theCompany’s cash-based and equity-based compensation plans. The Committee’s goalis to ensure that the total compensation paid to our executive officers,including our Chief Executive Officer and our Chief Financial Officer, is fair,reasonable and competitive.

6

----

Our compensation program forexecutive officers is designed to attract, as needed, individuals with theskills necessary for us to achieve our business plan, to motivate thoseindividuals, to reward those individuals fairly over time, and to retain thoseindividuals who continue to perform at or above the levels that we expect. Itis also designed to link rewards to measurable company and individualperformance when possible.

***General Compensation Philosophy and Objectives***

Our compensation philosophy is simple: we have acompetitive total rewards program aimed at attracting, retaining and motivating“A” players. We also believe in utilizing performance based measures to alignthe employee incentives with long-term shareholder value creation.

The Committee believes that the most effectiveexecutive compensation program is one that is designed to reward theachievement of specific semi-annual, long-term and strategic goals by theCompany, and one that aligns executives’ interests with those of theshareholders by rewarding performance that meets or exceeds established goals,with the ultimate objective of improving shareholder value. The Committeeevaluates both performance and compensation to ensure that the Companymaintains its ability to attract and retain superior employees in key positionsand that compensation provided to key employees remains competitive relative tothe compensation paid to similarly situated executives of our peer companies. Ourexecutive officers’ compensation currently has three primary components—(i) basecompensation or salary, (ii) semi-annual cash bonuses under aperformance-based, non-equity incentive plan, and (iii) equity awards inthe form of performance-accelerated restricted stock unit awards (“PARSUs”)granted pursuant to our Amended and Restated 2000 Stock Incentive Plan. We fixexecutive officer base compensation at a level we believe enables us to hireand retain individuals in a competitive environment and to reward satisfactoryindividual performance and a satisfactory level of contribution to our overallbusiness goals. We also take into account the base compensation that is payableby companies that we believe to be our competitors and by other private andpublic companies with which we believe we generally compete for executives. Tothis end, with the help of Radford Consulting, an outside human resourcesconsulting firm, we access a number of executive compensation surveys and otherdatabases and review them when making critical executive officer hiringdecisions and annually when we review executive compensation. We designed ourexecutive bonus plan to focus our management on achieving key company financialobjectives, to motivate certain desired individual behaviors and to rewardsubstantial achievement of these company financial objectives and individualgoals. We utilize cash bonuses to reward performance achievements with a timehorizon of one year or less and we utilize salary as the base amount necessaryto match our competitors for executive talent. In 2006, we utilized stockoptions and PARSUs to reward long-term performance, with excellent companyperformance and extended officer tenure producing potentially significantincentive value for the officer. In July 2006, based on the recommendationof Radford Consulting, we determined that PARSUs would be our primary methodfor delivery of equity compensation in the future.

We view the foregoing components of compensation asrelated but distinct. Although the Committee does review total compensation, wedo not believe that significant compensation derived from one component ofcompensation should negate or reduce compensation from other components. Wedetermine the appropriate level for each compensation component based in part,but not exclusively, on competitive benchmarking consistent with our recruitingand retention goals, our view of internal equity and consistency, and otherconsiderations we deem relevant, such as rewarding extraordinary performance. Webelieve that, as is common in the technology sector, equity is the primarycompensation-related motivator in attracting and retaining employees and thatsalary and bonus levels are secondary considerations to most employees. Exceptas described below, we have not adopted any formal or informal policies orguidelines for allocating compensation between long-term and currently paid outcompensation, between cash and non-cash compensation, or among different formsof non-cash compensation. However, 

7

----

our Committee’s philosophyis to make a greater percentage of an employee’s compensation performance-basedas he or she becomes more senior and to keep cash compensation at a reasonablecompetitive level while also providing the opportunity to be well rewardedthrough equity if the company performs well over time.

The Committee’s current intent is to perform an annualstrategic review of our executive officers’ compensation to determine whetherthey provide adequate incentives and motivation to our executive officers andwhether they adequately compensate our executive officers relative tocomparable officers in other companies with which we compete for executives. Thesecompanies may or may not be public companies or even in all cases technologycompanies. The Committee’s most recent review occurred in July 2006. Committeemeetings typically have included, for all or a portion of each meeting, notonly the Committee members but also our Chief Executive Officer and ourDirector of Human Resources. The Committee makes all compensation decisions(including the establishment of salary and bonus levels and the award of bonusand equity grants) for the executive officers. As required under NASDAQ rules,the Chief Executive Officer does not participate in the deliberation andapproval process with respect to his compensation. The Chief Executive Officerand Director of Human Resources annually review the performance of eachexecutive officer (other than the Chief Executive Officer whose performance isreviewed by the Committee). The conclusions reached and recommendations basedon these reviews, including those with respect to salary adjustments and annualaward amounts, are presented to the Committee. The Committee exercises itsdiscretion in accepting or modifying any recommended adjustments or awards toexecutives.

We account for equitycompensation paid to our executives and employees under the rules of SFAS No. 123R,which require us to estimate and record an expense over the service period ofthe award. Accounting rules also require us to record cash compensation asan expense at the time the obligation is accrued. Unless and until we achievesustained profitability, the availability to us of a tax deduction forcompensation expense will not be material to our financial position. Westructure cash bonus compensation so that it is taxable to our executives at thetime it becomes available to them. We currently intend that all cashcompensation paid will be tax deductible for us. With respect to equitycompensation awards, any gain recognized by employees from nonqualified optionsshould be deductible. However, to the extent that an option constitutes anincentive stock option gain recognized by the optionee, it will be deductibleif there is a disqualifying disposition by the optionee. In addition, if wegrant restricted stock or restricted stock unit awards that are not subject toperformance vesting, they may not be fully deductible by us at the time theaward is otherwise taxable to the employee.

***Our Peer Group and Benchmarking of Base Compensationand Equity Holdings***

Based on the foregoing objectives, the Committee hasstructured the Company’s annual and long-term incentive-based cash and non-cashexecutive compensation to motivate executives to achieve the business goals setby the Company and reward the executives for achieving such goals. Infurtherance of this, Radford Consulting conducted an annual review of our totalcompensation program for executives. Radford Consulting provided the Committeewith relevant market data and alternatives to consider when making compensationdecisions for all executives.

8

----

In making compensationdecisions, the Committee compares each element of total compensation against apeer group of publicly-traded companies (collectively, the “Compensation PeerGroup”). The Compensation Peer Group companies were selected based on companiesagainst which the Committee believes the Company competes for talent and forshareholder investment. The companies comprising the Compensation Peer Groupare:  

| **Actel Corporation**              | ** ** | **Adept Technology Inc.**             |
|------------------------------------|------------|---------------------------------------|
| **Anadigics Inc.**                 | ** ** | **Broadcom Corp.**                    |
| **California Micro Devices Corp.** | ** ** | **Cirrus Logic Inc.**                 |
| **Conexant Systems Inc.**          | ** ** | **Freescale Semiconductor Inc.**      |
| **Hi/Fn Inc.**                     | ** ** | **Integrated Device Technology Inc.** |
| **Linear Technology Corp.**        | ** ** | **Maxim Integrated Products**         |
| **Micrel Inc.**                    | ** ** | **National Semiconductor Corp.**      |
| **Pericom  Semiconductor Corp.**   | ** ** | **Philips Semiconductors Inc.**       |
| **Pixelworks  Inc.**               | ** ** | **Quicklogic Corp**                   |
| **RF  Micro Devices Inc.**         | ** ** | **Silicon Laboratories Inc.**         |
| **Sirenza  Microdevices Inc.**     | ** ** | **Texas Instruments Inc.**            |
| **Transmeta  Corp**                | ** ** | **Transwitch Corp**                   |
| **Triquent  Semiconductor Inc.**   | ** ** | **Vitesse Semiconductor Corp**        |
| **Zhone  Technologies Inc.**       | ** ** | ** **                            |

 

For comparison purposes, our annual revenues are inthe bottom quartile of the Compensation Peer Group. The large variance in sizeamong the companies comprising the Compensation Peer Group is taken into account.

The Committee attempts toestablish executive officers’ base salaries, annual bonus levels, and equitygrants at levels between the 50th and 75th percentile of ourCompensation Peer Group of executives with similar roles at our CompensationPeer Group. The Committee believes that the 50th percentile for base salariesis the lowest possible cash compensation level that would allow a company ofour size to competitively attract and retain talented officers. The Committeerealizes that using a benchmark may not always be appropriate but believes thatit is the best alternative at this point in the life cycle of the Company. Ininstances where an executive officer is uniquely key to our success, theCommittee may provide compensation in excess of these percentiles. TheCommittee’s judgments with regard to market levels of base compensation andaggregate equity holdings were based on a report obtained from RadfordConsulting. The Committee’s choice of the foregoing percentiles to apply to thedata in the report reflected consideration of our shareholders’ interests inpaying what was necessary, but not significantly more than necessary, toachieve our company goals, while conserving cash and equity as much aspracticable. The Committee believes that, given the industry in which weoperate and the company culture that we have created, base compensation andequity at these percentage levels are generally sufficient to retain ourexisting executive officers and to hire new executive officers when and asrequired. Variations to this objective may occur as dictated by the experiencelevel of the individual and market factors. These objectives recognize theCommittee’s expectation that, over the long term, the Company should be in aposition to generate shareholder returns in excess of the average of itsCompensation Peer Group.

***Cash Bonuses***

Our Chief Executive Officer and our other executiveofficers each have annual target bonus opportunities set forth in theirrespective employment agreements of up to a certain percentage of their currentannual base salary, based on achievement of certain financial or individualobjectives. With respect to the Chief Executive Officer, the target bonusopportunity is up to 100% of his current annual base salary and with respect tothe other named executive officers, the target bonus opportunities range from60% to 

9

----

35% of annual base salarydepending upon the individual’s employment agreement with the Company. Thedollar amounts of bonuses earned by our named executive officers under our 2006bonus Plan described below is set forth in the Summary Compensation Table for2006 under “Non-Equity Incentive Plan Compensation”.

The Company maintained a semi-annual cash bonus planfor fiscal 2006 (the “*2006 Bonus Plan*”),under which its employees, including the executive officers referenced above,were eligible for cash bonus awards. Bonus targets were established by ourCommittee based on the Company’s achievement of specified company andindividual performance. The 2006 Bonus Plan established performance targetsthat ranged from 50% of the eligible bonus to 150% of the eligible bonus. Performancerelative to the first half of 2006 Bonus Plan objectives resulted in anaggregate bonus payout of $408,000 which represented 84% attainment of the weightedobjectives. For the second half of the 2006 Bonus Plan, the Company achieved aportion of the objectives sufficient to entitle executives to an aggregate of61% of their target bonus. Certain of the executives covered under the planwaived the receipt of their bonus such that an aggregate of 25% or $83,000 ofthe earned bonus was paid. There can be no assurances that any executive willwaive bonuses in the future and, as such, we may be required to pay out greateramounts in future periods.

During 2006 the Company objectives included revenue,number of new products introduced, design wins and earnings before interest,taxes and depreciation and amortization, (“EBITDA”). Performance is scored on alinear scale between the 50%, 100% and 150% points and then weighted based on aweighting fact to determine one overall Company performance factor. Anyperformance below the 50% goal is scored at a zero percent attainment and anyscoring above the 150% goal is limited to a score of one hundred and fifty percentattainment before weighting. If the overall weighted score is below 50%, theCompany performance is scored at a zero percent and there is no incentiveearned during the period. If the scoring of individual objective is below fiftypercent (50%), the performance will be scored at zero percent for thatindividual objective. If the weighted individual objective score is below fiftypercent (50%) there will be no incentive earned during the period for thatindividual.

The Company expects tocontinue a semi-annual cash bonus plan for 2007 (the “*2007 BonusPlan*”), under which its employees, including the executive officersreferenced above, will be eligible for cash bonus awards. The Committee may, atits discretion, award a bonus or adjust a bonus award. The Committee hasestablished bonus targets for the first half of 2007 based on specified Companyobjectives similar to those under the 2006 Bonus Plan. The Committee decided touse only Company objectives for the first half of 2007 as the Committeeconcluded that using the Company objectives would provide more focus on thedesired outcomes.

***Long-term Equity Incentives***

We have granted awards to our executives under theAmended and Restated 2000 Stock Incentive Plan. The Amended and Restated 2000Stock Incentive Plan gives the Committee the latitude to design stock-basedincentive compensation to promote a high level of performance and achievementof company objectives and encourage the growth of shareholder value.

The Company’sequity awards program enables the Company to:

·       enhancethe link between the creation of shareholder value and long-term executiveincentive compensation;

·       providean opportunity for increased equity ownership by executives; and

·       maintaincompetitive levels of total compensation

The Company historically used time-based stock optionsas its primary equity incentive. On occasions, these stock options weresupplemented by restricted stock or stock options that were performance-based. 

10

----

Performance criteria werebased on Company performance targets such as EBITDA, revenue and stock priceand individual performance targets. The exercise price for all equity optiongrants was the average price of the Company’s common stock on the NASDAQ GlobalMarket on the grant date unless the NASDAQ is closed for trading on that date;the average price shall be the average price on the next trading day. Theaverage price is calculated as a simple average of the high and low prices forthe trading day.

In August 2006, our Committee, followingconsultation with Radford Consulting, determined that going forward the Companywould grant primarily PARSUs, rather than stock options and/or restricted stock.This determination was made based upon review of data provided by RadfordConsulting regarding industry practice and market data. Our exempt employeesand a limited number of our non-exempt employees are eligible for PARSUs. Generally,our PARSUs provide the holder the right to receive a designated number ofshares of our common stock on or shortly after the fourth annual anniversary ofthe date of grant if the holder has remained employed with us through such timeand the opportunity to receive on an accelerated basis a portion of such shares(not to exceed 18.75% of the total shares subject to the PARSU) at the end ofeach fiscal six month period to the extent the Company satisfies certaincompany performance objectives and the holder achieves his or her individualobjectives for such period and remains employed by the Company at such time. Ifthe holder is employed at the end of four years, vesting of the PARSU wouldoccur regardless of whether the performance specifications have been satisfied.The performance acceleration criteria were based on attainment of companyobjectives and the attainment of individual objectives which can increase ordecrease the company score. The weighting criteria used for cash bonuses anddescribed above were also used for determining PARSU vesting. At the end ofeach fiscal six month period, our Committee will evaluate and determine whetherthe Company has achieved its company objectives and whether the holder hasachieved his objectives. The company objectives and the weighting of thesecompany objectives were identical to those objectives under the Company’s cashbonus plan described above.

The Committee approved the first performance periodunder the PARSU agreement to cover the period of August 10, 2006 through December 31,2006 and for such period to be treated as a full six month performance periodunder the PARSU agreement. Performance to the objectives resulted in anaggregate of 63% attainment and the vesting of 53,000 common shares to theexecutives and an aggregate of 52% attainment for all other employees withPARSU agreements and the vesting of 75,000 common shares. The Committeeratified the number of shares vested for the first performance period through December 31,2006 in February 2007. The “Number of Shares Acquired on Vesting” in theOption Exercises and Stock Vested for 2006 table, includes the vesting of thesePARSUs.

Awards are expected to bemade in 2007 based on similar Company objectives and weighting criteria butwithout any individual objectives.

***Timing of Equity Grants***

The Company does not havea formal written policy regarding timing of equity grants. However no equitygrants were timed on the release or non-release of material non-publicinformation.

***Severance and Change of Control Payments***

We have entered intoemployment, termination of employment and change-in-control arrangements withthe following executive officers, which are summarized below.

11

----

***Employment Agreements***

**Bruce W. Diamond:**

On June 28, 2005, the Company entered into anemployment agreement with Mr. Diamond, the Company’s President and ChiefExecutive Officer.

The material terms of the employment agreementincluded the following: (i) Mr. Diamond’s annual base salary will be$350,000. The annual base salary may be increased in the years following thefirst anniversary of the effective date, but may not be decreased;(ii) beginning in fiscal year 2006, Mr. Diamond is eligible for anannual bonus target opportunity of one-hundred percent (100%) of his currentannual base salary, of which fifty percent (50%) is based on achievement ofdefined financial performance objectives and fifty percent (50%) is based ondefined major business objectives as determined by the Compensation Committee,(iii) an annual bonus target opportunity for the fiscal year endingDecember 31, 2005 of fifty percent (50%) of annual base salary is based ondefined objectives but will not be less than $50,000 if Mr. Diamondremains employed through December 31, 2005; and (iv) a grant of1,000,000 shares of restricted common stock at a purchase price equal to thepar value of the common stock of $0.01 per share of which 500,000 shares areTime-Vested Restricted Stock and vest over 36 months and 500,000 shares ofPerformance-Vested Restricted Stock which shall vest conditioned upon thesatisfaction of certain performance targets and objectives to be determined bythe Company with the performance period for such award to be not more than two(2) years or in the case of performance criteria conditioned onappreciation in the value of the Company’s common stock, the price targetsdesignated by the Company.

Mr. Diamond’s employment agreement also providedfor other benefits including the right to participate in fringe benefit plans,life and disability insurance plans, expense reimbursement, reimbursement fordocumented supplemental life insurance, tax preparation and planning, andvacation in accordance with the Company’s top management vacation policy.

Pursuant to the employment agreement, if the Companyterminates Mr. Diamond’s employment other than for cause or disability orif Mr. Diamond terminates his employment with the Company for good reason,and Mr. Diamond’s employment is not terminated automatically as a resultof his death, the Company will pay him an amount equal to one hundred fiftypercent of his annual base salary as in effect immediately prior to thetermination of the employment period and eighteen months accelerated vestingwith respect to any outstanding, unvested time-vested restricted stock andreimbursement for premiums paid for continued health benefits for Mr. Diamondand his dependents under the Company’s health plans for eighteen monthsfollowing the termination of his employment with the Company. Notwithstandingthe preceding sentence, the severance benefit shall be computed as an amountequal to two hundred ninety-nine percent of his annual base salary as in effectimmediately prior to the termination of the employment period, full vestingwith respect to any outstanding, unvested time-vested restricted stock andperformance-vested restricted stock and reimbursement for premiums paid forcontinued health benefits for Mr. Diamond and his dependents under the Company’shealth plans for thirty-six months with such amounts to be paid within thirtydays of the date of such termination, in each case solely in a circumstance inwhich there is a termination of Mr. Diamond’s employment within threemonths prior to or nine months following the occurrence of a change in controleither by the Company other than for cause or by him with good reason.

Mr. Diamond wasgranted a PARSU on August 10, 2006 for 366,300 shares of our common stockthat will accelerate and become fully vested upon change in control of theCompany.

12

----

**R. Gregory Miller:**

Effective April 10, 2006, the Company enteredinto an employment agreement with R. Gregory Miller for the position of VicePresident and Chief Financial Officer of the Company. The employment agreementis effective for three years with automatic one-year extensions thereafterunless advance written notice of an intention not to extend the term isprovided by either the Company or Mr. Miller.

Under the employment agreement, Mr. Miller is entitledto receive an annual base salary of $230,000 and is eligible to participate inthe Company’s discretionary cash bonus plan based on appropriate business andfinancial targets and individual objectives. Mr. Miller received a stockoption grant of 500,000 shares of the Company’s common stock which vests overfour years and a stock option grant of 180,000 shares of the Company’s commonstock which vests conditioned on the satisfaction of certain performancetargets and objectives. Mr. Miller also received a time vested restrictedstock grant of 10,000 shares of the Company’s common stock which vested uponthe one year anniversary of his employment on April 10, 2007. Mr. Miller’semployment agreement also provides for other benefits including the right to participatein fringe benefit plans, life and disability insurance plans, expensereimbursement, reimbursement for tax preparation and planning, and vacation inaccordance with the Company’s top management vacation policy.

Pursuant to the employment agreement, if the Companyterminates Mr. Miller’s employment other than for cause or disability orif Mr. Miller terminates his employment with the Company for good reason,and Mr. Miller’s employment is not terminated automatically as a result ofhis death, the Company will pay him an amount equal to one hundred percent ofhis annual base salary. Not withstanding the preceding sentence, the Company isobligated to pay Mr. Miller an amount equal to one hundred fifty percentof his annual base salary and the time vested stock option for 500,000 sharesof common stock will accelerate and become fully vested, solely in acircumstance in which there has occurred a change in control (as such term isdefined in his option agreement) within six months prior to any termination forgood reason or by the Company other than for cause.

Mr. Miller wasgranted a PARSU on August 10, 2006 for 98,000 shares of our common stockthat will accelerate and become fully vested upon change in control of theCompany.

**Rainer N. Growitz:**

Effective January 31, 2000, the Company enteredinto an employment agreement with Mr. Growitz for the position of VicePresident of Finance. The employment agreement was initially effective for aperiod of three years and it provides automatic one-year extensions thereafterunless advance written notice of an intention not to extend the term isprovided by either the Company or Mr. Growitz.

Under the employment agreement, Mr. Growitz isentitled to receive an annual base salary of $160,000 and is eligible to participatein the Company’s discretionary cash bonus plan, up to a maximum of 35% of basesalary, based on appropriate business and financial targets and individualobjectives. Mr. Growitz’s employment agreement also provides for otherbenefits including the right to participate in fringe benefit plans, life anddisability insurance plans, expense reimbursement, reimbursement for taxpreparation and planning, and vacation in accordance with the Company’s topmanagement vacation policy.

Pursuant to the employment agreement, if the Companyterminates Mr. Growitz’s employment other than for cause or disability orif Mr. Growitz terminates his employment with the Company for good reason,and Mr. Growitz’s employment is not terminated automatically as a resultof his death, the Company will pay him an amount equal to one hundred percentof his annual base salary. Not withstanding the preceding sentence, the Companyis obligated to pay Mr. Growitz an amount equal to one hundred fiftypercent of his annual base salary solely in a circumstance in which there hasoccurred a 

13

----

change in control withinthree months prior to any termination for good reason or by the Company otherthan for cause.

Mr. Growitz wasgranted a PARSU on August 10, 2006 for 31,500 shares of our common stockthat will accelerate and become fully vested upon change in control of theCompany.

**Haresh P. Patel:**

Effective October 24, 2005, the Company enteredinto an employment agreement with Haresh Patel for the position of Senior VicePresident of Sales and Marketing of the Company. The employment agreement iseffective for a period of three years with automatic one-year extensionsthereafter unless advance written notice of an intention not to extend the termis provided by either the Company or Mr. Patel.

Under the employment agreement, Mr. Patel isentitled to receive an annual base salary of $245,000 and will be eligible toparticipate in the Company’s discretionary cash bonus plan based on appropriatebusiness and financial targets and individual objectives. Mr. Patelreceived a stock option grant of 500,000 shares of the Company’s common stockwhich will vest over four years and a stock option grant of 200,000 shares ofthe Company’s common stock which shall vest conditioned on the satisfaction ofcertain performance targets and objectives. Mr. Patel’s employmentagreement also provides for other benefits including the right to participatein fringe benefit plans, life and disability insurance plans, expensereimbursement, reimbursement for tax preparation and planning, and vacation inaccordance with the Company’s top management vacation policy.

Pursuant to the employment agreement, if the Companyterminates Mr. Patel’s employment other than for cause or disability or ifMr. Patel terminates his employment with the Company for good reason, and Mr. Patel’semployment is not terminated automatically as a result of his death, theCompany will pay him an amount equal to one hundred percent of his annual basesalary. Not withstanding the preceding sentence, the Company shall pay Mr. Patelan amount equal to one hundred fifty percent of his annual base salary and thetime vested stock option for 500,000 shares of common stock will accelerate andbecome fully vested, solely in a circumstance in which there has occurred achange in control (as such term is defined in his option agreement) within sixmonths prior to any termination for good reason or by the Company other thanfor cause.

Mr. Patel was granteda PARSU on August 10, 2006 for 45,500 shares of our common stock that willaccelerate and become fully vested upon change in control of the Company.

**Morteza Saidi:**

Effective January 16, 2006, the Company enteredinto an employment agreement with Morteza Saidi for the position of VicePresident of Engineering for the Company. The employment agreement is effectivefor three years with automatic one-year extensions thereafter unless advancewritten notice of an intention not to extend the term is provided by either theCompany or Mr. Saidi.

Under the employment agreement, Mr. Saidi isentitled to receive an annual base salary of $225,000 and will be eligible toparticipate in the Company’s discretionary cash bonus plan based on appropriatebusiness and financial targets and individual objectives. Mr. Saidireceived a stock option grant of 540,000 shares of the Company’s common stockwhich will vest over four years and a stock option grant of 180,000 shares ofthe Company’s common stock which shall vest conditioned on the satisfaction ofcertain performance targets and objectives. Mr. Saidi also received a timevested restricted stock grant of 10,000 shares of the Company’s common stockwhich vested upon the one year anniversary of his employment on January 16,2007. Mr. Saidi’s employment agreement also provides for other benefitsincluding the right to participate in fringe benefit plans, life and disabilityinsurance plans, expense reimbursement, 

14

----

reimbursement for taxpreparation and planning, and vacation in accordance with the Company’s topmanagement vacation policy.

Pursuant to the employment agreement, if the Companyterminates Mr. Saidi’s employment other than for cause or disability or ifMr. Saidi terminates his employment with the Company for good reason, and Mr. Saidi’semployment is not terminated automatically as a result of his death, theCompany will pay him an amount equal to one hundred percent of his annual basesalary. Not withstanding the preceding sentence, the Company shall pay Mr. Saidian amount equal to one hundred fifty percent of his annual base salary and thetime vested stock option for 540,000 shares of common stock will accelerate andbecome fully vested, solely in a circumstance in which there has occurred achange in control (as such term is defined in his option agreement) within six monthsprior to any termination for good reason or by the Company other than forcause.

Mr. Saidi was granteda PARSU on August 10, 2006 for 38,500 shares of our common stock that willaccelerate and become fully vested upon change in control of the Company.

**Mark Knoch:**

Effective August 8, 2005, the Company enteredinto an employment agreement with Mark Knoch for the position of Vice Presidentof Operations for the Company. The employment agreement is effective for threeyears with automatic one-year extensions thereafter unless advance writtennotice of an intention not to extend the term is provided by either the Companyor Mr. Knoch.

Under the employment agreement, Mr. Knoch isentitled to receive an annual base salary of $200,000 and will be eligible toparticipate in the Company’s discretionary cash bonus plan based on appropriatebusiness and financial targets and individual objectives. Mr. Knochreceived a stock option grant of 450,000 shares of the Company’s common stockwhich will vest over four years and a restricted stock grant of 150,000 sharesof the Company’s common stock which shall vest conditioned on the satisfactionof certain performance targets and objectives. Mr. Knoch’s employmentagreement also provides for other benefits including the right to participatein fringe benefit plans, life and disability insurance plans, expensereimbursement, reimbursement for tax preparation and planning, and vacation inaccordance with the Company’s top management vacation policy.

Pursuant to the employment agreement, if the Companyterminates Mr. Knoch’s employment other than for cause or disability or ifMr. Knoch terminates his employment with the Company for good reason, and Mr. Knoch’semployment is not terminated automatically as a result of his death, theCompany will pay him an amount equal to one hundred percent of his annual basesalary. Not withstanding the preceding sentence, the Company shall pay Mr. Knochan amount equal to one hundred fifty percent of his annual base salary and thetime vested stock option for 450,000 shares of common stock will accelerate andbecome fully vested, solely in a circumstance in which there has occurred achange in control (as such term is defined in his option agreement) within sixmonths prior to any termination for good reason or by the Company other thanfor cause.

Mr. Knoch was granteda PARSU on August 10, 2006 for 98,000 shares of our common stock that willaccelerate and become fully vested upon change in control of the Company.

15

----

**Potential PaymentsUpon Termination of Employment**

Wehave quantified the amount of benefits and payments that would be owed orpayable under our employment agreements if the named executive’s employment hadterminated on December 31, 2006, given the named executive’s compensationand service levels as of such date and, if applicable, based on the closingmarket price on December 29, 2006 of $1.57 per share in the table below:

| **Benefit**                   | ** ** | ** ** | ** ** | **Bruce W. Diamond** | ** ** | **R. Gregory Miller** | ** ** | **Rainer N. Growitz** | ** ** | **Haresh P. Patel** | ** ** | **Morteza Saidi** | ** ** | **Mark Knoch** | ** ** |
|-------------------------------|------------|------------|------------|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|------------------------|------------|---------------------|------------|
| **UNEARNED  COMPENSATION**    |       |       |       |                           |       |                            |       |                            |       |                          |       |                   |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Cash Severance                |       |       | $          | 525,000                        |       |                            |       | $                               | 230,000    |                          |       |                   | $          | 160,000             |       |   |   | $ | 245,000 |   |   |   | $ | 225,000 |   |   |   | $ | 200,000 |   |   |
| Health &  Welfare(1) |       |       |       |                           |       |                            |       |                            |       |                          |       |                   |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Restricted Stock and PARSUs   |       |       | $          | 392,475                        |       |                            |       | $                               | —     |                          |       |                   | $          | —              |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Stock Options                 |       |       | $          | —                         |       |                            |       | $                               | —     |                          |       |                   | $          | —              |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Total                         |       |       | $          | 917,475                        |       |                            |       | $                               | 230,000    |                          |       |                   | $          | 160,000             |       |   |   | $ | 245,000 |   |   |   | $ | 225,000 |   |   |   | $ | 200,000 |   |   |

 

**Potential PaymentsUpon Change in Control**

Wehave quantified the amount of benefits and payments that would be owed orpayable under our employment agreements upon a change in control assuming thata triggering event occurred on December 31, 2006 and a valuation of ourcommon stock based on its closing market price on December 29, 2006 of$1.57 per share in the table below:

| **Benefit**                   | ** ** | ** ** | ** ** | **Bruce W. Diamond** | ** ** | **R. Gregory Miller** | ** ** | **Rainer N. Growitz** | ** ** | **Haresh P. Patel** | ** ** | **Morteza Saidi** | ** ** | **Mark Knoch** | ** ** |
|-------------------------------|------------|------------|------------|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-------------------------------|------------|------------------------|------------|---------------------|------------|
| **UNEARNED  COMPENSATION**    |       |       |       |                           |       |                            |       |                            |       |                          |       |                   |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Cash Severance                |       |       | $          | 1,046,500                      |       |                            |       | $                               | 345,000    |                          |       |                   | $          | 240,000             |       |   |   | $ | 367,500 |   |   |   | $ | 337,500 |   |   |   | $ | 300,000 |   |   |
| Health &  Welfare(2) |       |       |       |                           |       |                            |       |                            |       |                          |       |                   |       |                |       |   |   |   |   |   |   |   |   |   |   |
| Restricted Stock and PARSUs   |       |       | $          | 1,593,865                      |       |                            |       | $                               | 153,860    |                          |       |                   | $          | 49,455              |       |   |   | $ | 71,435 |   |   |   | $ | 60,445 |   |   |   | $ | 153,860 |   |   |
| Stock Options                 |       |       | $          | —                         |       |                            |       | $                               | —     |                          |       |                   | $          | —              |       |   |   | $ | 216,825 |   |   |   | $ | — |   |   |   | $ | 27,000 |   |   |
| Total                         |       |       | $          | 2,640,365                      |       |                            |       | $                               | 498,860    |                          |       |                   | $          | 289,455             |       |   |   | $ | 655,760 |   |   |   | $ | 397,945 |   |   |   | $ | 480,860 |   |   |

 

----

(1)                Mr. Diamondis entitled to reimbursement for premiums paid for continued health benefitsfor Mr. Diamond and his dependents under the Company’s health plans for eighteenmonths following the termination of his employment with the Company.Mr. Miller, Mr. Growitz, Mr. Patel, Mr. Saidi andMr. Knoch are entitled to receive group health insurance benefits underthe Company’s benefit plans for one year following the termination ofemployment.

(2)                Mr. Diamond is entitled toreimbursement for premiums paid for continued health benefits forMr. Diamond and his dependents under the Company’s health plans forthirty-six months following a change in control. Mr. Miller, Mr. Growitz,Mr. Patel, Mr. Saidi and Mr. Knoch are entitled to receive grouphealth insurance benefits under the Company’s benefit plans for three yearsfollowing a change in control.

16

----

**SUMMARYCOMPENSATION TABLE FOR 2006**

Thefollowing table sets forth 2006 compensation information for: (i) theprincipal executive officer; (ii) the principal financial officer; (iii) threeother executive officers, who, based on their total compensation, were the mosthighly compensated in 2006, (our “**namedexecutive officers**”).

| **Name and Principal Position**                            | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary ($)** | ** ** | **Bonus ($)** | ** ** | **Stock  Awards  ($)(1)** | ** ** | **Option  Awards  ($)(1)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)(2)** | ** ** | **Change in  Pension  Value and  Non  qualified  Deferred  Compensation  Earnings   ($)(3)** | ** ** | **All Other  Compensation   (4)** | ** ** | **Total ($)** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|--------------------|------------|---------------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------|------------|
| **(a)**                                                                   | ** ** | **(b)**    | ** ** | **(c)**  | ** ** | **(d)**             | ** ** | **(e)**            | ** ** | **(f)**                   | ** ** | **(g)**                    | ** ** | **(h)**                                                   | ** ** | **(i)**                                                                                                     | ** ** | **(j)**                                     | ** ** |
| Bruce W. Diamond                                                          |       |       | 2006       |     |       |                | 348,655    |               |       |                      | —     |                       |       | 711,424                                                   |       | 104,102                                                                                                     |       |                                        | 173,426    |               |       |   | — |   |   |   | 11,462 |   |   | 1,349,069 |   |
| President and  Chief Executive Officer (principal executive officer)      |       |       |       |     |       |                |       |               |       |                      |       |                       |       |                                                      |       |                                                                                                        |       |                                        |       |               |       |   |   |   |   |   |   |   |   |   |   |
| R. Gregory Miller                                                         |       |       | 2006       |     |       |                | 159,231    |               |       |                      | —     |                       |       | 19,950                                                    |       | 201,362                                                                                                     |       |                                        | 23,540     |               |       |   | — |   |   |   | 4,777 |   |   | 408,860 |   |
| Vice President and  Chief Financial Officer (principal financial officer) |       |       |       |     |       |                |       |               |       |                      |       |                       |       |                                                      |       |                                                                                                        |       |                                        |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Mark Knoch                                                                |       |       | 2006       |     |       |                | 225,000    |               |       |                      | —     |                       |       | 171,643                                                   |       | 113,206                                                                                                     |       |                                        | 53,581     |               |       |   | — |   |   |   | 7,879 |   |   | 571,309 |   |
| Vice President  Operations                                                |       |       |       |     |       |                |       |               |       |                      |       |                       |       |                                                      |       |                                                                                                        |       |                                        |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Haresh Patel                                                              |       |       | 2006       |     |       |                | 245,001    |               |       |                      | —     |                       |       | —                                                    |       | 105,078                                                                                                     |       |                                        | 95,240     |               |       |   | — |   |   |   | 1,131 |   |   | 446,450 |   |
| Vice President  Sales and Marketing                                       |       |       |       |     |       |                |       |               |       |                      |       |                       |       |                                                      |       |                                                                                                        |       |                                        |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Morteza Saidi                                                             |       |       | 2006       |     |       |                | 207,694    |               |       |                      | —     |                       |       | 15,385                                                    |       | 194,496                                                                                                     |       |                                        | 48,831     |               |       |   | — |   |   |   | 6,231 |   |   | 472,637 |   |
| Vice President  Engineering                                               |       |       |       |     |       |                |       |               |       |                      |       |                       |       |                                                      |       |                                                                                                        |       |                                        |       |               |       |   |   |   |   |   |   |   |   |   |   |
| Rainer N. Growitz                                                         |       |       | 2006       |     |       |                | 173,846    |               |       |                      | —     |                       |       | —                                                    |       | 18,364                                                                                                      |       |                                        | 38,800     |               |       |   | — |   |   |   | 5,765 |   |   | 236,775 |   |
| Vice President Finance  and Corporate   Secretary(5)                      |       |       |       |     |       |                |       |               |       |                      |       |                       |       |                                                      |       |                                                                                                        |       |                                        |       |               |       |   |   |   |   |   |   |   |   |   |   |

----

1.                     The amounts incolumn (e) reflect the dollar amount recognized for financial statementreporting purposes for the fiscal year ended December 31, 2006 inaccordance with SFAS 123(R), excluding forfeitures. See Note 8 to theConsolidated Financial Statements included in our Annual Report on Form 10-Kfor the assumptions used in determining fair value.

2.                     Representscash bonuses under the 2006 Bonus Plan described under “Cash Bonuses” in CompensationDiscussion and Analysis.

3.                     The Company does not have adefined benefit pension plan or a non-qualified deferred compensation plan.

4.                     The amount shown incolumn (i) reflects for each Named Executive Officer:

·         401(K) matchingcontributions

·         Medicalreimbursements (up to $5,000 per year)

5.                     Mr. Growitzserved as our Interim Chief Financial Officer and acting principal financialofficer until April 2006.

**GRANTS OFPLAN-BASED AWARDS FOR 2006**

Thefollowing table sets forth, for the fiscal year ended December 31, 2006,each grant of cash or equity based on awards to our named executive officersunder plans established by us.

| ** **        | ** ** | ** ** | ** ** | **Estimated Future   Payouts  Under  Non-Equity Incentive   Plan Awards** | ** ** | **Estimated   Future  Payouts   Under  Equity   Incentive  Plan   Awards** | ** ** | **All Other   Stock  Awards:   Number  of shares   of Stock or** | ** ** | **All Other   Option  Awards:   Number  of Securities  Underlying** | ** ** | **Exercise   or Base   Price of  Option ** | ** ** | **Closing   Price  on Grant  Date if   Different   from    Exercise** | ** ** | **Grant   Date   Fair   Value of  Stock and  Option ** | ** ** |
|-------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **Name**          | ** ** | ** ** | ** ** | **Grant Date**                                                                                          | ** ** | **Target ($)(1)**                                                                         | ** ** | **Maximum ($)(2)**                                                                             | ** ** | **Maximum (#)**                                                                    | ** ** | **Units (#)**                                                  | ** ** | **Options (#)**                                                                                     | ** ** | **Awards ($)**                                                                  | ** ** | **Price ($)** | ** ** | **Awards ($)** | ** ** |
| Bruce W. Diamond  |       |       | 1/13/2006  |                                                                                                         |       |                                                                                           | 173,426    |                                                                                                |       |                                                                                    | 525,000    |                                                                |       |                                                                                                     | 500,000    | (4)                                                                                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 825,000 |   |   |
|              |       |       | 8/10/2006  |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    | —     |                                                                |       |                                                                                                     |       |                                                                                 |       |   | 366,300 | (5) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 326,826 |   |   |
| R. Gregory Miller |       |       | 4/10/2006  |                                                                                                         |       |                                                                                           | 23,540     |                                                                                                |       |                                                                                    | 155,250    |                                                                |       |                                                                                                     | —     |                                                                                 |       |   | — |   |   |   | 500,000 | (6) |   |   | $  | 2.79 | (3) |   |   | $ | 2.74 |   |   |   | $ | 692,426 |   |   |
|              |       |       | 4/10/2006  |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    |       |                                                                |       |                                                                                                     | 180,000    | (7)                                                                                  |       |   |   |   |   |   |   |   |   |   | $  | 2.79 | (3) |   |   | $ | 2.74 |   |   |   | $ | 257,400 |   |   |
|              |       |       | 4/10/2006  |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    | —     |                                                                |       |                                                                                                     |       |                                                                                 |       |   | 10,000 | (8) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 27,400 |   |   |
|              |       |       | 8/10/2006  |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    | —     |                                                                |       |                                                                                                     |       |                                                                                 |       |   | 98,000 | (5) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 90,055 |   |   |
| Mark Knoch        |       |       | 8/10/2006  |                                                                                                         |       |                                                                                           | 53,581     |                                                                                                |       |                                                                                    | 202,500    |                                                                |       |                                                                                                     | —     |                                                                                 |       |   | 98,000 | (5) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 87,914 |   |   |
|              |       |       | 10/19/2006 |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    |       |                                                                |       |                                                                                                     | 75,000     | (9)                                                                                  |       |   |   |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 175,500 |   |   |
| Haresh Patel      |       |       | 8/10/2006  |                                                                                                         |       |                                                                                           | 95,240     |                                                                                                |       |                                                                                    | 220,500    |                                                                |       |                                                                                                     | —     |                                                                                 |       |   | 45,500 | (5) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 41,090 |   |   |
| Morteza Saidi     |       |       | 1/17/2006  |                                                                                                         |       |                                                                                           | 48,831     |                                                                                                |       |                                                                                    | 194,400    |                                                                |       |                                                                                                     | —     |                                                                                 |       |   | — |   |   |   | 540,000 | (10) |   |   | $  | 1.64 | (3) |   |   | $ | 1.61 |   |   |   | $ | 486,010 |   |   |
|              |       |       | 1/17/2006  |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    |       |                                                                |       |                                                                                                     | 180,000    | (11)                                                                                 |       |   | — |   |   |   |   |   |   |   | $  | 1.64 | (3) |   |   | $ | 1.61 |   |   |   | $ | 225,000 |   |   |
|              |       |       | 1/17/2006  |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    |       |                                                                |       |                                                                                                     | —     |                                                                                 |       |   | 10,000 | (12) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 16,100 |   |   |
|              |       |       | 8/10/2006  |                                                                                                         |       |                                                                                           |       |                                                                                                |       |                                                                                    |       |                                                                |       |                                                                                                     | —     |                                                                                 |       |   | 38,500 | (5) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 35,034 |   |   |
| Rainer N. Growitz |       |       | 8/10/2006  |                                                                                                         |       |                                                                                           | 38,800     |                                                                                                |       |                                                                                    | 84,000     |                                                                |       |                                                                                                     | —     |                                                                                 |       |   | 31,500 | (5) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | $ | 28,440 |   |   |
|                   |            |            |            |                                                                                                              |            |                                                                                                |            |                                                                                                     |            |                                                                                         |            |                                                                     |            |                                                                                                          |            |                                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

              (1)  Representscash bonuses under the 2006 Bonus Plan described under “Cash Bonuses” inCompensation Discussion and Analysis.

17

----

              (2)  This columnshows the maximum amount that could have been payable under the Company’s 2006Bonus Plan.

              (3)  The exerciseprice of the option award differs from the market price on the date of grant. Theexercise price was determined based on the average of the high and low price ofthe Company’s common stock on the date of grant, while the market price on thedate of grant is the closing price of the Company’s common stock on that date.

              (4)  This is themaximum number of shares of restricted stock that will vest if specifiedperformance targets are achieved. The performance targets are based on EBITDA,revenue, stock price and completion of a pre-determined corporate event.

              (5)  These PARSUsmay vest on an accelerated basis based on performance criteria determined bythe Compensation Committee of the Board of Directors or cliff vest after 4years.

              (6)  These optionsvest 25% one year after April 10, 2006 and 1/36 per month of servicethereafter.

              (7)  This is themaximum number of options that will vest if specified performance targets areachieved. The performance targets are based on EBITDA, stock price andsuccessful implementation of a new ERP system. The award was granted on April 10,2006 and the Compensation Committee approved the performance targets on October 19,2006.

              (8)  Thisrestricted stock award vests 100% one year after April 10, 2006.

              (9)  This is themaximum number of shares of restricted stock that will vest upon completion ofa pre-determined corporate event.

          (10)  Theseoptions vest 25% one year after January 17, 2006 and 1/36 per month ofservice thereafter.

          (11)  This is themaximum number of options that will vest if specified performance targets areachieved. The performance targets are EBITDA, new product development andhiring of employees. The award was granted on January 17, 2006 and theCompensation Committee approved the performance targets on October 19,2006.

          (12)  Thisrestricted stock award vests 100% one year after January 17, 2006.

18

----

**Narrative toSummary Compensation Table and Grants of 2006 Plan-Based Awards**

See CompensationDiscussion and Analysis above for complete description of compensation planspursuant to which the amounts listed under the Summary Compensation Table andGrants of 2006 Plan-Based Awards were paid or awarded and the criteria for suchpayment, including targets for payment of annual incentives, as well asperformance criteria on which such payments were based. The CompensationDiscussion and Analysis also describes the options and restricted stock grants.

**OUTSTANDING EQUITYAWARDS AT FISCAL YEAR END FOR 2006**

Thefollowing table sets forth certain information concerning outstandingunexercised option and stock awards held by our named executive officers at December 31,2006 which have not vested:

|          | ** ** | **Option Awards** | ** ** | **Stock Awards**   | ** ** |
|----------|------------|------------------------|------------|-------------------------|------------|
| **Name** | ** ** | ** **             | ** ** | **Date of  Grant** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Exercisable (#)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Unexercisable (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Date of  Grant** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Unearned  Shares,  Units or  Other Rights  That Have  Not Vested (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested ($)** | ** ** |
|          |            |                        |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Bruce W. Diamond  |   | 7/15/03  |   |   | 18,750  | (1)    |   |   | 6,250   |   |   |   | —  |   |   |   | $      | 0.85   |   |   |   | 7/14/2013  |   |     | 7/29/05 |   |    | 263,904 | (3)    |   |   | $       | 414,329 |   |   |    | — |   |   |    | —  |   |   |
|-------------------|--------|----------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|----------|---------|--------|---------|---------|--------|--------|--------|---------|---------|--------|--------|---------|--------|--------|--------|---------|---------|--------|--------|
|                   |   | 7/22/04  |   |   | 5,000   | (2)    |   |   | 5,000   |   |   |   | —  |   |   |   | $      | 2.59   |   |   |   | 7/21/2014  |   |     | 1/13/06 |   |    | —  |   |   |   | —  |    |   |   | 350,000 | (4)    |   |   | $       | 549,500 |   |   |
|                   |   |     |   |   | —  |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | — |       |   | 8/10/06  |    |   | 338,920 | (5)     |   |   | $      | 532,104 |    |   |   | —  |   |   |   | —  |    |   |
| R. Gregory Miller |   | 4/10/06  |   |   | —  |   |   |   | 500,000 | (6)    |   |   | 180,000 | (7)    |   |   | $      | 2.79   |   |   |   | 4/9/2016   |   |     | 4/10/06 |   |    | 10,000  | (8)    |   |   | $       | 15,700  |   |   |    | — |   |   |    | —  |   |   |
|                   |   |     |   |   | —  |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | — |       |   | 8/10/06  |    |   | 89,154  | (9)     |   |   | $      | 139,972 |    |   |   | —  |   |   |   | —  |    |   |
| Mark Knoch        |   | 8/8/05   |   |   | 112,500 | (10)   |   |   | 337,500 |   |   |   | —  |   |   |   | $      | 1.49   |   |   |   | 8/7/2015   |   |     | 8/10/06 |   |    | 90,398  | (11)   |   |   | $       | 141,925 |   |   |    | — |   |   |    | —  |   |   |
|                   |   |     |   |   | —  |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | — |       |   | 11/30/05 |    |   | —  |    |   |   | — |    |    |   | 75,000 | (12)    |   |   | $      | 117,750 |    |   |
|                   |   |     |   |   | —  |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | — |       |   | 10/19/06 |    |   | —  |    |   |   | — |    |    |   | 75,000 | (12)    |   |   | $      | 117,750 |    |   |
| Haresh Patel      |   | 10/24/05 |   |   | 145,833 | (13)   |   |   | 354,167 |   |   |   | 190,000 | (14)   |   |   | $      | 0.94   |   |   |   | 10/23/2015 |   |     | 8/10/06 |   |    | 41,812  | (15)   |   |   | $       | 65,645  |   |   |    | — |   |   |    | —  |   |   |
| Morteza Saidi     |   | 1/17/06  |   |   | —  |   |   |   | 540,000 | (16)   |   |   | 180,000 | (17)   |   |   | $      | 1.64   |   |   |   | 1/16/2016  |   |     | 1/17/06 |   |    | 10,000  | (18)   |   |   | $       | 15,700  |   |   |    | — |   |   |    | —  |   |   |
|                   |   |     |   |   | —  |   |   |   | —  |   |   |   | —  |   |   |   | — |   |   |   | — |       |   | 8/10/06  |    |   | 35,225  | (19)    |   |   | $      | 55,303  |    |   |   | —  |   |   |   | —  |    |   |
| Rainer N. Growitz |   | 1/31/00  |   |   | 189,064 | (20)   |   |   | 120,000 |   |   |   | —  |   |   |   | $      | 1.37   |   |   |   | 1/30/2010  |   |     | 8/10/06 |   |    | 28,951  | (21)   |   |   | $       | 45,453  |   |   |    | — |   |   |    | —  |   |   |
|                   |   | 4/3/01   |   |   | 50,000  | (22)   |   |   | —  |   |   |   | —  |   |   |   | $      | 2.22   |   |   |   | 4/2/2011   |   |     | —  |   |    | —  |   |   |   | —  |    |   |   | —  |   |   |   | —  |    |   |
|                   |   | 11/9/04  |   |   | —  |   |   |   | —  |   |   |   | 25,000  | (23)   |   |   | $      | 2.23   |   |   |   | 11/8/2014  |   |     | —  |   |    | —  |   |   |   | —  |    |   |   | —  |   |   |   | —  |    |   |

----

              (1)  Theoption was granted on July 15, 2003 and vests annually over 4 years.

              (2)  Theoption was granted on July 22, 2004 and vests annually over 4 years.

              (3)  500,000shares of restricted stock were granted on July 29, 2005 and vest monthlyover 36 months.

              (4)  500,000shares of restricted stock were granted on January 13, 2006 and vest basedon performance targets which are based on EBITDA, revenue, stock price andcompletion of a pre-determined corporate event. 150,000 shares of restrictedstock have vested as at December 31, 2006.

              (5)  366,300PARSUs were granted on August 10, 2006 and may vest on an acceleratedbasis based on performance criteria determined by the Compensation Committee ofthe Board of Directors or cliff vest after 4 years. 27,380 PARSUs have vestedas at December 31, 2006.

              (6)  500,000options were granted on April 10, 2006 and vest 25% one year after April 10,2006 and 1/36 per month of service thereafter.

              (7)  180,000options were granted on April 10, 2006 and vest based on performancetargets which are based on EBITDA, stock price targets and successfulimplementation of a new ERP system.

              (8)  10,000shares of restricted stock were granted on April 10, 2006 and vest 100%one year after April 10, 2006.

              (9)  98,000PARSUs were granted on August 10, 2006 and may vest on an acceleratedbasis based on performance criteria determined by the Compensation Committee ofthe Board of Directors or cliff vest after 4 years. 8,846 PARSUs have vested asat December 31, 2006.

          (10)  450,000options were granted on August 8, 2005 and vest annually over 4 years.

          (11)  98,000PARSUs were granted on August 10, 2006 and may vest on an acceleratedbasis based on performance criteria determined by the Compensation Committee ofthe Board of Directors or cliff vest after 4 years. 7,602 PARSUs have vested asat December 31, 2006.

          (12)  75,000shares of restricted stock were granted on November 30,2005 and 75,000shares of restricted stock were granted on October 19, 2006. Both awardsvest upon completion of a pre-determined corporate event.

          (13)  500,000options were granted on October 24, 2005 and vest 25% one year after October 24,2006 and 1/36 per month of service thereafter.

          (14)  200,000options were granted on October 24, 2005 and vest based on performancetargets which are based on EBITDA, revenue and gross margin on products soldthrough distribution. 10,000 options have vested as at December 31, 2006.

          (15)  45,500PARSUs were granted on August 10, 2006 and may vest on an acceleratedbasis based on performance criteria determined by the Compensation Committee ofthe Board of Directors or cliff vest after 4 years. 3,688 PARSUs have vested asat December 31, 2006.

          (16)  540,000options were granted on January 17, 2006 and vest 25% one year after January 17,2006 and 1/36 per month of service thereafter.

19

----

          (17)  180,000options were granted on January 17, 2006 and vest based on performancecriteria determined by the Compensation Committee of the Board of Directors.

          (18)  10,000shares of restricted stock were granted on January 17, 2006 and vest 100%one year after January 17, 2006.

          (19)  38,500PARSUs were granted on August 10, 2006 and may vest on an acceleratedbasis based on performance criteria determined by the Compensation Committee ofthe Board of Directors or cliff vest after 4 years. 3,275 PARSUs have vested asat December 31, 2006.

          (20)  368,064options were granted on January 31, 2000. 150,000 options vest annuallyover 5 years; 150,000 vest based on performance criteria or cliff vest on January 31,2009 and 68,064 vested 100% on January 31, 2000.

          (21)  31,500PARSUs were granted on August 10, 2006 and may vest on an acceleratedbasis based on performance criteria determined by the Compensation Committee ofthe Board of Directors or cliff vest after 4 years. 2,549 PARSUs have vested asat December 31, 2006.

          (22)  50,000options were granted on April 3, 2001 and vest annually over 5 years.

          (23)  25,000options were granted on November 9, 2004 and vest based on performancecriteria.

**OPTION EXERCISESAND STOCK VESTED FOR 2006**

Thefollowing table sets forth for the fiscal year ended December 31, 2006certain information regarding options exercised by our named executive officersand the vesting of restricted stock awards:

| ** **        | ** ** | **Option Awards** | ** ** | **Stock Awards**                                               | ** ** |
|-------------------|------------|------------------------|------------|---------------------------------------------------------------------|------------|
| **Name**          | ** ** | ** **             | ** ** | **Number of  Shares Acquired  On Exercise (#)** | ** ** | **Value Realized  on Exercise ($)** | ** ** | **Number of  Shares Acquired  on Vesting (#)** | ** ** | **Value Realized  on Vesting ($)** | ** ** |
| Bruce W. Diamond  |       |                   | —     |                                                                |       |   | $ | — |   |   |   | 352,786 |   |   |   | $ | 735,906 |   |   |
| R. Gregory Miller |       |                   | —     |                                                                |       |   | $ | — |   |   |   | 8,846 |   |   |   | $ | 13,888 |   |   |
| Mark Knoch        |       |                   | —     |                                                                |       |   | $ | — |   |   |   | 120,102 |   |   |   | $ | 199,810 |   |   |
| Haresh Patel      |       |                   | —     |                                                                |       |   | $ | — |   |   |   | 159,521 |   |   |   | $ | 366,998 |   |   |
| Morteza Saidi     |       |                   | —     |                                                                |       |   | $ | — |   |   |   | 3,275 |   |   |   | $ | 5,142 |   |   |
| Rainer N. Growitz |       |                   | 4,000      |                                                                |       |   | $ | 7,515 |   |   |   | 12,549 |   |   |   | $ | 29,152 |   |   |
|                   |            |                        |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**COMPENSATION OFDIRECTORS FOR 2006**

The followingtable sets forth the annual compensation paid or accrued by the Company to oron behalf of our directors, other than employee directors for the fiscal yearended December 31, 2006.

| **Name(1)**                | ** ** | ** ** | ** ** | **Fees Earned  or Paid in  Cash ($)(2)** | ** ** | **Stock  Awards ($)(3)** | ** ** | **Option  Awards ($)(4)** | ** ** | **Change in  Pension Value  and Deferred  Compensation  Earnings ($)(5)** | ** ** | **All Other  Compensation ($)** | ** ** | **Total ($)** | ** ** |
|----------------------------|------------|------------|------------|--------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------|------------|
| **Current Directors:**     | ** ** |       | ** ** | ** **                                                   |       |                          | ** ** | ** **                     |       |                                                                                          | ** ** | ** **                                |       |               | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| W. Dexter  Paine, III |       |       | $          | 30,125                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 9,819              | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 39,944 |   |
| Michael E.  Holmstrom      |       |       | $          | 51,375                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 14,606             | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 65,981 |   |
| Liane J.  Pelletier        |       |       | $          | 25,625                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 28,278             | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 53,903 |   |
| Jack G. Levin              |       |       | $          | 20,750                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 4,294              | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 25,044 |   |
| Patrice M.  Daniels        |       |       | $          | 15,997                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 26,379             | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 42,376 |   |
| Catherine P. Lego          |       |       | $          | 41,500                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 11,419             | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 52,919 |   |
| Robert Whelton             |       |       | $          | 14,917                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 7,860              | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 22,777 |   |
| **Former  Directors:**     | ** ** |       | ** ** | ** **                                                   |       |                          | ** ** | ** **                     |       |                                                                                          | ** ** | ** **                                |       |               | ** ** | ** ** |   |   | ** ** | ** ** |   | ** ** | ** ** |
| Dag F. Wittusen            |       |       | $          | 11,230                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | 4,251              | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 15,481 |   |
| Herald Y. Chen             |       |       | $          | 18,908                                                       | ** ** |                          |       | $                              | —     | ** **                                                                                    |       |                                      | $          | —             | ** ** |   |   | $ | — | ** ** |   |   | $ | — | ** ** |   | $ | 18,908 |   |

----

(1)          Directors who are alsoemployed by us do not receive additional compensation for their services as adirector. Bruce Diamond, the Company’s President and Chief Executive Officer,is our only employee director but is not included in this table as he receivesno additional compensation for his service as a director. All of thecompensation received by Mr. Diamond is shown in the Summary CompensationTable.

(2)          Our directors have notreceived stock awards.

20

----

(3)          Non-employeedirectors are eligible to participate in the WJ Communications, Inc.amended and restated 2000 Non-Employee Director Stock Compensation Plan (the “Non-EmployeeDirector Plan”) approved by the shareholders at the Company’s 2003 annualmeeting:

·       Each non-employee directorwho joins the Board will receive an option to acquire 36,000 shares of commonstock with an exercise price equal to the fair market value of the common stockupon the commencement of his or her directorship. Any director, officer,employee, partner or other affiliate of Fox Paine and/or its controlledaffiliates who becomes a member of the Board shall not be eligible for theinitial option award;

·       Each non-employee directorwho is re-elected to the Board will receive an option to acquire 18,000 sharesof common stock with an exercise price equal to the fair market value of thecommon stock upon the re-election of his or her directorship;

·       Each non-employee directorwill receive an annual cash award of $20,000 for every full year in which he orshe serves;

·       Each non-employee directorthat serves as chair of the Audit Committee will receive an annual cash awardof $12,500 for every full year in which he or she serves;

·       Each other non-employeedirector that serves as a member of the Audit Committee will receive an annualcash award of $5,000 for every full year in which he or she serves;

·       Annual cash awards shall bepayable quarterly in four equal installments beginning on the date on which theannual meeting of shareholders is held. In the event that a non-employeedirector’s directorship is terminated before completion of a full service year,the annual cash award will be prorated according to the time served during suchservice year;

·       Each non-employee directorwill receive $1,500 in cash for each Board or Committee meeting attended exceptif there are multiple meetings on the same day in which case the maximumpayment will be $1,500;

·       Each non-employee directorshall be reimbursed for reasonable, out-of-pocket expenses incurred inattending meetings of the Board or any committee thereof.

(4)          The amounts included in “OptionAwards” reflect the dollar amount recognized for financial statement reportingpurposes for the fiscal year ended December 31, 2006 in accordance withSFAS 123(R), disregarding forfeiture assumptions, and thus includesamounts from awards granted in and prior to 2006. See Note 8 to theConsolidated Financial Statements included in our Annual Report on Form 10-Kfor the assumptions used in determining fair value. As of December 31,2006, each of our non-employee directors held outstanding options to purchasethe following number of shares of our common stock: W. Dexter Paine, III,48,000; Michael E. Holmstrom, 53,000; Liane J. Pelletier, 63,000; Jack G.Levin, 28,000; Patrice M. Daniels, 43,000; Catherine P. Lego, 53,000; andRobert Whelton, 43,000.   During 2006,each of our non-employee directors was granted an option to purchase 18,000shares of common stock with a grant date fair value of $12,603. Options topurchase shares of common stock issued pursuant to the Non-Employee DirectorPlan will vest and become exercisable in cumulative annual installments of 25%on each of the first, second, third and fourth anniversaries of the date of thegrant of the option, unless a change in control (as defined in the Non-EmployeeDirector Plan) occurs, whereby all options vest and become immediatelyexercisable in exchange for the per share consideration to be received in thechange in control by holders of common stock, or the cash equivalent of thesame, at the discretion of the Board or any committee thereof to which theBoard delegates administration of the Non-Employee Director Plan (the “PlanAdministrator”).

21

----

(5)          Eachnon-employee director may elect to defer receipt of all or a portion of thecash otherwise payable. In the event such an election is made, the electingnon-employee director will receive his or her cash in one or a series of distributionsto commence as soon as practicable following the date of termination of his orher directorship. In the event a change in control occurs, all deferred cash isdistributed to the electing non-employee director.

**COMPENSATIONCOMMITTEE REPORT**

The Compensation Committee has reviewed and discussedthe Compensation Discussion and Analysis with the Company’s management.

Basedon the Compensation Committee’s review and discussion noted above, theCompensation Committee recommended to the Board of Directors that theCompensation Discussion and Analysis be included in this Amendment No. 1on Form 10-K/A.
|        | Submitted by the  Compensation Committee of the Board of Directors of WJ  Communications, Inc. |
|--------|-----------------------------------------------------------------------------------------------------|
|   | W. Dexter Paine, III                                                                           |
|   | Liane J. Pelletier                                                                                  |

 

**COMPENSATIONCOMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**

The Compensation Committee is composed of W. DexterPaine, III and Liane J. Pelletier, neither of who are or have ever beenour officer or employee. W. Dexter Paine, III is President of Fox Paine &Company LLC and the information set forth in Item 13 below is incorporatedherein by reference. No executive officer of the Company serves as a directorof another entity.

22

----

**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Thefollowing table lists, as of March 15, 2007, information as to thebeneficial ownership of Common Stock by (i) each of the Company’sdirectors and nominee for directorship, (ii) each executive officer of theCompany for whom information is given in the Summary Compensation Table under “Compensationof Executive Officers” above, (iii) all directors and executive officersas a group, and (iv) each person or entity believed by the Company tobeneficially own more than five percent (5%) of the Common Stock outstanding.Except as otherwise indicated in the footnotes below, each beneficial owner hasthe sole power to vote and to dispose of all shares held by that holder. Ineach instance, information as to the number of shares owned and the nature ofownership has been provided by the individuals identified or described and isnot within the direct knowledge of the Company.

| **Name and Address of Beneficial Owner(1)** | ** ** | ** ** | ** ** | **Amount and Nature  of Beneficial  Ownership(2)** | ** ** | **Percent of  Common Stock(2)** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------|------------|
| Fox Paine  Capital, LLC(3)                                           |       |       | 25,492,044 |                                                              |       |                                      | 37.3       | % |   |
| Fox Paine Capital  Fund, L.P(3)                                      |       |       | 24,155,413 |                                                              |       |                                      | 35.3       | % |   |
| FPC Investors,  L.P(3)                                               |       |       | 358,422    |                                                              |       |                                      | *          |   |   |
| Kopp Investment  Advisors, LLC(4)                                    |       |       | 7,796,641  |                                                              |       |                                      | 11.4       | % |   |
| W. Dexter  Paine, III(5)                                        |       |       | 25,554,673 |                                                              |       |                                      | 37.4       | % |   |
| Liane J.  Pelletier(6)                                               |       |       | 26,250     |                                                              |       |                                      | *          |   |   |
| Partrice M.  Daniels                                                 |       |       | —     |                                                              |       |                                      | *          |   |   |
| Michael E.  Holmstrom(7)                                             |       |       | 25,000     |                                                              |       |                                      | *          |   |   |
| Jack G. Levin(8)                                                     |       |       | 2,500      |                                                              |       |                                      | *          |   |   |
| Catherine P. Lego(9)                                                 |       |       | 45,000     |                                                              |       |                                      | *          |   |   |
| Robert  Whelton(10)                                                  |       |       | 6,250      |                                                              |       |                                      | *          |   |   |
| Bruce W.  Diamond(11)                                                |       |       | 933,194    |                                                              |       |                                      | 1.4        | % |   |
| Haresh Patel(12)                                                     |       |       | 199,612    |                                                              |       |                                      | *          |   |   |
| Mark Knoch(13)                                                       |       |       | 270,469    |                                                              |       |                                      | *          |   |   |
| Morteza Saidi(14)                                                    |       |       | 176,399    |                                                              |       |                                      | *          |   |   |
| R. Gregory  Miller(15)                                               |       |       | 160,482    |                                                              |       |                                      | *          |   |   |
| Rainer N.  Growitz(16)                                               |       |       | 288,578    |                                                              |       |                                      | *          |   |   |
| *All directors and  executive officers as a group (14 persons)       |       |       | 27,688,407 |                                                              |       |                                      | 39.9       | % |   |

----

                 * The percentage of shares beneficially owneddoes not exceed 1%.

       (1) Unless otherwise indicated, the address of each of the beneficialowners identified is c/o WJ Communications, Inc., 401 River Oaks Parkway,San Jose, California 95134.

       (2) Unless otherwise noted, each person has voting and investment power,with respect to all such shares. Based on 68,354,373 shares of Common Stockoutstanding. Pursuant to the rules of the Securities and ExchangeCommission, certain shares of Common Stock which a person has the right toacquire within 60 days of the date hereof pursuant to the exercise of stockoptions are deemed to be outstanding for the purpose of computing thepercentage ownership of such person but are not deemed outstanding for thepurpose of computing the percentage ownership of any other person.

       (3) Fox Paine & Company, LLC is the manager of (i) FoxPaine Capital Fund, LP (“LP1”), a direct owner of 24,155,413 shares of CommonStock of WJ Communications, Inc. (the “Issuer”), and (ii) FPCInvestors, LP (“LP2”) (collectively, LP1 and LP2 are “LPs”), a direct owner of358,422 shares of Common Stock of the Issuer. Fox Paine Capital, LLC is theGeneral Partner of each of the LPs and the manager of each of WJ CoinvestmentFund I, LLC, WJ Coinvestment Fund III, LLC and WJ Coinvestment Fund IV,LLC (collectively, the “Funds”), which directly own 601,478, 251,155 and 

23

----

125,576 shares, respectively,of Common Stock (the “Shares”) of the Issuer. As a result, each of theReporting Persons may be deemed to be the indirect beneficial owners of25,492,044 shares of Common Stock of the Issuer owned by the LPs and the Funds.

       (4) As reported by Kopp Investment Advisors, LLC and related entities onSchedule 13G filed with the Securities and Exchange Commission on January 23,2007. In its Schedule 13G, Kopp Investment Advisors, LLC states that as of December 31,2006, it has sole voting power as to 5,076,741 shares, shared voting power asto no shares, sole dispositive power with respect to 703,800 shares and shareddispositive power with respect to 4,773,991 shares. In addition, Mr. LeRoyC. Kopp, who controls Kopp Holding Company, LLC which owns 100% of KoppInvestment Advisors, LLC, has sole voting power as to 2,318,900 shares, sharedvoting power as to no shares, sole dispositive power with respect to 2,318,900shares and shared dispositive power with respect to no shares. The addressof Kopp Investment Advisors, LLC and related entities is 7701 FranceAvenue South, Suite 500, Edina, MN 55435

       (5) Includes 25,492,044 shares beneficially owned as described infootnote 3, 47,629 shares awarded to Mr. Paine under the amended andrestated 2000 Non Employee Director Stock-Compensation Plan receipt of whichhas been deferred, and 15,000 shares issuable to Mr. Paine subject tocurrently exercisable options.

       (6) Represents 26,250 shares issuable to Ms. Pelletier subject tocurrently exercisable options.

       (7) Represents 10,000 shares held of record by Mr. Holmstrom and15,000 shares issuable to subject to currently exercisable options.

       (8) Represents 2,500 shares issuable to Mr. Levin subject tocurrently exercisable options.

       (9) Represents 30,000 shares held of record by Ms. Lego and 15,000shares issuable subject to currently exercisable options.

(10) Represents 6,250 shares issuable to Mr. Whelton subject tocurrently exercisable options.

(11) Represents 46,228 shares held of record by Mr. Diamond, 23,750shares issuable subject to currently exercisable options, 15,676 shares ofperformance accelerated restricted stock units and 847,540 shares of restrictedstock. Pursuant to his employment agreement, Mr. Diamond was granted500,000 shares of time-vesting restricted stock on July 29, 2005 and500,000 shares of performance-vesting restricted stock on January 16,2006. The number of shares in the table includes the net number of shares ofrestricted stock beneficially owned as of such date after the disposition of anaggregate of 152,460 shares of vested time-vesting shares of restricted stocksolely for withholding tax purposes

(12) Represents 2,112 shares of performance accelerated restricted stockunits and  197,500 shares issuablesubject to currently exercisable options.

(13) Represents 3,616 shares held of record by Mr. Knoch, 112,500shares issuable subject to currently exercisable options, 4,353 shares ofperformance accelerated restricted stock units and 150,000 shares of restrictedstock. Pursuant to his employment agreement, Mr. Knock was granted 150,000shares of performance restricted stock.

(14) Represents 1,875 shares of performance accelerated restricted stockunits, 168,750 shares issuable subject to currently exercisable options and5,774 shares of restricted stock.

(15) Represents 10,000 shares held of record by Mr. Miller, 135,417shares issuable subject to currently exercisable options, 5,065 shares ofperformance accelerated restricted stock units and 10,000 restricted stock.Pursuant to his employment agreement, Mr. Miller was granted 10,000 sharesof time-vesting restricted stock on April 10, 2006.

24

----

(16) Represents 48,054 shares held of record by Mr. Growitz,239,064 shares issuable subject to currently exercisable options and 1,460 sharesof performance accelerated restricted stock units.

**Item 13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We entered into aManagement Agreement and a Shareholders’ Agreement with related persons in January 31,2000 that are still in effect today.

**ManagementAgreement**

On January 31, 2000, Fox Paine Capital Fund, aninvestment fund managed by Fox Paine & Company, LLC (“Fox Paine &Company” or “Fox Paine”), became the controlling shareholder of the Company.Fox Paine Capital Fund acquired its controlling position in an all cash mergerbetween FP-WJ Acquisition Corp. and the Company, then called Watkins-JohnsonCompany (the “Recapitalization Merger”), whereby Fox Paine Capital Fund and itsco-investors paid a total of $50.8 million for approximately 91.1% of theCommon Stock of the Company (or $41.125 per pre-split share as the Common Stockwas then constituted). W. Dexter Paine, III, the Chairman of our Board ofDirectors, is the President of Fox Paine.

As part of the Recapitalization Merger, the Companyentered into a management agreement with Fox Paine & Company. Sincethe Recapitalization Merger, and for each subsequent year, the Company will payFox Paine a fee in the amount of 1% of the Company’s net income before interestexpense, interest income, income taxes, depreciation and amortization andequity in earnings (losses) of minority investments, calculated without regardto the fee. In exchange for its management fee, Fox Paine assists the Companywith its strategic planning, budgets and financial projections and helps theCompany identify possible strategic acquisitions and recruit qualifiedmanagement personnel. Fox Paine also assists in customer and supplierrelationships on behalf of the Company and consults with the Company on variousmatters including tax planning and public relations strategies, economic andindustry trends and executive compensation. Due to the Company’s loss incurredfrom 2003, 2004 and 2005, no management fees were paid to Fox Paine for theyears ended December 31, 2004, December 31, 2005 and December 31,2006. The Company has agreed to reimburse Fox Paine for its expenses incurredin providing these services. The Company paid Fox Paine $29,000, $29,000 and$108,000 for the reimbursement of expenses incurred by Fox Paine for the yearsended December 31, 2006, December 31, 2005 and December 31,2004, respectively. The Company also paid Fox Paine $700,000 in July of2004 for investment banking services rendered in connection with the EiCAcquisition that was completed on June 18, 2004.

Fox Paine will continue toprovide management services under this agreement until its affiliates no longerown shares of Common Stock or are no longer represented on the Board ofDirectors. The management agreement with the Company is similar to thoseentered into between Fox Paine and each of the other companies acquired by FoxPaine’s affiliates. In connection with this agreement, the Company has agreedto indemnify Fox Paine against various liabilities that may arise as a resultof the management services it will perform for the Company. The Company hasalso agreed to reimburse Fox Paine for its expenses incurred in providing theseservices.

**Shareholders’Agreement**

On January 31,2000, the Company entered into a shareholders’ agreement with Fox Paine CapitalFund, investors affiliated with Fox Paine Capital Fund and several non-fundinvestors, including co-investors and certain employees of the Company. Underthe shareholders’ agreement, subject to limited exceptions:

·       Fox Paine Capital Fund andits affiliates, as a group, may make up to five demands for registration underthe Securities Act of their shares of Common Stock;

25

----

·       In the event the Companyregisters any of its equity securities under the Securities Act, or shares ofCommon Stock of Fox Paine Capital Fund pursuant to a demand registration, eachof the Company’s other shareholders who are a party to the agreement, mayexercise piggyback registration rights to include all or a portion of itsshares of Common Stock in the registration.

In the event that either Fox Paine Capital Fund or itsaffiliates makes a demand for registration, the Company has agreed to pay allexpenses related to that registration. The Company has also agreed to indemnifyFox Paine Capital Fund against various liabilities associated with suchregistration.

The shareholders’ agreement also provides that theCompany’s shareholders who are a party to the agreement will vote their sharesin order to ensure that if and to the extent Fox Paine Capital Fund owns sharesof Common Stock, Fox Paine Capital Fund will be represented on the Board ofDirectors.

Fox Paine exercisedregistration rights in connection with the secondary underwritten publicoffering that we completed January 28, 2004.

**Policies andProcedures**

Our policies andprocedures with respect to the review, approval and ratification oftransactions with related persons is that any such transactions are subject tothe review and approval by the Audit Committee of the Board of Directors. Sincethe foregoing related party transactions were entered into in January of2001, they pre-date our becoming a public company and were not subject to AuditCommittee review or approval.

**DirectorIndependence**

As required under NASDAQMarketplace Rules, a majority of our board is comprised of independentdirectors. As of the date of this report, our board has determined for suchpurpose that Michael E. Holmstrom, Liane J. Pelletier, Patrice M. Daniels,Catherine P. Lego and Robert Whelton are each independent as defined in theNASDAQ Marketplace Rules. Our audit committee, compensation committee andcorporate governance and nominating committee is comprised solely ofindependent directors.

**Item 14.**                 PRINCIPALACCOUNTANT FEES AND SERVICES

Feesbilled by our principal accounting firm, Deloitte & Touche LLP, themember firms of deloitte touche tohmatsu, and their respective affiliates(collectively, the “Deloitte Entities”) are as follows:

| ** **          | ** ** | **Year Ended**   | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Audit fees          |       |                  | $          | 680,008 |   |   |   | $ | 708,600 |   |   |
| Audit-related  fees |       |                  | —     |   |   |   | 161,195 |   |   |
| Tax fees            |       |                  | 25,673     |   |   |   | 134,546 |   |   |
| All other fees      |       |                  | —     |   |   |   | — |   |   |
| Total               |       |                  | $          | 705,681 |   |   |   | $ | 1,004,341 |   |   |

 

Audit fees billed or expected to be billed by theDeloitte Entities include professional services rendered for the audit of ourannual financial statements, the reviews of the financial statements includedin our Quarterly Reports on Form 10-Q and the filing of RegistrationStatements with the Securities and Exchange Commission and fees required by theSarbanes-Oxley Act of 2002. Audit-related fees are fees billed for assuranceand related services that are reasonably related to the performance of theaudit or review of financial statements and included due diligence related tomergers and acquisitions, and consulting on financial accounting/reportingstandards and controls. Tax fees are professional services 

26

----

rendered for taxcompliance, tax consulting and tax planning including services related to theaudit of our 1996 through 2000 tax returns by the Internal Revenue Service andassociated amended state returns. All Other Fees consist of fees for productsand services other than the services reported above.

The Audit Committee hasconsidered whether the provision of non-audit services is compatible withmaintaining the principal accountant’s independence and has concluded that thenon-audit services provided by the Deloitte Entities are compatible withmaintaining the Deloitte Entities’ independence.

**Pre-ApprovalPolicies and Procedures**

The Audit Committee approves in advance all audit andpermissible non-audit services to be performed by our independent registeredpublic accounting firm. The Audit Committee considers whether the provision ofany proposed non-audit services is consistent with the SEC’s rules onauditor independence and has pre-approved certain specified audit and non-auditservices to be provided by the Deloitte Entities for up to twelve (12) monthsfrom the date of the pre-approval. If there are any additional services to beprovided, a request for pre-approval must be submitted by management to theAudit Committee for its consideration. The Audit Committee pre-approved all ofthe services performed in 2006 and 2005 by the Deloitte Entities relating tothe “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees”described above as required by the Sarbanes-Oxley Act of 2002.

27

----

**PART IV**

**Item15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

| Exhibit    | ** ** | ** **                                                                                                                                                      |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Exhibit Description**                                                                                                                                    |
| 31.1       |       | Certification of Bruce W. Diamond, Chief Executive  Officer (principal executive officer) pursuant to Rule 13a-14 of  the Securities Exchange Act of 1934  |
| 31.2       |       | Certification of R. Gregory Miller, Chief Financial  Officer (principal financial officer) pursuant to Rule 13a-14 of  the Securities Exchange Act of 1934 |

 

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized, in the City of San Jose,State of California, on the 26th day of April 2007.
|                                 |   | WJ  COMMUNICATIONS, INC.               |
|---------------------------------|--------|----------------------------------------|
|                            |   | (Registrant)                           |
| Date: April 26,  2007 | By:    | /s/  BRUCE W. DIAMOND                  |
|                            |   | Bruce W. Diamond                       |
|                            |   | President and  Chief Executive Officer |

 

29

----