UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-K

|ý                                                                    | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|-------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2007                         
|OR                                                                  
|o                                                                    | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                    to

Commission file number 000-31337

WJ COMMUNICATIONS, INC.(Exact name of registrant as specified in its charter)

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

(408) 577-6200(Registrant's telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on which RegisteredCommon Stock, $0.01 par value

NASDAQ Global Market


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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý    No o

Indicate by check mark if disclosure 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 information statements incorporated by reference in Part III of the
Form 10-K or any amendment to the Form 10-K. o

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

|Large accelerated filer o |  | Accelerated filer o |  | Non-accelerated filer ý (Do not check if a smaller reporting company) |  | Smaller reporting company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

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

As of July 1, 2007, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of voting stock
held by non-affiliates of the registrant was approximately $60,986,226 (based upon the $1.75 closing price of the common stock as reported by the NASDAQ Global Market on June 29,
2007). Shares of the registrant's common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been
excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

As
of March 21, 2008 there were 68,916,945 shares outstanding of the registrant's common stock, $0.01 par value.

DOCUMENTS
INCORPORATED BY REFERENCE: The information required by Items 10, 11, 12, 13 and 14 of Part III of this Report is incorporated by reference to the registrant's
Form 10-K/A which will be filed no later than 120 days after the registrant's fiscal year ended December 31, 2007.



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SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, the shareholders' annual report, press releases and certain information provided periodically in writing or
orally by the Company's officers, directors or agents contain certain forward-looking statements within the meaning of the federal securities laws that also involve substantial uncertainties and
risks. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such
as "may," "anticipates," "expects," "intends," "plans," "believes," "seeks" and "estimates" and variations of these words and similar expressions, are intended to identify forward-looking statements.
These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from those expressed, implied or forecasted in the forward-looking statements. In addition, the forward-looking events discussed in this annual report might not
occur. These risks and uncertainties include, among others, those described in the section of this report entitled "Risk Factors." Readers should also carefully review the risk factors described in
the other documents that we file from time to time with the Securities and Exchange Commission. We assume no obligation to update or revise the forward-looking statements or risks and uncertainties to
reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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WJ COMMUNICATIONS, INC.  FORM 10-K ANNUAL REPORT  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007  TABLE OF CONTENTS

|         |  |                                                                                                              |  | Page
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  | PART I                                                                                                       |  |     
|Item 1.  |  | Business                                                                                                     |  | 4   
|Item 1a. |  | Risk Factors                                                                                                 |  | 15  
|Item 1b. |  | Unresolved Staff Comments                                                                                    |  | 32  
|Item 2.  |  | Properties                                                                                                   |  | 32  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 33  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 33  
|         |  | PART II                                                                                                      |  |     
|Item 5.  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 34  
|Item 6.  |  | Selected Consolidated Financial Data                                                                         |  | 36  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 38  
|Item 7a. |  | Quantitative and Qualitative Disclosure About Market Risks                                                   |  | 55  
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                                                     |  | 56  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 101 
|Item 9a. |  | Controls and Procedures                                                                                      |  | 101 
|Item 9b. |  | Other Information                                                                                            |  | 102 
|         |  | PART III                                                                                                     |  |     
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 103 
|Item 11. |  | Executive Compensation                                                                                       |  | 103 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 103 
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 103 
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 103 
|         |  | PART IV                                                                                                      |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 104 
|         |  | Signatures                                                                                                   |  | 109 

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PART I

Item 1.    BUSINESS

Overview

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

During
the first quarter of 2007, we ceased internal wafer manufacturing and adopted the fabless semiconductor business model. During the second quarter of 2007, we sold our fab assets
to AmpTech, Inc. The fabless semiconductor model is more cost effective than having our own facility due to our limited volumes and the cost of developing and supporting our process
technologies. There is a viable commercial wafer foundry market which we have accessed for the production of our wafers and
we may enter into limited process development activities with some of these vendors to further optimize the processes and our products. We have manufacturing and supply agreements with Global
Communications Semiconductors, Inc. (GCS) and AmpTech, Inc. to provide our GaAs and InGaP HBT wafers.

Building
on the fabless business model, in order to further drive anticipated future cost savings, on August 4, 2007 we committed to an offshore program that will result in the
transition of our final test and support operations to the Philippines. The operations are currently located in our San Jose, California facility. We incurred certain restructuring costs during 2007
associated with the implementation of this plan of approximately $150,000 as well as approximately $380,000 in dual staffing and start-up costs in 2007. The transition is expected to be
completed in the first quarter of 2008 and we anticipate cost savings of approximately $400,000 per quarter beginning in the second quarter of 2008.

During
the third quarter of 2007, we implemented a restructuring plan for our Texas facility to cover the lease abandonment of the unused portion of our Texas facility and accrued
$142,000 for this restructuring cost. During the fourth quarter of 2007, we reached an early lease termination agreement with the landlord and turned the facility over to the landlord late in December
which completed this restructuring program. Total costs associated with this program were restructuring costs of $142,000 and operating costs of $7,000.

We
announced on October 10, 2007 that we had engaged Thomas Weisel Partners as our financial advisor to assist us in the evaluation of strategic alternatives to maximize
shareholder value. We entered into a definitive merger agreement dated March 9, 2008 with TriQuint Semiconductor, Inc. to be purchased for $1.00 per share. The closing of the merger is
subject to customary closing conditions including approval by our stockholders.

In
2004 and 2005 we augmented our technology base and design capabilities with two acquisitions. On January 28, 2005 we completed our acquisition of Telenexus, Inc.
("Telenexus"). We believe the

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addition
of Telenexus' RFID products and technology have enhanced our RFID reader offerings enabling us to further capitalize on the market opportunity. On June 18, 2004, we completed our
acquisition of the wireless infrastructure business and associated assets from EiC Corporation, a California corporation and EiC Enterprises Limited (together "EiC"). We believe that the addition of
EiC's technical expertise further enhances WJ's strategy of offering customers what we believe to be industry leading products for the wireless infrastructure market.

WJ
Communications, Inc. (formerly Watkins Johnson Company, "we", "us", "our" or the "Company") was formed after a recapitalization merger with Fox Paine on January 31,
2000. We were originally incorporated in California and reincorporated in Delaware in August 2000.

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

Industry Background

Industry overview

We
believe several important trends provide long-term growth opportunities for RF technology in markets such as wireless communications and RFID. Market trends that drive the
growth in demand for high-performance RF products include:



Network Infrastructure

Consumers and businesses are continually seeking improved connectivity, mobility, functionality, reliability and bandwidth from voice and data networks. Increased
deployment and use of wireless communications systems and the rise of wireless Internet applications have also placed additional demand on network infrastructure.

Wireless
communications providers continue to make investments in network infrastructure to expand capacity and offer a broader range of services to support the changing needs of end
users while reducing their operating costs. In addition, wireless network operators and service providers have announced their plans for deployment and are deploying their next generation wireless
services and networks, referred to in the industry as 2.5G and 3G networks. Sprint and Clearwire have also

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announced
their commitment to a future deployment of another next generation 4G network technology utilizing WiMax (Worldwide Interoperability for Microwave Access) technology and there are a number
of WiMax network trials being conducted on a worldwide basis. These networks will offer subscribers increased speeds, additional application capabilities, and broader compatible coverage across
geographies. To meet these objectives, network operators are building new and upgrading existing mobile networks to offer greater network capacity and speed to deliver voice and data services. These
next generation wireless networks require new equipment based on more advanced RF semiconductor technology.

Original
equipment manufacturers ("OEMs") must develop systems to meet the requirements of communications service providers. In meeting these requirements, OEMs face significant
market and product performance pressures including lower cost, higher performance, greater reliability and shorter time to market. OEMs are adopting new approaches in designing systems to
deliver the performance and feature improvements that service providers require. In a typical communications system, the principal functional blocks are the RF subsystem, which receives, amplifies and
transmits signals, the signal processor, which encodes and decodes digitized signals, and the antenna. Since the RF subsystem receives the signal, interfaces with the signal processor, and amplifies
and transmits the signal, a system's performance and signal quality are significantly affected by the RF subsystem. To lower their production costs and shorten product development cycles,
OEMs are seeking innovative RF components from third-party suppliers. We believe that there is a substantial market opportunity for a third-party supplier of high performance RF components who
can meet the needs for flexibility, performance and value required by OEMs.

RF
components are generally technically sensitive devices that demand circuit design expertise and sophisticated process technology. RF components are tightly coupled to a process
technology to achieve their performance. Although there are multiple RF process technologies available to a designer, either through foundries or the suppliers' internal wafer fabrication facilities,
the complexity of adopting a
new technology to the end component performance has resulted in companies focusing their efforts in selected product areas which has allowed multiple suppliers to target different segments of the
markets.

Radio Frequency Identification (RFID)

Radio frequency identification, or RFID, is a generic term for technologies that use radio waves to automatically identify individual items. In general, the
system consists of an RFID tag, which contains the identification of the item tagged, and an RFID reader, which sends out a radio signal to read the information contained on the tag. The RFID tag is
made up of a microchip with an antenna, and it can be either passive or active. Passive RFID tags contain no internal power source such as a battery. To read a passive RFID tag, the reader sends out
electromagnetic waves. Passive RFID tags draw power from these electromagnetic waves and use it to power the microchip's circuits. The microchip modulates the waves that the tag reflects back to the
reader and the reader converts the returned waves into digital data. The digital data is then passed on to a host computer that can make use of the data. Active RFID tags operate more or less in the
same manner except that the tags have a battery; this internal power supply in the tag allows for active response to the reader as well as active data manipulation on the tag.

Profitable
and effective commercial RFID systems have been in operation for over a decade. The current market is driven by traditional applications such as security/access control,
automobile immobilization, toll collection, and transportation. Many other applications are in the early adoption phase, including pallet tracking, point of sale commerce and baggage handling. There
are notable obstacles to overcome before significant growth can be seen, including but not limited to, acceptable industry and application standards, cost, end user education, frequency regulations,
power restrictions, indirect channel support and the highly fragmented competitive environment.

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Going
forward, the supply chain will begin to drive the RFID market. For example, Wal-Mart Stores Inc. (NYSE: WMT) and the United States Department of Defense mandate
for their respective suppliers to deliver product RFID tagged at the case and pallet level is expected to help spur the industry to move beyond experimentation to implementation. The next level in the
supply chain will be item level tagging leading to the need for a high volume of shelf readers so that real time inventory tracking and shrinkage reduction can be put into place. In our view, the
natural evolution for RFID will be into cell phones and other portable devices for point of sale applications.

The RF Challenge

Radio frequency ("RF") semiconductor technology presents different engineering challenges than standard semiconductor design. In general, digital semiconductors
are created from standard semiconductor circuit designs that have predictable performance. This permits an automated design process. Each RF component, however, has distinctly different
characteristics that influence overall system performance in complex ways. Instead of having stable inputs and outputs, the RF circuit characteristics can drift based on process variations,
temperature, power supply and other variables. As a result, performance characteristics are unique for each device, and the RF engineer must evaluate and develop new designs on a continuous basis for
each system performance level and frequency. In addition to being skilled in semiconductor circuit design, the RF circuit designer must have a thorough understanding of signal processing principles,
must understand the totality of the system for which the device is intended and must be able to create designs that function within the unique parameters of different wireless system architectures.

The
knowledge and skills required to design and produce RF semiconductors, components and integrated modules are unique and can take many years to develop. Manufacturers seek companies
with the technical skills and engineering resources to design, produce and integrate RF semiconductors and the other advanced products required by current and future generations of wireless
communications equipment.

The WJ Communications Solution

With the ability to design and produce RF semiconductors, components, integrated RF modules and interface these assemblies with other network elements, we enable
both current and next generation wireless networks and RFID systems worldwide. Our core technology lies within our advanced RF semiconductor designs.

Our
RF expertise covers a broad range of frequencies used in advanced communications networks today. Our capabilities are comprised of the following key elements:



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Business Strategy

Our objective is to be a leading supplier of innovative RF semiconductor products. To meet this goal, we intend to:



Products and Technology

We are committed to being a leader and innovator of RF products and believe that we are positioned to provide a broad portfolio of RF technology products. Our RF
products are comprised primarily of semiconductors including amplifiers, mixers, RF integrated circuits, transistors, chipsets and multi-chip modules ("MCMs"), and RFID mobile readers and
reader modules. Our MCMs integrate multiple RF semiconductors, process technologies and functions in a single package allowing us to significantly reduce cost, power consumption and circuit
board space. Our ability to design our semiconductors in multiple process technologies enables us to address a variety of end-markets and applications.

Semiconductor Products and Process Technologies

Our semiconductor products include a broad array of high performance semiconductors that we produce primarily for sale into the wireless infrastructure and RFID
reader markets.

Our
semiconductor products are comprised primarily of amplifiers, mixers, multi-chip modules and transistors. Amplifiers and transistors increase the level of signals while
mixers translate a signal from one frequency to another. The strength of our semiconductor technology lies in our ability to design and in the case of our gallium arsenide ("GaAs") semiconductor
products, produce highly linear products. High linearity is one of the most critical performance parameters for wireless networks and represents a semiconductors' ability to amplify and transform
signals with minimal distortion and interference.

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We
have expertise in designing and manufacturing RF components in multiple process technologies. We use the following mature processes to support our current product portfolio. These
technologies are also used actively in new product design and will be for the next four to five years.



During
2007, we qualified and introduced into production the 28 Volt version of our 12 Volt InGaP HBT process. This new process technology supports our new and expanding line of
higher-powered amplifier products that operate at higher supply voltages.

In
addition to the processes listed above, we design products using the following processes:



Finally,
we are continuously evaluating emerging process technologies for their suitability to future product offerings.

Customers

We sell our products principally to original equipment manufacturers, including their manufacturing subcontractors and to our distributor. We believe that we have
strong relationships with market leaders in our target markets. A sample of our revenue-producing customers includes:

Alcatel-Lucent
Intelleflex CorporationComScope, Inc. (Andrew Corporation)
Motorola, Inc. (including Symbol Technologies)Celestica, Inc.
Nokia Siemens NetworksEricsson
Nortel NetworksElcoteq Electronics Company
Powerwave Technologies, Inc.Flextronics International, Ltd.
Richardson Electronics, Ltd.Hitachi America, Ltd.
Samsung Electronics Co. Ltd.Huawei Technologies Co., Ltd.
ZTE Corporation


We
depend on a limited number of key customers for a majority of our sales. In 2007, Richardson Electronics, Ltd., our worldwide distributor of our RF semiconductor products,
Celestica, a contract manufacturer for several of our end customers, and Motorola each accounted for 10% or more of our sales and in aggregate accounted for approximately 70% of our sales. In 2006,
Richardson Electronics, Ltd and Celestica each accounted for 10% or more of our sales and in aggregate accounted for approximately 60% of our sales. Motorola acquired Symbol Technologies on
January 9, 2007. If we combined our sales to the two separate companies and treated them as one in 2006, the combined company would have been a 10% or more customer. In 2005, Richardson
Electronics, Ltd and Celestica each accounted for 10% or more of our sales and in aggregate accounted for approximately 58% of our sales. For further discussion see Footnote 13. We
expect that our key customers will continue to account for a substantial portion of our sales in 2008 and in the foreseeable future. These customers and their respective contributions to our net
revenue have varied and will likely continue to vary from period to period. We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without
incurring a significant penalty, and

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currently
we do not have agreements with any of our key customers that contain long-term commitments to purchase specified volumes of our products.

Sales, Marketing and Customer Support



Manufacturing

We completed our transition to a fabless business model with the March 2007 closure of our wafer manufacturing facility in Milpitas, California which had produced
a majority of our gallium arsenide semiconductor products in the past. We have qualified and are using Global Communications Semiconductors Inc. (GCS), to manufacture these products for us. In
May 2007, we sold a substantial portion of our wafer manufacturing equipment to AmpTech Inc. and entered into a wafer manufacturing and supply agreement with them to provide a second source of
manufacturing support for the products that we previously manufactured in our Milpitas facility. AmpTech is in the qualification process and had not as of the end of 2007 begun to supply production
wafers to us. We expect this to occur during 2008. We have previously used and plan to continue using external wafer foundries for our SiGe, MESFET and InGaP HBT semiconductor products. Our
semiconductor products are packaged in the Philippines, Malaysia, Thailand and China at vendor facilities.

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Our
San Jose, California facility produces our RFID products. We contract with a number of surface mount manufacturers for assembly and once the surface mount assembly operations are
completed, the products are shipped to our facility for testing and final configuration.

We
depend on single or limited source suppliers for the components and materials used in many of our products, including our SiGe processed wafers, 5 Volt, 12 Volt and 28 Volt InGaP HBT
processed wafers, gallium arsenide wafers, packaging, electronic components and antennas. Although we rely on limited or sole source suppliers for other components and materials, there are typically
alternative sources of supply available for them. If in the future we face difficulties obtaining these components and materials from any of our limited or sole source suppliers, we may face a delay
in the shipment of products which are produced using these components and materials while we identify and qualify an alternative source of supply, if available. As a result of these delays, we may
fail to satisfy customer orders and our sales may decline while we look for a suitable alternative supplier.

We
are committed to producing quality products and our management systems governing the production of our products are ISO 9001 (revision 2000) certified. The International
Organization for Standardization ("ISO") is a network of the national standards institutes of 148 countries including the United States of America. The ISO 9000 family of standards is primarily
concerned with "quality management," meaning the systems the organization utilizes to fulfill: the customer's quality requirements, and applicable regulatory requirements, while aiming to enhance
customer satisfaction, and achieve continual improvement of its performance in pursuit of these objectives. The ISO 9001: 2000 is approved as an American National Standard by the American
Society for Quality.

Our
systems are regularly assessed by independent certifying bodies, through routine quality system audits, for adherence to ISO 9001 standards.

Research and Development

Our future success depends on our ability to develop new designs, technologies and product enhancements. We have assembled a core team of experienced engineers
and technologists to accomplish these objectives. These employees are involved in advancing our core technologies, as well as applying these core technologies to our product development activities in
our target markets. In 2006, we established a design center in China in addition to our centers in San Jose, California and Plano, Texas. We have made, and will continue to make, a substantial
investment in research and development activities. Research and development costs, which are expensed when incurred, were $14.9 million, $18.3 million and $18.1 million for the
years 2007, 2006 and 2005, respectively.

Intellectual Property

The protection of our intellectual property is critical to our success. We rely on patent, copyright, trademark and trade secret laws, as well as confidentiality
procedures and contractual provisions, to protect our proprietary rights. We believe that one of our competitive strengths is our core competence in engineering, manufacturing and understanding our
customers and markets, and we take aggressive
steps to protect that knowledge. We apply for patents and enter into non-disclosure and confidentiality agreements to protect our proprietary technologies and know-how
resulting from our ongoing research and development.

We
seek patent protection for our unique developments in circuit designs, processes and algorithms. We have 4 United States patents and 11 foreign patents. We currently have 8 patent
applications pending in the United States Patent and Trademark Office. Our existing United States patents will expire between June 2007 and October 2022. We have chosen to pursue foreign patent
protection in selected foreign countries. Our failure to pursue foreign protection in certain countries and the fact that patent rights may be unavailable or limited in some foreign countries could
make it easier for our competitors to utilize our intellectual property. We cannot assure you that any patent will

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be
issued as a result of our pending applications or any future applications or that, if issued, these patents will be sufficient to protect our technology. In addition, we cannot assure you that any
existing or future United States or foreign patents will not be challenged, invalidated or circumvented, or that any patent granted will provide us with adequate protection or any competitive
advantages.

We
license various technologies from third parties that we have integrated into our products. We have a non-exclusive, non-transferable, perpetual license to use
particular thin-film technology and transferable, non-exclusive, perpetual licenses to use particular gallium arsenide technology, and technology used in the field of
commercial, or non-military, RF communications. Although our business does not depend on any of the licenses to a material extent, our failure to maintain these licenses could harm our
business.

We
generally enter into non-disclosure agreements with our vendors, customers and licensees. Our employees are generally required to enter into agreements providing for the
maintenance of confidentiality and the assignment of rights to inventions made by them while in our employ. We generally control access to the distribution of documentation and other information
concerning our intellectual property. We also have entered into non-disclosure agreements to protect our confidential information delivered to third parties, in connection with possible
strategic partnerships and for other purposes.

We
have entered into license agreements in connection with some of our recent business dispositions with respect to some of our intellectual property used in these sold businesses. We
cannot assure you that the other parties to these license agreements will honor the terms of the agreements or aggressively prevent the misappropriation or infringement of our intellectual property.
Further, under these license agreements, some of our intellectual property may be licensed to one or more of our competitors.

The
telecommunications industry is characterized by the vigorous protection and pursuit of intellectual property rights. We cannot assure you that actions alleging infringement by us of
third-party intellectual
property, misappropriation or misuse by us of third-party trade secrets or the invalidity of the patents held by us will not be asserted or prosecuted against us, or that any assertions of
infringement, misappropriation or misuse or prosecutions seeking to establish the invalidity of our patents will not harm our competitive position or reputation or result in significant monetary
expenditures.

Employees

We believe that one of our most important assets is our base of well-trained and experienced employees. As of December 31, 2007, we had 172
employees. We had a substantial reduction in the number of manufacturing related employees in the first half of 2007 as we completed the planned closure of our Milpitas wafer manufacturing facility.
None of our employees are covered by collective bargaining agreements or represented by labor unions, and we have never experienced a work stoppage. We believe our employee relations are good.

Backlog

Our backlog is comprised of standard purchase orders and annual contracts for the delivery of products. For our annual contracts, our major customers provide us
with rolling sales forecasts on a regular basis. These forecasts are subject to change, including changes as a result of changes in market conditions, and could fluctuate significantly from quarter to
quarter. At December 31, 2007, our backlog was $4.6 million, compared to $8.2 million at December 31, 2006. We include in our backlog all accepted product purchase orders
for which delivery has been specified within 90 days, including orders from distributors. We do not recognize revenue from sales through our distributors until the distributor has sold our
product to the end customer. Product orders in our backlog are subject to

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changes
in delivery schedules or quantities or to cancellation at the option of the purchaser without significant penalty. Our backlog may vary significantly from time to time depending upon the level
of capacity available to satisfy unfilled orders. Accordingly, although useful for scheduling production, we do not believe that backlog as of any particular date is necessarily indicative of our 2008
results.

Competition

The markets for our products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and
evolving industry standards. We compete primarily on the basis of product performance and design, reliability, quality, level of integration, delivery, price, customer support, reputation and the
availability and breadth of product offerings. In
each of the markets we serve, we compete primarily with other suppliers of high performance RF components. We also compete with current and potential communications equipment manufacturers who
manufacture RF components internally. We expect increased competition from existing competitors and from a number of companies that may enter the RF component market, as well as future competition
from companies that may offer new or emerging technologies. Some of our competitors are large public companies that have significantly greater financial, technical, marketing and other resources than
us. As a result, these competitors may be able to devote greater resources to the development, promotion, sale and support of their products. Furthermore, those of our competitors that have large
market capitalization or cash reserves may be better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines. Many of our
competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, these competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the promotion and sale of their products. Current and potential competitors have established or may establish financial or
strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors
could emerge and rapidly acquire significant market share. In addition, competitors may develop technologies that more effectively address our markets with products that offer enhanced features, lower
power requirements or lower cost. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business,
financial condition and results of operations.

Business Combinations

We have completed two acquisitions in connection with the implementation of our business strategy to acquire and develop new and complementary technologies.

On
January 28, 2005 we completed our acquisition of Telenexus, Inc. pursuant to an Agreement and Plan of Merger, dated January 19, 2005, by and between us, WJ
Newco, LLC (the "WJ Sub"), Telenexus and Richard J. Swanson, Wilfred K. Lau, David Fried, Kurt Christensen and Mark Sutton. Telenexus was merged with and into the WJ Sub effective on
January 29, 2005. The WJ Sub was the survivor in the merger and is our wholly owned subsidiary. Telenexus designs, develops, produces and markets radio frequency identification reader products
for a broad range of industries and markets. By virtue of the merger, we purchased through the WJ Sub all of the assets necessary for the conduct of the RFID business of Telenexus, consisting
primarily of, and including, but not limited to RFID modules, baseband processing algorithm technology, applications software and realizations of several reader product designs. The consideration we
paid on the closing date in connection with the merger consisted of cash in the amount of $3.0 million, which was paid out of our cash reserves on the closing date, and 2,333,333 shares of our
common stock valued at $8.2 million at the closing date. Including

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acquisition
costs of $230,000, the aggregate purchase price for the net assets of Telenexus totaled $11.4 million.

On
June 18, 2004, we completed our acquisition of the wireless infrastructure business and associated assets from EiC Corporation, a California corporation and EiC Enterprises
Limited (together "EiC"). The aggregate purchase price was $13.3 million which included consideration to EiC in the form of payments of cash of $10.0 million and the issuance of 737,000
shares of our common stock valued at $2.5 million, as well as acquisition related costs we incurred of $1.2 million and $152,000 of estimated registration statement related expenses
reduced by a $576,000 benefit from the termination settlement of the associated supply agreement with EiC recognized during our quarter ended December 31, 2004.

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

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

Compliance with Environmental, Health and Safety Regulations

We are committed to achieving high standards of environmental quality and product safety, and strive to provide a safe and healthy workplace for our employees,
contractors and the communities in which we do business. We have developed environmental, health and safety policies for our business, and internal processes focused on minimizing and properly
managing any hazardous materials used in our facilities and products.

The
manufacture, assembly and testing of our products requires the use of hazardous materials that are subject to a broad array of environmental, health and safety laws and regulations.
As we continue to use advanced process technologies, the materials, technologies and products themselves become increasingly complex. Our evaluations of new materials for use in research and
development, manufacturing, and assembly and test take into account environmental, health and safety considerations. Many new materials being evaluated for use may be subject to existing or future
laws and regulations. Failure to comply with any of the applicable laws or regulations could result in fines, suspension of production, alteration of fabrication and assembly processes, curtailment of
operations or sales, and legal liability. Our failure to properly manage the use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials could subject us to future
liabilities. Existing or
future laws and regulations could require us to procure pollution abatement or remediation equipment, modify product designs, or incur other expenses. In addition, restrictions on the use of certain
materials in our facilities or products in the future could have a material adverse effect on our operations. Compliance with these complex laws and regulations, as well as internal voluntary
programs, is integrated into our assembly and test processes.

Our
former Scotts Valley and Palo Alto sites have significant environmental liabilities for which in July 1999 we entered into and funded fixed price remediation contracts and obtained
cost overrun and

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unknown
pollution conditions insurance coverage. There can be no assurance that this insurance will be sufficient to cover all liabilities related to these two sites.

The
Scotts Valley site is a federal Superfund site. Chlorinated solvent and other contamination was identified at the site in the early 1980s, and by the late 1980s we had installed a
groundwater extraction and treatment system. In 1991, we entered into a consent decree with the United States Environmental Protection Agency providing for remediation of the site. In July 1999, we
signed a remediation agreement with an environmental consulting firm, ARCADIS Geraghty & Miller. Pursuant to this remediation agreement, we paid $3.0 million in exchange for which
ARCADIS agreed to perform the work necessary to assure satisfactory completion of our obligations under the consent decree. The agreement also contains a cost overrun guaranty from ARCADIS up to a
total project cost of $15.0 million. In addition, the agreement included procurement of a ten-year, claims-made insurance policy to cover overruns of up to
$10.0 million from Indian Harbor Insurance Company, along with a ten-year, claims-made $10.0 million policy to cover various unknown pollution conditions at the
site.

The
Palo Alto site is a state Superfund site and is within a larger, regional state Superfund site. As with the Scotts Valley site, contamination was discovered in the 1980s, and
groundwater extraction and treatment systems have been operating for several years at both the site and the regional site. In July 1999, we entered into a remediation agreement with an environmental
consulting firm, SECOR. Pursuant to this remediation agreement, we paid $2.4 million in exchange for which SECOR agreed to perform the work necessary to assure satisfactory completion of our
obligations under the applicable remediation orders. The payment included the premium for a thirty year, claims-made insurance policy to cover cost overruns up to $10.0 million from
AIG, along with a ten-year claims-made $10.0 million insurance policy to cover various unknown pollution conditions at the site.

With
respect to our remaining current or former production facilities, to date either no contamination of significance has been identified or reported to us or the regulatory agency
involved has granted closure with respect to the identified contamination.

Nevertheless,
we may face environmental liabilities related to these sites in the future which could harm our business.

Item 1a.    RISK FACTORS

You should carefully consider the risks described below before making an investment decision in our securities. These risk factors are
effective as of the date of this Annual Report on Form 10-K and shall be deemed to be modified or superseded to the extent that a statement contained in our future filings modifies
or replaces such statement. The forward-looking statements in this Annual Report on Form 10-K involve risks and uncertainties and actual results may differ materially from the
results we discuss in the forward-looking statements. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected.
In that case, the trading price of our stock could decline, and you may lose all or part of your investment. The most significant risks and uncertainties known to us that we believe make an investment
in our stock speculative or risky are set forth in this section. This section does not include those risks and uncertainties that could apply to any issuer or any offering.

If we fail to complete our proposed merger transaction with TriQuint, it could adversely affect us.

We entered into a definitive merger agreement dated March 9, 2008 with TriQuint Semiconductor, Inc. to be purchased for $1.00 per share in cash. We
are subject to certain risks as a result of this merger agreement, including the following:



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

We have not recorded operating income since 1999, and we may not be able to achieve revenue or earnings growth or obtain sufficient revenue to sustain
profitability. In 2007, our sales were $43.9 million and we incurred an operating loss of $8.1 million compared to sales of $48.8 million and an operating loss of
$10.8 million for 2006. In addition, our sales for 2005 were $31.6 million and we incurred an operating loss of $22.1 million. Our accumulated deficit was $190.8 million at
December 31, 2007.

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



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

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We operate in the highly cyclical semiconductor industry which has experienced significant fluctuations in demand.

The semiconductor industry is highly cyclical and has historically experienced significant fluctuations in demand for products. The industry has experienced
significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. These downturns have been characterized by diminished
product demand of end-customers, production overcapacity, high inventory levels and accelerated erosion of average selling prices.

We
have experienced these conditions in our business in the past and may experience such downturns in the future. Future downturns in the semiconductor industry could seriously impact
our revenues and harm our business, financial condition and results of operations.

We depend on Richardson Electronics, Ltd. for distribution of our RF semiconductor products and the loss of this relationship could materially
reduce our sales.

Richardson Electronics, Ltd. is the worldwide distributor of our RF semiconductor products. Richardson Electronics, Ltd. is our largest customer and
represents 40%, 44% and 45% of sales in 2007, 2006 and 2005, respectively. We cannot assure you that this relationship will improve sales of our products or that it is the most effective method of
distribution. If Richardson Electronics, Ltd. fails to successfully market and sell our products, our sales could materially decline. Our agreement with this distributor does not require it to
purchase our products and is terminable at any time. If this distribution relationship is discontinued, our sales could decline significantly.

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

We depend on a small number of customers for a majority of our sales. We currently have three customers in 2007 and two customers in 2006 and 2005 which each
account for more than 10% of our sales and in aggregate accounted for 70%, 60%, and 58% of our sales in 2007, 2006, and 2005 respectively. This concentration exposes us to significant risk if these
customers were to reduce their level of business with us.

In
addition, most of our sales result from purchase orders or from contracts that can be cancelled on short notice. Moreover, it is possible that our customers may develop their own
products internally or purchase products from our competitors. Also, events that impact our customers, for example wireless carrier consolidation, can adversely affect our sales. We expect that a few
key customers will continue to account for a substantial portion of our revenue in 2008. The loss of, or a reduction in orders from, a significant customer for any reason could cause our sales to
decrease.

A significant portion of our sales are to customers outside of the United States and there are inherent risks associated with sales to our foreign
customers.

We sell a significant portion of our product to customers outside of the United States. Sales to customers outside of the United States accounted for
approximately 46%, 52% and 44% of our sales in 2007, 2006 and 2005, respectively. Most of our foreign sales are to customers located in China. We expect that sales to customers outside of the United
States will continue to account for a significant portion of our sales. Although all of our foreign sales are denominated in U.S. dollars, such sales are subject to certain risks, including, among
others, changes in regulatory requirements, the imposition of tariffs and other trade barriers, the existence of political, legal and economic instability in foreign markets, language and cultural
barriers, seasonal reductions in business activities, our ability to receive timely payment and collect our accounts receivable, difficulties in protecting intellectual property rights, currency
fluctuations, and potentially adverse tax consequences, which could adversely affect our business and financial results.

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The new markets we are targeting, such as China, may not grow as forecasted and we may not be a successful participant in those markets.

Our growth strategy is based in part on our success in penetrating new RF semiconductor and radio frequency identification ("RFID") markets. We cannot assure you
that our new products will succeed. In addition to the risks generally associated with new product development and introduction, these products are subject to the particular risks described below.

The
growth of the RFID market will depend on, among other things, the ability of suppliers to meet size, portability, cost and power consumption objectives, the ability of industry
participants to agree on appropriate technology standards and the willingness of end users to invest in the required equipment and information systems. Even if the market does grow as forecasted, our
ability to successfully participate in the RFID market will depend upon, among other things, our timely development and marketing of appropriate products, attracting the most advantageous industry
partnerships, securing any necessary additional intellectual property and forming customer relationships. Therefore, we may not be a successful participant in these markets.

We
have developed several new multi-chip modules for the TD-SCDMA wireless infrastructure market in China and we recently received our initial production orders
for TD-SCDMA Multi Chip Module chipsets for delivery in the first half of 2008. These orders are significant and there can be no assurance that we will be able to timely fill them. This is
a new wireless communications standard developed in China and is expected to be initially only deployed in China. Should the technology not meet the high transaction volume system performance
requirements or should China choose not to deploy the technology broadly or should our customers not supply a major portion of the system requirements, our revenue opportunity would be limited which
would negatively impact our expected revenue and we may not recover the costs to develop and produce these products. There can be no assurance regarding the actual timing of our TD-SCDMA
rollout in China and its actual impact on our financial results.

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

On October 30, 2006, our Board of Directors committed us to a restructuring plan to close and exit our Milpitas fabrication facility during the first
quarter of 2007. We completed the closure of the Milpitas fabrication facility at the end of March 2007. Global Communication Semiconductors, Inc., our foundry partner, has become the primary
source for the manufacture and supply of our GaAs and InGaP HBT wafers as a result of the fab closure. In May 2007 we entered into a manufacturing supply agreement with AmpTech to provide an
additional source of supply for our GaAs and InGaP HBT wafers. AmpTech is still in its start up phase and as a result its ability to consistently supply us wafers has not been demonstrated. If our
foundry partners are unable to meet our wafer needs for any reason there can be no assurance that we will be able to find alternative sources.

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



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

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

Third party intellectual property claims could harm our business.

We occasionally receive communications from third parties alleging infringement of patent and other intellectual property rights. While we are not subject to any
current claims that we believe could be material, there can be no assurance that material claims will not arise in the future. While all of our revenue is derived from products containing our
proprietary intellectual property, approximately 10% and 7% of our revenue for 2007 and 2006, respectively, was derived from newly developed technologies which could have a higher risk of infringement
claims. We intend to vigorously protect our proprietary intellectual property rights with respect to all of our products. However, we cannot assure you that claims can be amicably disposed of, and it
is possible that litigation could ensue. Litigation could result in substantial costs to us and diversion of our resources. If we fail to obtain a necessary license or if we do not prevail in patent
or other intellectual property litigation, we could be required to discontinue selling the affected products, to seek to develop non-infringing technologies, which may not be feasible, and
to pay monetary damages, any of which could harm our business.

Our quarterly operating results may fluctuate significantly. As a result, we may fail to meet the expectations of securities analysts and investors,
which could cause our stock price to decline.

Our quarterly revenues and operating results have fluctuated significantly in the past and are expected to vary from quarter to quarter due to a number of the
factors described in this "Risk Factors" section and in our public filings, many of which are not within our control. If our operating results do not meet our publicly stated guidance or the
expectations of securities analysts or investors, our stock price may
decline. For example, during our second quarter 2007 earnings call we provided lower forward guidance and in early October we pre-announced lower expectations for the third and fourth
quarters of 2007. Subsequent to such announcements, the trading price of our common stock declined significantly.

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If we are unable to develop and introduce new RF products successfully and in a cost-effective and timely manner or to achieve market
acceptance of our new semiconductors, our operating results would be adversely affected.

The future success of our business depends on our ability to develop new RF products for existing and new markets, introduce these products in a
cost-effective and timely manner and convince leading equipment manufacturers to select these products for design into their own new products. Our quarterly results in the past have been,
and are expected in the future to continue to be, dependent on the introduction of new products and the timely completion and delivery of those products to customers. The development of new
semiconductor devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products and lower than anticipated manufacturing yields
in the early production of such products. Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:



If
we are not able to develop and introduce new products successfully and in a cost-effective and timely manner, our business, financial condition and results of operations
would be materially and adversely affected.

Our
new products generally are incorporated into our customers' products at the design stage. We often incur significant expenditures for the development of a new product without any
assurance that an equipment manufacturer will select our product for design into its own product. The value of our semiconductors largely depends on the commercial success of our customers' products.
We cannot assure you that we will continue to achieve design wins or that equipment that incorporates our products will be commercially successful.

The amount and timing of revenue from newly designed RF products is often uncertain.

We announce from time to time new products and design wins for new and existing RF products. Achieving a design win with a customer does not create a binding
commitment from that customer to purchase our products. Rather, a design win is solely an expression of interest by potential customers to purchase our products and is not supported by binding
commitments of any nature. Accordingly, a customer may choose at any time to discontinue using our products in their designs or product development efforts. Even if our products are chosen to be
incorporated into our customers products, we still may not realize significant revenues from those customers if their products are not commercially successful. A design win may not generate revenue if
the customer's product is rejected by their end market. Typically, most new products or design wins have very little impact on near-term revenue. It may take well over a year before a new
product or design win generates revenue. Once a manufacturer of communications equipment has designed a supplier's semiconductor into its products,

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the
manufacturer may be reluctant to change its source of semiconductors due to the significant costs associated with qualifying a new supplier and potentially redesigning its product. Accordingly,
our failure to achieve design wins with equipment manufacturers, which have chosen a competitor's semiconductor, could create barriers to future sales opportunities with these manufacturers.

Our products typically have lengthy sales cycles and we may ultimately be unable to recover our investment in new products.

After we have developed and delivered a RF product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to
incorporate our product. Our customer may need three to six months or longer to test, evaluate and adopt our products and an additional three to nine months or more to begin volume production of
equipment that incorporates our products. In some cases, it may take significantly longer than three to nine months before customers commence volume production of equipment incorporating some of our
products. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our expenses for research and development, sales and marketing efforts and make investments in
inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer
selects our products to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful.
The delays inherent in our lengthy sales cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us
to lose sales that we had anticipated. In addition, our business, financial condition and results of operations could be materially and adversely affected if a significant customer curtails, reduces
or delays orders during our sales cycle or chooses not to release equipment that contains our products.

The
resources devoted to product research and development and sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and
obsolete inventory. If we incur significant marketing and inventory expenses in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions and we still have higher cost products in inventory, our operating results would
be harmed.

If we are unable to respond to the rapid technological changes taking place in our industry, our existing products could become obsolete and we could
face difficulties making future sales.

The markets in which we compete are characterized by rapidly changing technologies, evolving industry standards and frequent improvements in products and
services. If the technologies supported by our products become obsolete or fail to gain widespread acceptance, as a result of a change in industry standards or otherwise, we could face difficulties
making future sales.

We
must continue to make significant investments in research and development to develop product enhancements, new designs and technologies on a cost effective basis. If we are unable to
develop and/or gain access to and introduce new products or enhancements in a timely and cost effective manner in response to changing market conditions or customer requirements, or if our new
products do not achieve market acceptance, our sales could decline. Additionally, initial lower margins are typically experienced with new products under development.

Our existing and potential customers operate in an intensely competitive environment, and our success will depend on the success of our customers.

The companies in our target markets face an extremely competitive environment. Some of the products we design and sell are customized to work with specific
customers' systems. If the companies

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with
whom we establish business relations are not successful in building their systems, promoting their products, including new revenue-generating services, receiving requisite approvals and
accomplishing the many other requirements for the success of their businesses, our growth will be limited. Furthermore, our customers may have difficulty obtaining parts from other suppliers causing
these customers to cancel or delay orders for our products. In addition, we have limited ability to foresee the competitive success of our customers and to plan accordingly.

If the wireless communications market fails to grow, or declines, our sales may not grow or may decline.

Our future growth depends on the success of the wireless communications market. The rate at which this markets will grow is difficult to predict. This market may
fail to grow or decline for many reasons, including:



If
the markets for our products in wireless communications declines, fail to grow, or grows more slowly than we anticipate, the use of our products may be reduced and our sales could
suffer.

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

We use rolling forecasts based on anticipated product orders to determine our component requirements. It is important that we accurately predict both the demand
for our products and the lead times required to obtain the necessary products and/or components and materials. Lead times for components and materials that we, or our outsourced manufacturers, order
can vary significantly and depend on factors such as specific supplier requirements, the size of the order, contract terms and current market demand for the components. Since we rely on outsourced
manufacturers, many of these factors will be outside of our direct managerial control. For substantial increases in production levels, our outsourced manufacturers and some suppliers may need six
months or more lead-time. As a result, we may be required to make financial commitments in the form
of purchase commitments. We lack visibility into the finished goods inventories of our customers and the end-users. This lack of visibility impacts our ability to accurately forecast our
requirements. If we overestimate our component, material and outsourced manufactured requirements, we may have excess inventory, which would increase our costs. An additional risk for potential excess
inventory results from our volume purchase commitments with certain material suppliers, which can only be reduced in certain circumstances. Additionally, if we underestimate our component, material,
and outsourced manufacturing requirements, we may have inadequate inventory, which could interrupt and delay delivery of our products to our customers. Any of these occurrences would negatively impact
our sales and profitability. We have incurred, and may in the future incur, charges related to excess and obsolete inventory. These charges amounted to approximately $1.0 million,
$1.6 million and $1.0 million in 2007, 2006 and 2005, respectively. While these charges may be partially offset by subsequent sales of previously written-down inventory,
there can be no assurance that any such sales will be significant. As we broaden our product lines we must outsource the manufacturing of or purchase a wider variety of components. In addition, new
product lines contain a greater degree of uncertainty due to a lack of visibility of customer acceptance and potential competition. Both of these factors will contribute a higher level of inventory
risk in our near future.

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We depend on outsourced manufacturers and single or limited source suppliers which makes us susceptible to shortages or price fluctuations that could
adversely affect our operating results.

We currently purchase several key components and materials used in our products from single or limited source suppliers. These products amounted to 66%, 7% and
15% of our revenue in 2007, 2006 and 2005, respectively. Global Communications Systems (GCS) became a material supplier to us as of April 2007 with the closure of our wafer manufacturing facility
which is primarily responsible for the increase in percentage of products from this category of supplier. In 2008, we expect GCS will continue as our primary wafer foundry partner and Cirtek which is
providing us leased space and test and warehouse operators for our test and warehousing operations in addition to a substantial portion of our packaging services will be material to our business. In
the event one of our sole source suppliers or outsourced manufacturers is unable to deliver us products or unwilling to sell us components or materials, it could harm our business. It could take us as
long as six to twelve months to replace our single or limited source suppliers and there can be no assurance that we would be successful. Additionally, we or our outsourced manufacturers may fail to
obtain required products and components in a timely manner in the future. We may also experience difficulty identifying alternative sources of supply for the components used in our products or
products we obtain through outsourcing. We would experience delays if we were required to test and evaluate products of potential alternative suppliers or products we obtain through outsourcing.
Furthermore, financial or other difficulties faced by our outsourced manufacturers, or suppliers or significant changes in demand for the components or materials they use in the products and/or supply
to us could limit the availability of those products, components or materials to us. Although we purchase services from our vendors in U.S. dollars and sell our products in U.S. dollars which leaves
us currency neutral, most of our international suppliers purchase materials, labor and other inputs into the services that they provide to us in local currencies. Recently, the U.S. dollar has been
weak relative to many international currencies which could either adversely impact the financial results of our vendors and/or they may attempt to increase our costs
which could adversely affect our results. Thus far we have not experienced any material delays or unusual pricing related to such suppliers, but we cannot assure you that this will continue to be the
situation.

We rely on the significant experience and specialized expertise of our senior management in our industry and must retain and attract qualified engineers
and other highly skilled personnel in a highly competitive job environment to maintain and grow our business.

Our performance is substantially dependent on the continued services and on the performance of our senior management and our highly qualified team of engineers,
who have many years of experience and specialized expertise in our business. Our performance also depends on our ability to retain and motivate our executive officers and other key employees. The loss
of the services of any of our executive officers or of a number of our engineers could harm our ability to maintain and build our business. We have no "key man" life insurance policies.

Our
future success also depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, sales, and marketing personnel. If we fail to
attract, integrate and retain the necessary personnel, our ability to maintain and build our business could suffer significantly.

Our business is subject to the risks of product returns, product liability and product defects.

Products as complex as ours frequently contain undetected errors or defects, especially when first introduced or when new versions are released. The occurrence of
errors could result in product returns from and reduced product shipments to our customers. In addition, any failure by our products to properly perform could result in claims against us by our
customers. Such failure also could result in the loss of or delay in market acceptance of our products or harm our reputation. Due to the recent introduction of some of our products, we have limited
experience with the problems that could arise

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with
these products. If problems occur or become significant, it could result in a reduction in our revenues and increased costs related to inventory write-offs, warranty claims and other
expenses which could have a material and adverse affect on our financial condition.

Our
purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability
provision contained in these agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries.
Although we maintain insurance to protect against claims associated with the use of our products, our insurance coverage may not
adequately cover all claims asserted against us. In addition, even ultimately unsuccessful claims could result in costly litigation, divert our management's time and resources and damage our customer
relationships.

We use a number of specialized technologies, some of which are patented, to design, develop and produce our products. Infringement of our intellectual
property rights could hurt our competitive position, harm our reputation and negatively impact our future profitability.

We regard the protection of our copyrights, patents, service marks, trademarks, trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, patent, trademark and trade secret law, as well as on confidentiality procedures and contractual provisions, to protect our proprietary rights. We seek patent protection for
our unique developments in circuit designs, processes and algorithms. Adequate protection of our intellectual property rights may not be available in every country where our products and services are
made available. We intend, as a general policy, to enter into confidentiality and invention assignment agreements with all of our employees and contractors, as well as into nondisclosure agreements
with parties with which we conduct business, to limit access to and disclosure of our proprietary information; however, we have not done so on a uniform basis. As a result, we may not have adequate
remedies to preserve our trade secrets or prevent third parties from using our technology without authorization. We cannot assure you that all future employees, contractors and business partners will
agree to these contracts, or that, even if agreed to, these contractual arrangements or the other steps we have taken to protect our intellectual property will prove sufficient to prevent
misappropriation of our technology or to deter independent third-party development of similar technologies. If we are unable to execute these agreements or take other steps to prevent misappropriation
of our technology or to deter independent development of similar technologies, our competitive and financial position and reputation could suffer, and we could be forced to make significant
expenditures.

We
file patent applications with the U.S. Patent and Trademark Office and in selected foreign countries covering particular aspects of our technology and intend to prosecute such
applications to the fullest extent of the law. Based upon our assessment of our current and future technology, we may decide to file additional patent applications in the future, and may decide to
abandon current patent applications. We cannot assure you that any patent application we have filed or will file will result in an issued patent, or, if patents are issued to us, that such patents
will provide us with any competitive advantages and will not be challenged by third parties or invalidated by the U.S. Patent and Trademark Office or foreign patent office. Any failure to protect our
existing patents or to secure new patents may limit our ability to protect the intellectual property rights that such patents or patent applications were intended to cover. Furthermore, the patents of
others may impair our ability to do business.

We
have several registered trademarks and service marks, in the United States and abroad. Should we decide to apply to register additional trademarks or service marks in the United
States and/or foreign countries, there is no guarantee that we will be able to secure such registrations. The inability to register or decision not to register our trademarks and service marks could
harm our competitive position, harm our reputation and negatively impact our future profitability.

24

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We must gain access to improved process technologies.

For our semiconductor products, our future success will depend upon our ability to continue to gain access to new and/or improved process technologies in order to
adapt to emerging industry standards or competitive market conditions. In the future, we may be required to transition one or more of our products to process technologies with smaller geometries,
other materials or higher speed in order to reduce costs and/or improve product performance. We may not be able to gain access to new process technologies in a timely or affordable manner. In
addition, products based on these technologies may not achieve market acceptance.

Due to our relationships with foreign vendors, manufacturers, customers and subcontractors, we are subject to international operational, financial and
political risks.

We expect to continue to rely on vendors, manufacturers and subcontractors located in China, Malaysia, Thailand, Taiwan and the Philippines. Additionally, we
utilize vendors located in such countries to source gallium arsenide ("GaAs") wafers, to fabricate certain products, to assemble certain products and to package the majority of our semiconductor die
in plastic. Accordingly, we will be subject to risks and challenges such as:



Political
and economic instability and changes in governmental regulations in these areas as well as the United States could affect the ability of our overseas vendors to supply
materials or services. Any interruption or delay in the supply of our required components, products, materials or services, or our inability to obtain these components, materials, products or services
from alternate sources at acceptable prices and within a reasonable amount of time, could impair our ability to meet scheduled product deliveries to our customers and could cause customers to cancel
orders.

We face intense competition, and, if we do not compete effectively in our markets, we will lose sales and have lower margins.

The semiconductor industry is intensely competitive in each of the markets we serve and is characterized by:



25

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Our
end markets are rapidly evolving and intensely competitive, and we expect competition to intensify further in the future.

Many
of our current and potential competitors have substantially greater technical, financial, marketing, distribution and other resources than we have. Price competition is intense and
the market prices and margins of products frequently decline after competitors begin making similar products. A number of our competitors may have greater name recognition and market acceptance of
their products and technologies. Furthermore, our competitors, or the competitors of our customers, may develop new technologies, enhancements of existing products or new products that offer superior
price or performance features. These new products or technologies could render obsolete our products or the systems of our customers into which our products are integrated. If we fail to successfully
compete in our markets, our business and operating results would be materially and adversely affected.

Our growth depends in part on future acquisitions and investments in new businesses, products or technologies that involve numerous risks, including the
use of cash and diversion of management's attention.

As part of our growth plans, we may make acquisitions of and investments in new businesses, products and technologies. If we identify an acquisition candidate, we
may not be able to successfully negotiate or finance the acquisition. Even if we are successful, we may not be able to integrate the acquired business, products or technologies into our existing
business and products. As a result of the rapid pace of technological change, we may misgauge the long-term potential of the acquired business or technology or the acquisition may not be
complementary to our existing business. Furthermore, potential acquisitions and investments, whether or not consummated, may divert our management's attention and require considerable cash outlays at
the expense of our existing operations.
In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could
affect our profitability.

We may not be able to successfully integrate the businesses we may acquire in the future, which could harm our business, financial condition and results
of operations.

Our strategy includes the potential to acquire technology and products through acquisitions to address our target markets in addition to our internally developed
technologies. Integrating completed acquisitions into our existing operations involves numerous risks including the following:



We
may not be able to successfully integrate our acquisitions which could harm our business, financial condition and results of operations.

Changes in the regulatory and market dynamics environment of the communications industry may reduce the demand for our products.

The deregulation of the telecommunications industry has resulted in an increased number of service providers. Such increase, coupled with the expanding use of the
Internet and data networking by businesses and consumers, has resulted in the rapid growth of the communications industry. This has led and will likely continue to lead to intense competition, short
product life cycles, and, to some

26

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extent,
regulatory uncertainty in and outside the United States. The course of the development of the communications industry is difficult to predict. For example, the delays in governmental approval
processes that our customers are subject to, such as the issuance of site permits and the auction of frequency spectrum, have in the past caused, and may in the future cause, the cancellation,
postponement or rescheduling of the installation of communications systems by our customers. A reduction in network infrastructure expenditures could negatively affect the sale of our products.
Moreover, in the short term, deregulation may result in a delay or a reduction in the procurement cycle because of the general uncertainty involved with the transition period of businesses.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud which
could subject us to regulatory sanctions, harm our business and operating results and cause the trading price of our stock to decline.

Effective internal controls required under Section 404 of the Sarbanes-Oxley Act of 2002 are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business, reputation and operating results could be harmed. We have in the past discovered, and may in
the future discover, areas of our internal controls that need improvement. For example, "material weaknesses" were identified in our quarter ended December 31, 2005, October 1, 2006,
December 31, 2006 and December 31, 2007 which means that there was "a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will not be prevented or detected." During these periods, the finance team experienced a high rate of turnover and partially
due to the turnover, had been understaffed and had limited training in our processes and procedures. During the second half of 2006 and 2007, we hired a new finance team but suffered some turnover as
a result of our mid-year announcement of our program to offshore certain functions and then our announcement that we were evaluating strategic alternatives which we believe limited our
ability to attract and hire qualified personnel to complete our resourcing plans. With our announced merger with TriQuint Semiconductor we may be unable to attract qualified personnel and we may
suffer additional turnover as a result of the announcement. As such, during this period we believe that there could be a higher risk of deficiencies in our financial reporting. We cannot be certain
that the measures we have taken or intend to take will ensure that we maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or
improved controls or difficulties encountered in their implementation could subject us to regulatory sanctions, harm our business and operating results or cause us to fail to meet our reporting
obligations. Inferior
internal controls could also harm our reputation and cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.

Our future profitability could suffer from known or unknown liabilities that we retained when we sold parts of our company.

In the past, we completed the divestiture of all but our current business. In the transactions in which we sold our other businesses, we generally retained
liability arising from events occurring prior to the sale. Some of these liabilities were known to us, such as the environmental condition of the production facilities we sold. We may have
underestimated the scope of these liabilities, and we may become aware of additional liabilities associated with the following in the future:



27

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If
these and any other unknown liabilities and obligations exceed our expectations and established reserves, our future profitability could suffer and our capital needs could increase.

If we fail to comply with environmental regulations we could be subject to substantial fines, we could be required to suspend production, alter
manufacturing processes or cease operations.

Two of our former production facilities at Scotts Valley and Palo Alto have significant environmental liabilities for which we have entered into and funded fixed
price remediation agreements and obtained cost-overrun and unknown pollution insurance coverage.

We
cannot assure you that this insurance will be sufficient to cover all liabilities related to these two sites. In addition, we are subject to a variety of federal, state and local
governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. In the
past, we have been subject to periodic environmental reviews and audits, which have resulted in minor fines. If we fail to comply with these regulations, substantial fines could be imposed on us, and
we could be required to suspend production, alter manufacturing processes or cease operations any of which could have a material negative effect on our sales, income and business operations.

If RF emissions pose a health risk, the demand for our products may decline.

News reports have asserted that some radio frequency emissions from wireless handsets may be linked to various health concerns, including cancer, and may
interfere with various electronic medical devices, including hearing aids and pacemakers. If it were determined or perceived that RF emissions from wireless communications equipment create a health
risk, the market for our wireless customers' products and, consequently, the demand for our products could decline significantly.

We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money,
and additional funds may not be available on terms acceptable to us.

We believe that the cash, cash equivalents and investments on hand, the cash we expect to generate from operations and borrowings under our line of credit will be
sufficient to meet our liquidity and capital spending requirements for at least the next twelve months. However, it is possible that we may
need to raise additional funds to fund our activities during and/or beyond that time. We could raise these funds by selling more stock to the public or to selected investors, or by borrowing money.

In
addition, even though we may not need additional funds, we may still elect to sell additional equity securities or obtain credit facilities for other reasons. We may not be able to
obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds through arrangements with
strategic partners or others that may require us to relinquish rights to certain technologies or potential markets. If we raise additional funds by issuing additional equity or convertible debt
securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of
the holders of our common stock.

It
is possible that our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors,
including:



28

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In
addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or
technologies.

Our facilities are concentrated in an area susceptible to earthquakes.

Our facilities and the facilities of some of our key suppliers are concentrated in an area where there is a risk of significant earthquake activity. Substantially
all of the production equipment that currently accounts for our sales is located in a known earthquake zone. We cannot predict the extent of the damage that our facilities and/or our supplier's
facilities would suffer in the event of an earthquake or how such damage would affect our business. We do not maintain earthquake insurance.

Risks Related to Our Stock

Sales of substantial amounts of our common stock by our largest shareholder could adversely affect the market price of our common stock.

We registered for resale up to 25,492,044 shares of common stock by Fox Paine Capital Fund, L.P., FPC Investors, LP, WJ Coinvestment Fund
I, LLC, WJ Coinvestment Fund III, LLC and WJ Coinvestment Fund IV, LLC (together the "Fox Paine Entities") pursuant to an agreement providing for registration rights. The Fox
Paine Entities are collectively our largest stockholder. As of December 31, 2007, the Fox Paine Entities beneficially owned 37% of our common stock which represents approximately
25.5 million of our 68.5 million outstanding shares of common stock. Our stock is not heavily traded and our stock prices can fluctuate significantly. As such, sales of substantial
amounts of our common stock into the public market by the Fox Paine Entities or perceptions that significant sales could occur, could adversely affect the market price of our common stock.

Furthermore,
future sales of substantial amounts of common stock by our officers, directors and other stockholders, including any sales under a Rule 10b5-1 sales plan,
in the public market or otherwise or the awareness that a large number of shares is available for sale, could adversely affect the market price of our common stock. In addition to the adverse effect a
price decline would have on holders of our common stock, that decline would impede our ability to raise capital through the issuance of additional shares of common stock or other equity or convertible
debt securities.

In
addition to the adverse effect a price decline would have on holders of our common stock, a price decline in our common stock could impede our ability to raise capital through the
issuance of additional shares of common stock or other equity or convertible debt securities. A price decline in our common stock below the NASDAQ minimum bid requirements due to substantial sales of
our common

29

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stock
could result in our common stock being delisted from the NASDAQ Global Market. Delisting could in turn reduce the liquidity of our common stock and inhibit or preclude our ability to raise
capital.

We are currently not in compliance with NASDAQ minimum bid price requirements and if we are unable to regain compliance it may harm our stock price and
make it more difficult for you to sell shares.

Our common stock is listed on the NASDAQ Global Market and their marketplace rules for continued listing require, among other things, that the bid price for our
common stock not fall below $1.00 per share for a period of 30 consecutive trading days. On December 20, 2007, we received a letter from the NASDAQ Stock Market advising that for the previous
30 consecutive business days, the bid price of our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the NASDAQ Global Market pursuant to NASDAQ
Marketplace Rule 4450(a)(5). NASDAQ stated
in its letter that in accordance with NASDAQ Marketplace Rule 4450(e)(2), we will be provided 180 calendar days, or until June 17, 2008, to regain compliance with the minimum bid price
requirement. The NASDAQ letter also states that if, at any time before June 17, 2008, the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive
business days, the NASDAQ staff will provide us with written notification that we have achieved compliance with the minimum bid price requirement.

In
the event we do not regain compliance with the minimum bid price requirement by June 17, 2008, the NASDAQ staff will provide us with written notification that our common stock
will be delisted from the NASDAQ Global Market. At that time, we may appeal the delisting determination to a NASDAQ Listings Qualifications Panel pursuant to applicable NASDAQ rules. Alternatively,
NASDAQ Marketplace Rule 4450(i) may permit us to transfer our common stock to the NASDAQ Capital Market (formerly known as the NASDAQ SmallCap Market) if our common stock satisfies all
criteria, other than compliance with the minimum bid price requirement, for initial inclusion on such market. In the event of such a transfer, the NASDAQ Marketplace Rules provide that we will be
afforded an additional 180 calendar days to comply with the minimum bid price requirement while listed on the NASDAQ Capital Market. There can be no assurance that we will be able to regain
compliance.

If
our common stock ceases to be listed for trading on the NASDAQ Global Market and we are not permitted to transfer to the NASDAQ Capital Market, we expect that our common stock would
be traded on the Over-the-Counter Bulletin Board (OTC-BB). In addition, our stock could then potentially be subject to the Securities and Exchange Commission's
"penny stock" rules, which place additional disclosure requirements on broker-dealers. These additional disclosure requirements may harm your ability to sell shares if it causes a decline in the
ability or willingness of broker-dealers to sell our common stock. We also expect that the level of trading activity of our common stock would decline if it is no longer listed on the NASDAQ Global
Market or NASDAQ Capital Market. As such, if our common stock ceases to be listed for trading on the NASDAQ Global Market or NASDAQ Capital Market, it may harm our stock price, increase the volatility
of our stock price and make it more difficult to sell your shares of our common stock.

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

As of December 31, 2007, Fox Paine & Company, LLC ("Fox Paine") is the indirect beneficial owner of 37% of our outstanding share capital. As
a result, Fox Paine has and will continue to have significant influence over the outcome of matters requiring stockholder approval, including:



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Fox
Paine's significant ownership interest could also delay, prevent or cause a change in control relating to us which could adversely affect the market price of our common stock.

Fox
Paine's significant ownership interest could also subject us to a class action lawsuit, which could result in substantial costs and divert our management's attention and financial
resources from more productive uses. Fox Paine, on September 18, 2002, made a proposal to acquire all of the shares held by unaffiliated stockholders, which was subsequently withdrawn on
March 27, 2003. Prior to Fox Paine's withdrawal of such proposal, four lawsuits, three of which were purported class action lawsuits, were filed against us and Fox Paine in connection with such
proposal. Among other things, these lawsuits sought an injunction against the consummation of the proposal and an award of unspecified compensatory damages. These lawsuits were voluntarily dismissed
after Fox Paine's withdrawal of such proposal without any consideration being required to be paid to the plaintiff and each party was obligated to bear its own attorney's fees, costs and expenses. We
can make no assurance, however, that Fox Paine will not at some point in the future make another proposal regarding us and, if so, what the terms and outcome of such proposal might be. If Fox Paine
were in the future to make a proposal involving us then, depending on the terms of such proposal, the resulting transaction could result in litigation, which could adversely affect our business or our
stock price.

In
addition, Fox Paine receives management fees from us which could influence their decisions regarding us. Under our management agreement with Fox Paine, we are obligated to pay Fox
Paine a fee in the amount of 1% of the prior year's income before interest expense, interest income, income taxes, depreciation and amortization and equity in earnings (losses) of minority
investments, calculated without regard to the fee. Due to our losses incurred, we have not been required to pay management fees to Fox Paine since 2001.

Fox
Paine may in the future make significant investments in other communications companies. Some of these companies may be our competitors. Fox Paine and its affiliates are not obligated
to advise us of any investment or business opportunities of which they are aware, and they are not restricted or prohibited from competing with us.

The
sale of a substantial number of shares of our common stock by Fox Paine or the perception that such sale could occur, could negatively affect the market price of our common stock and
could also materially impair our future ability to raise capital through an offering of securities. In addition, the sale of a substantial number of shares of our common stock by Fox Paine could
result in the loss of Fox Paine's services to us as well as the services of members of Fox Paine on our board of directors which could adversely effect our business.

Our stock price is highly volatile and our stock has low trading volume.

The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations.
Since our initial public offering in August 2000, through December 31, 2007, our common stock has traded at prices as low as $0.40 and as high as $59.875 per share. Furthermore, although our
stock trades on the NASDAQ Global Market, it is thinly traded and our average daily trading volume during the year ended December 31, 2007 was low compared to the number of shares of common
stock we had outstanding. The low trading volume of our stock can cause our stock price to fluctuate significantly as well as make it difficult for you to sell your shares quickly. As a result of our
stock being thinly traded and/or our low stock price, institutional investors might not be interested in owning our stock. Significant fluctuations in our stock

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price
have also occurred and may continue to occur in response to various factors, many of which we cannot control, including:



In
addition, the market prices of securities on the NASDAQ Global Market and that of our customers and competitors have been especially volatile. This volatility has significantly
affected the market prices of securities for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, you may not be able to resell your shares of common stock
at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were
the object of a securities class action litigation, it could result in substantial losses and divert management's attention and resources from other matters.

We do not expect to pay any dividends for the foreseeable future.

Although we had cash, cash equivalents and short-term investments of approximately $16.7 million at December 31, 2007, we do not
anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Accordingly, investors must rely on sales of their common stock after price appreciation, which may
never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not invest in our common stock.

The resale of substantial amounts of our common stock that we issue for acquisitions could harm our stock price.

We have in the past, and may in the future, issue shares of our common stock in connection with acquisitions. To date, we have issued an aggregate of 2,442,882
shares of our common stock in connection with the EiC and Telenexus acquisitions. An additional 2,540,323 shares could have been issued under the EiC Agreement if earn-out targets had been
met. Since our stock is not heavily traded and our stock prices can fluctuate significantly, the resale of a substantial number of shares issued in connection with acquisitions could harm our stock
price.

Item 1b.    UNRESOLVED STAFF COMMENTS

None.

Item 2.    PROPERTIES

We have two leased buildings in San Jose, California totaling over 124,000 square feet consisting of a larger building of approximately 82,000 square feet, and a
smaller building of approximately 42,000 square feet, both of which have a remaining lease term of approximately 3.25 years. In July of 2007, we leased space in a building in Philippines
totaling approximately 6,000 square feet, which has a lease

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term
of 3 years. The Fremont facility we acquired as a part of the EiC transaction in June 2004 was shut down during the first quarter of 2005 after we relocated the manufacturing capacity and
associated personnel to our facility in Milpitas and completed our obligations under the sublease agreement.

In
September 2001, we decided to abandon the smaller building at our San Jose facility based on revised anticipated demand for our products and market conditions. As of
December 31, 2007, we have signed three tenants to cover approximately 100% of such excess leased space. In September 2002, we decided to abandon a portion of the larger building at our San
Jose facility based on revised anticipated demand for our products and market conditions. This excess space is located on the first floor of our current corporate headquarters and originally housed a
portion of our optics and integrated assemblies manufacturing operations. We are seeking tenants to occupy the excess leased space.

We
believe that our present facilities are in good condition and suitable for our operations. We also believe that we have excess space, which more than meets our anticipated
requirements for the foreseeable future.

Item 3.    LEGAL PROCEEDINGS

From time to time we are involved in litigation, regulatory proceedings and claims that are incidental to the conduct of our business in the ordinary course,
including the litigation described below. While we currently believe that any adverse outcome of such matters would not materially affect our business or financial condition, there can be no assurance
that this will ultimately be the case.

A
lawsuit was filed in 2001 against thirty semiconductor defendants, including us, by the Lemelson Medical, Education and Research Foundation Limited Partnership in the United States
District Court for the District of Arizona (Case No. CV-01-1440-PHX-HRH) alleging patent infringement of eighteen patents. The complaint seeks
injunctive relief and unspecified damages, as well as attorneys' fees and costs. This litigation was stayed pending the outcome of similar litigation in Nevada against other defendants and the Court
vacated the on November 7, 2007. We recently reached an agreement in principle to resolve the four beam processing and LOCOS patents remaining at issue in this matter and expect to enter into a
licensing agreement with the Lemelson Foundation for a total fee of $115,000.

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

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

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is listed on the NASDAQ Global Market and traded under the symbol "WJCI". Prior to July 1, 2006, this market was called the NASDAQ
National Market. The following table sets forth, for the periods indicated the high and low sales prices as reported on the NASDAQ Global Market for WJ Communications, Inc. common stock.

High

LowFirst Quarter (through April 2, 2006)

$
2.57

$
1.58Second Quarter (through July 2, 2006)

$
3.10

$
1.40Third Quarter (through October 1, 2006)

$
2.17

$
1.29Fourth Quarter (through December 31, 2006)

$
2.43

$
1.38First Quarter (through April 1, 2007)

$
1.86

$
1.41Second Quarter (through July 1, 2007)

$
1.94

$
1.54Third Quarter (through September 30, 2007)

$
1.86

$
1.18Fourth Quarter (through December 31, 2007)

$
1.29

$
0.61


As
of December 31, 2007, there were approximately 150 stockholders of record of our common stock according to our transfer agent.

Issuer Purchases of Equity Securities

We did not repurchase any shares of our common stock during 2007 except for shares repurchased for tax withholding on employee stock transactions.

Dividend Policy

We did not pay any dividends in 2007 and 2006. We do not intend to pay cash dividends on our common stock for the foreseeable future. Instead, we intend to retain
all earnings for use in the operation and expansion of our business. Our board of directors will make any future determination of the payment of dividends based upon various factors then existing,
including, but not limited to, our financial condition, operating results and current and anticipated cash needs. In addition, covenants in our revolving credit facility limit our ability to declare
and pay cash dividends on our common stock.

Recent Sales of Unregistered Securities

We did not sell any of our securities that were not registered under the Securities Act during 2007 that were not otherwise previously reported by us on
Form 8-K or Form 10-Q.

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Equity Compensation Plan Information

Equity Compensation Table.The following table sets forth information as of December 31, 2007, with respect WJ
Communications' equity compensation plans.

|Plan Category                                             |  | Number of Shares of
Common Stock to be
Issued Upon Exercise
of Outstanding
Options and Rights |     | Weighted-Average
Exercise Price of
Outstanding Options |      | Number of Shares of Common
Stock Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Shares Reflected
in the First Column) |          
|--------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- | --- | ------------------------------------------------------ | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Equity Compensation Plans Approved by Stockholders(1)     |  | 8,732,853                                                                                     | (2) | $                                                      | 1.02 |                                                                                                                                                           | 2,983,372
|Equity Compensation Plans Not Approved by Stockholders(4) |  | 1,627,348                                                                                     |     | $                                                      | 1.07 |                                                                                                                                                           | 223,163  

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Item 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this report. The statements of operations data for the years
ended December 31, 2007, 2006 and 2005 and the selected balance sheet data as of December 31, 2007 and 2006 are derived from our audited consolidated financial statements which are
included elsewhere in this annual report on Form 10-K. The statements of operations data for the years ended December 31, 2004 and 2003 and the selected consolidated balance
sheet data as of December 31, 2005, 2004 and 2003 are derived from our audited

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consolidated
financial statements which are not included in this annual report on Form 10-K. The historical results are not necessarily indicative of results to be expected for any
future period.

|                                            |                                                                                      | Year Ended December 31,                         |                         
|------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------------------------- | ------------------------
|
|
|Consolidated Statements of Operations Data: |                                                                                      |                                                 |                         
|                                            | Sales, net                                                                           |                                                 | $                       
|                                            | Cost of goods sold                                                                   |                                                 |                         
|                                            |                                                                                      |                                                 |                         
|                                            | Gross profit                                                                         |                                                 |                         
|                                            | Operating expenses:                                                                  |                                                 |                         
|                                            |                                                                                      | Research and development                        |                         
|                                            |                                                                                      | Selling and administrative                      |                         
|                                            |                                                                                      | Acquired in-process research and development(1) |                         
|                                            |                                                                                      | Recapitalization merger(2)                      |                         
|                                            |                                                                                      | Restructuring charges (credits)(3)              |                         
|                                            |                                                                                      | Gain on sale of assets held for sale            |                         
|                                            |                                                                                      |                                                 |                         
|                                            |                                                                                      |                                                 | Total operating expenses
|                                            |                                                                                      |                                                 |                         
|                                            | Loss from operations                                                                 |                                                 |                         
|                                            | Interest income                                                                      |                                                 |                         
|                                            | Interest expense                                                                     |                                                 |                         
|                                            | Other incomenet                                                                     |                                                 |                         
|                                            |                                                                                      |                                                 |                         
|                                            | Loss before income taxes                                                             |                                                 |                         
|                                            | Income tax expense (benefit)                                                         |                                                 |                         
|                                            |                                                                                      |                                                 |                         
|                                            | Net loss                                                                             |                                                 | $                       
|                                            |                                                                                      |                                                 |                         
|                                            | Basic and diluted net loss per share                                                 |                                                 | $                       
|                                            |                                                                                      |                                                 |                         
|                                            | Shares used to calculate loss from continuing operations per sharebasic and diluted |                                                 |                         

|
|

|                                          |                            | December 31,
|----------------------------------------- | -------------------------- | ------------
|
|
|Selected Consolidated Balance Sheet Data: |                            |             
|                                          | Cash and cash equivalents  |             
|                                          | Short-term investments     |             
|                                          | Working capital            |             
|                                          | Total assets               |             
|                                          | Total stockholders' equity |             

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS

Special Notice Regarding Forward-Looking Statements. The following discussion and analysis contains forward-looking statements including
financial projections, statements as to the plans and objectives of management for future operations, and statements as to our future economic performance, financial condition or results of
operations. These forward-looking statements are not historical facts but rather are based on current expectations, estimates, projections about our industry, our beliefs and our assumptions. Words
such as "may," "anticipates," "expects," "intends," "plans," "believes," "seeks" and "estimates" and variations of these words and similar expressions are intended to identify forward-looking
statements. Our actual results may differ materially from those projected in these forward-looking statements as a result of a number of factors, including, but not limited to, those factors described
in "Risk Factors" above. Readers of this report are cautioned not to place undue reliance on these forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related disclosures included elsewhere in this annual report
on Form 10-K. Except for historic actual results reported, the following discussion may contain predictions, estimates and other forward-looking statements that involve a number of
risks and uncertainties. See "Special Notice Regarding Forward-looking Statements" above and "Risk Factors" above for a discussion of certain factors that could cause future actual results to differ
from those described in the following discussion.

Overview

We are a radio frequency ("RF") semiconductor company providing RF product solutions worldwide to communications equipment companies. We design, develop and
manufacture innovative, high performance products for both current and next generation wireless and RF identification ("RFID") systems. Our RF product solutions are comprised of advanced, highly
functional RF semiconductors, components and integrated assemblies which address the radio frequency challenges of these various systems. We currently generate the majority of our revenue from our
products utilized in wireless networks. Our revenue from our products used in RF identification systems represents a less

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significant
portion of our current revenue, however, we believe these systems represent one of our future growth opportunities. The RF challenge is to create product designs that function within the
unique parameters of various wireless system architectures. Our solution is comprised of design expertise, advanced device technology and manufacturability. Our communications products are used by
telecommunication equipment manufacturers supporting and facilitating mobile communications, enhanced voice services, data and image transport. Our objective is to be a leading supplier of innovative
RF semiconductor products.

During
the first quarter of 2007, we ceased internal wafer manufacturing and adopted the fabless semiconductor business model. During the second quarter of 2007, we sold our fab assets
to AmpTech, Inc. The fabless semiconductor model is more cost effective than having our own facility due to our limited volumes and the cost of developing and supporting our process
technologies. There is a viable commercial wafer foundry market which we have accessed for the production of our wafers and we may enter into limited process development activities with some of these
vendors to further optimize the processes and our products. We have manufacturing and supply agreements with Global Communications Semiconductors, Inc. and AmpTech, Inc. to provide our
GaAs and InGaP HBT wafers.

Building
on the fabless business model, in order to further drive future anticipated cost savings, on August 4, 2007 we committed to an offshore program that will result in the
transition of our final test and support operations to the Philippines. The operations are currently located in our San Jose, California facility. We incurred and accrued restructuring costs
associated with the implementation of this plan of approximately $150,000 as well as approximately $380,000 in dual staffing and start-up costs in 2007. The transition is expected to be
completed in the first quarter of 2008 and we anticipate cost savings of approximately $400,000 per quarter beginning in the second quarter of 2008.

During
the third quarter of 2007, we implemented a restructuring plan for our Texas facility to cover the lease abandonment of the unused portion of our Texas facility and accrued
$142,000 for this restructuring cost. During the fourth quarter of 2007, we reached an early lease termination agreement with the landlord and turned the facility over to the landlord late in December
which completed this restructuring program. Total costs associated with this program were restructuring costs of $142,000 and operating costs of $7,000.

We
announced on October 10, 2007 that we had engaged Thomas Weisel Partners as our financial advisor to assist us in the evaluation of strategic alternatives to maximize
shareholder value. As a result of this evaluation, we entered into a definitive merger agreement dated March 9, 2008 with TriQuint Semiconductor, Inc. to be purchased for $1.00 per
share. The closing of the merger is subject to customary closing conditions including approval by our stockholders.

In
2004 and 2005, we augmented our technology base and design capabilities through acquisitions. On June 18, 2004, we completed our acquisition of the wireless infrastructure
business and associated assets from EiC Corporation, a California corporation, and EiC Enterprises Limited (together "EiC"). We believe that the addition of EiC's technical expertise further enhanced
our strategy of offering customers what we believe to be industry leading products for the wireless infrastructure market. On January 28, 2005, we acquired Telenexus, Inc. We believe the
addition of Telenexus' RFID products and technology have allowed us to continue to enhance our RFID reader offerings to further capitalize on the market opportunity.

WJ
Communications, Inc. (formerly Watkins-Johnson Company, "we," "us," "our", "WJ" or the "Company") was formed after a recapitalization merger with Fox Paine on
January 31, 2000. We were originally incorporated in California and reincorporated in Delaware in August 2000.

Our
principal executive offices are located at 401 River Oaks Parkway, California 95134, and our telephone number at that location is (408) 577-6200. Our Internet
address iswww.wj.com.Our annual

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reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and
Exchange Commission, or SEC, filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The
information contained on our website is not intended to be part of this report. Our common stock is listed on the NASDAQ Global Market ("NASDAQ") and traded under the symbol "WJCI".

Sales

We sell our products to a small group of communications original equipment manufacturers ("OEMs") and their suppliers and subcontractors. Our major customers
provide forecasted demand on a regular basis, which assists us in managing our inventory requirements. These forecasts, however, are subject to changes, including changes as a result of market
conditions, and could fluctuate from quarter to quarter.

A
significant portion of our sales are to customers outside of the United States. Sales to customers outside of the United States accounted for approximately 46%, 52% and 44% of our
sales in 2007, 2006 and 2005, respectively. Most of our foreign sales were to customers located in China and Thailand.

We
depend on a small number of customers for a majority of our sales. Sales to our customers, which individually account for 10% or more of our total annual sales were, in aggregate,
70%, 60% and 58% of our sales in 2007, 2006 and 2005, respectively. We anticipate that we will continue to sell a majority of our products to a relatively small group of customers.

In
addition, most of our sales result from purchase orders or contracts that can be cancelled on short notice. Delays in manufacturing or supply procurement or other factors, including
general market slow downs, have caused and could potentially continue to cause cancellation, reduction or delay in orders by or in shipments to a customer. If the markets for our products decline,
fail to grow, or grow more slowly than we anticipate, the use of our products may be reduced with a significant negative impact on our sales, earnings, inventory valuations and cash flow. Generally,
the selling prices of our products tend to decrease over time as a result of increased volumes or general competitive pressures and in general we expect that prices will continue to decline as a
result of volume increases or these competitive pressures.

Cost of Goods Sold

Our cost of goods sold consists primarily of direct and indirect costs to produce our products and any write-downs for excess or obsolete product that we do not
believe we will be able to sell.

We
recognize cost of goods sold upon recognition of revenue. We recognize losses on contracts, including purchase order commitments, when identified. During 2007, we recognized a loss of
$196,000 relating to purchase obligations for direct material which were in excess of our requirements. We have not recognized such losses during 2006 or 2005.

Research and Development

Research and development expense represents wages, supplies and allocated overhead costs to design, develop and improve products and processes. These costs are
expensed as incurred. We generate revenues from development contracts with customers that have enabled us to accelerate our own product development efforts. Such development revenues have only
partially funded our product development activities, and we generally retain ownership of the products developed under these
arrangements. As a result, we classify all development costs related to these contracts as research and development expenses.

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Selling and Administrative

Selling and administrative expense consists primarily of wages, travel and facility costs incurred by and other expenses allocated to our selling and
administrative departments. Selling and administrative expense also includes manufacturer representatives sales commissions, trade show and advertising expenses and fees and expenses of legal,
accounting, and other professional consultants.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a continuous basis, we evaluate all our significant estimates including those
related to revenue recognition, stock-based compensation, inventory valuation, valuation of intangible assets and goodwill, impairment of long-lived assets, income taxes, restructuring
including accruals for abandoned lease properties. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstance, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions and such differences could be material.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. See
Note 2 to the consolidated financial statements included elsewhere in this Form 10-K for a detailed discussion of our significant accounting policies.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." This SAB requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged
for products delivered and the collectibility of those fees.

Effective
for our second quarter ended July 3, 2005, we changed the application of our revenue recognition policy regarding our distributors. We had previously recognized revenue
upon shipment to our distributors less estimated reserves for distributor right of return, authorized price reductions for specific end-customer sales opportunities and price protection
based on known events and historical trends. Effective for our second quarter ended July 3, 2005, we recognize revenue from our distribution channels when our distributors have sold the product
to the end customer. Historically, we have received stock rotation requests from our distributors that were within the amounts estimated and contractually allowed with only one exception of an
insignificant amount. However, the request for stock rotation during our second quarter ended July 3, 2005 was higher than the amount contractually allowed. Our management, with the concurrence
of our Audit Committee, believed the increasing percentage of our new product introductions makes it likely that stock rotation reserves will continue to be difficult to estimate based on historical
patterns and contractual provisions. Based on this change in facts and circumstances and our management's future expectations, we believed that we could no longer reasonably estimate the amount of
future returns from our distributors as of July 3, 2005. Accordingly, beginning in our second quarter of 2005, recognition of revenue and associated cost of sales on shipments to distributors
is deferred until the resale to the end customer. This change in application resulted in a $4.1 million revenue deferral in our second quarter of 2005. Although revenue

41

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is
deferred until resale, title of products sold to distributors transfers upon shipment. Accordingly, shipments to distributors are reflected in the consolidated balance sheets as accounts receivable
and a reduction of inventories at the time of shipment. Deferred revenue and the corresponding cost of sales on shipments to distributors are reflected in the consolidated balance sheet on a net basis
as "Deferred margin on distributor inventory." For further discussion, see Note 2 to the consolidated financial statements included elsewhere in this Form 10-K.

Through
the quarter ended April 3, 2005, revenues from our distributors were recognized upon shipment based on the following factors: our sales price was fixed or determinable by
contract at the time of shipment, payment terms were fixed at shipment and were consistent with terms granted to other customers, the distributor had full risk of physical loss, the distributor had
separate economic substance, we had no obligation with respect to the resale of the distributor's inventory, and we believed we could reasonably estimate the potential returns from our distributor
based on their history and our visibility in the distributor's success with its products and into the market place in general. In accordance with Financial Accounting Standards Board ("FASB")
Statement No. 48 "Revenue
Recognition When Right of Return Exists", we accrued a reserve based on our reasonable estimate of future returns based on historical trends and contractual limitations.

We
have a program with our distributor whereby they will receive a credit if they sold a specific product at a reduced price to specific end customers pre-authorized by us.
We maintain a log of all such pre-authorized price reductions which we accrue as a reduction to revenue in the period that the pre-authorization occurs per issue 4 of
EITF 01-9 "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." Through the quarter ended April 3, 2005, the pricing
allowance was solely offset to revenue. Since we began recognizing revenue from our distribution channels only when our distributors have sold the product to the end customer, the pricing allowance
will offset revenue only when the products with pre-authorized price reductions have shipped to the end customer otherwise it will offset "Deferred margin on distributor inventory." As of
December 31, 2007 and December 31, 2006, our pricing allowance was $207,000 and $249,000, respectively.

If
we reduce the prices of our products as negotiated with the distributor, the distributor may receive a credit for the difference between the price paid by the distributor and the
reduced price on applicable unsold products remaining in the distributor's inventory on the effective date of the price reduction assuming that inventory is less than 24 months old as
determined by the original invoice date.

Stock-based Compensation

We adopted the provisions of, and account for stock-based compensation in accordance with, SFAS 123R effective January 1, 2006. We elected the
modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-based compensation cost is
measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

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

We
estimate the expected term of options granted by reviewing annual historical employee exercise behavior of option grants with similar vesting periods and the expected life assumptions
of semiconductor peer companies. Our estimate of pre-vesting option forfeitures is based on historical

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

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

See
Notes 2 and 8 to the condensed consolidated financial statements for further information regarding the SFAS 123R disclosures.

Write-down of Excess and Obsolete Inventory

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

Valuation of Intangible Assets and Goodwill

We periodically evaluate our intangible assets and goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," for indications of
impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets include goodwill and purchased technology. Factors we consider
important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of
the acquired assets or the strategy for our overall business, or significant negative industry or economic trends. If these criteria indicate that the value of

43

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the
intangible asset may be impaired, an evaluation of the recoverability of the net carrying value of the asset over its remaining useful life is made. If this evaluation indicates that the
intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value, and the remaining amortization period may be adjusted. Any such impairment
charge could be significant and could have a material adverse effect on our reported financial statements if and when an impairment charge is recorded. If an impairment charge is recognized, the
amortization related to intangible assets would decrease during the remainder of the fiscal year.

Income Taxes

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

We
record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able
to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

On
January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes" and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Upon adoption of FIN 48 on January 1, 2007, the Company recognized a cumulative adjustment to the liability for unrecognized income tax benefits in the
amount of $825,000, which was accounted for as a reduction to the January 1, 2007 net deferred tax asset and valuation allowance balances.

Restructuring

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

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we
have made from time to time and an adjustment for property tax due to change in the ownership of our San Jose buildings during the three months ended April 1, 2007, actual results to date
have been consistent with our assumptions at the time of the restructuring charges.

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

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

During
the second quarter of 2007 we implemented a restructuring plan to provide for the restructuring expenses, primarily severance payments, associated with a reduction of personnel.

On
August 4, 2007, our Board of Directors committed to an offshore program that will result in the transition of our final test and support operations to the Philippines. The
operations are currently located in our San Jose, California facility. We have incurred and expect to incur certain restructuring costs, primarily severance benefits associated with the implementation
of this plan as well as dual staffing, retention and start-up costs. The transition is expected to be completed by the end of the first quarter of 2008.

During
the third quarter of 2007 we initiated a restructuring plan for our Texas facility to cover the lease abandonment of the unused portion of our Texas facility, which was completed
in the fourth quarter of 2007.

Impairment of Long-Lived Assets

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

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

Current Operations

The following table sets forth certain statements of operations data expressed as a percentage of sales for the periods indicated. As a result of our new
products, changing market conditions and other

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factors,
the historical percentages and comparisons set forth below may not reflect our expected future operations.

Percentage of Sales
Year Ended December 31,2007

2006

2005Consolidated Statements of Operations Data:Sales, net

100.0
%
100.0
%
100.0
%Cost of goods sold

52.2

48.6

53.5Gross profit

47.8

51.4

46.5Operating expenses:Research and development

33.9

37.6

57.2Selling and administrative

34.7

36.6

48.4Acquired in-process research and development





10.7Restructuring credits

(0.4
)
(0.6
)
Gain on the sale of assets held for sale

(2.1
)


Total operating expenses

66.1

73.6

116.3Loss from operations

(18.3
)
(22.2
)
(69.8
)Interest income

1.8

2.5

3.3Interest expense

(0.2
)
(0.1
)
(0.3
)Other incomenet

0.3

(0.2
)
Loss before income taxes

(16.4
)
(20.0
)
(66.8
)Income tax benefit

(0.7
)
(2.8
)
(0.4
)Net loss

(15.7
)%
(17.2
)%
(66.4
)%


Comparison of Years Ended December 31, 2007, 2006 and 2005

Sales

We recognized sales of $43.9 million, $48.8 million and $31.6 million in 2007, 2006 and 2005 respectively. The decrease in 2007 sales
compared to 2006 was due to overall weakness in the wireless infrastructure market. Sales in 2006 were strong with particular strength in third generation (3G) systems. Even with the overall market
weakness in 2007 our sales were substantially higher than the $31.6 million recorded in 2005. Over the comparable twelve-month periods, we have experienced an approximate (7%) decrease in the
mix weighted average selling price of our semiconductor products in 2007 compared to an approximate (1%) decrease in the mix weighted average selling price of our semiconductor products in 2006, when
compared to 2006 and 2005 respectively. Units shipped in 2007 decreased to 22.4 million units compared to 23.9 million units in 2006 and increased from 17.0 million units in 2005.
Sales in the comparable period in 2005 were also impacted by the change in application of our revenue recognition policy regarding sales to our distributors resulting in a $4.1 million revenue
deferral in our second quarter of 2005. For further discussion, see Note 2 to the condensed consolidated financial statements included elsewhere in this Form 10-K.

Significant
orders for our products related to the TD-SCDMA build-out in China are currently expected to materialize in 2008. We received our first production
order for these products and shipped approximately $480,000 in the first quarter of 2008. We also announced on March 10, 2008 the receipt of our second TD-SCDMA production order for
approximately $1 million which is expected to be delivered early in the second quarter of 2008. We anticipate that the use of our products in the TD-SCDMA build out would have a
positive impact on our total sales and financial results in 2008 but there are still substantial risks to realizing this expectation.

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Cost of Goods Sold

Our cost of goods sold for 2007 was $22.9 million, a decrease of $0.8 million or 3.3% as compared with cost of goods sold of $23.7 million in
2006. Our cost of goods sold for 2006 increased by $6.8 million or 40% as compared with cost of goods sold of $16.9 million in 2005. As a percentage of sales, our cost of goods sold
increased to 52% in 2007 from 49% in 2006 and decreased from 54% in 2005. In 2007 our cost of goods sold decreased by $0.8 million compared to 2006 as a result of a decrease in SFAS 123R
stock compensation expense of $167,000 and overhead spending of $1.3 million which was offset with an increase in our direct material of $673,000. We also revised our depreciation estimates for
certain equipment in the wafer fabrication facility resulting in increased depreciation of $514,000 in the first quarter of 2007 over what the depreciation amount would have been. During the second
half of 2007, we incurred approximately $380,000 of incremental costs associated with the transfer of our test and planning operations to the Philippines. With the increase in our direct material
costs and a significant portion of our operations overhead being fixed or semi-fixed we were not able to reduce our cost of goods sold as much as sales declined which resulted in the
higher cost of goods sold as a percent of sales when compared to 2006. Compared to 2005, the 2006 decrease in our cost of goods sold as a percentage of sales reflects a favorable change in our product
sales mix to higher margin semiconductor products. This decrease was partially offset by inventory write-downs to reduce excess inventories to their estimated net realizable value amounting to
$1.6 million for 2006. The majority of the excess inventory write-down related to a faster than anticipated industry transition to lead-free parts. We also revised our
depreciation estimates for certain equipment in the wafer fabrication facility resulting in increased depreciation of $337,000 in the fourth quarter of 2006 over what the depreciation amount would
have been.

We
expect to complete our test and planning transfer to the Philippines by the end of the first quarter of 2008 and we are projecting a saving of $350,000 per quarter related to cost of
goods beginning in the second quarter. We are also anticipating $50,000 per quarter of selling and administrative expense savings which will result in an anticipated total program savings of $400,000
per quarter.

With
our transition to a fabless semiconductor manufacturing model and as our cost saving initiatives are realized, we expect cost of goods sold will decrease as a percentage of sales on
a full year basis depending on the overall level of sales that we are able to achieve and the competitive environment.

Research and Development

Our 2007 research and development expense was $14.9 million or 34% of sales which was a decrease of $3.4 million or 19% as compared to our 2006
research and development expense which was $18.3 million or 38% of sales. Our 2006 research and development expense increased $259,000 or 1% as compared with our research and development
expense of $18.1 million or 57% of sales in 2005. The decrease in research and development expense in 2007 was primarily due to the reduced costs for our fab process development and new product
materials which resulted from the closure of our internal wafer fabrication facility in March 2007 partially offset by increased SFAS 123R stock compensation expense
of $423,000. The increase in research and development expense in 2006 was primarily related to stock compensation expense related to the adoption of SFAS 123R, additional effort on engineering
development agreements, increased spending on design consulting services and engineering wafer processing at outside foundries which was partially offset by a decrease in overall overhead.

We
generate revenues from development contracts with customers that have enabled us to accelerate our own product development efforts. Such development revenues have only partially
funded our product development activities, and we generally retain ownership of the products developed under these arrangements. As a result, we classify all development costs related to these
contracts as research

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and
development expenses. We recorded revenue of $383,000, $770,000 and $832,000 under such development agreements in 2007, 2006 and 2005, respectively.

Product
research and development is essential to our future success and we expect to continue making investments in new product development and engineering talent. In 2008, we will
continue to focus our research efforts and resources on semiconductor development targeting multiple growth markets such as RF amplifiers, mixers and converters for wireless infrastructure, base
station power amplifiers, WiMAX and RFID. We will also continue to explore the process capabilities of third party foundries and develop products under new process technologies such as SiGe and
BiCMOS. We expect expenditures for new product development in 2008 will be lower than 2007, in absolute dollars and as percentage of sales, primarily due to savings relating to closure of our internal
wafer fabrication facility in March 2007.

Selling and Administrative

Selling and administrative expense for 2007 was $15.2 million or 35% of sales which was a decrease of $2.7 million or 15% compared to 2006. 2006
expense was $17.9 million or 37% of sales, an increase of $2.6 million or 17% as compared with selling and administrative expense of $15.3 million or 48% of sales in 2005. During
2007 selling and administrative expense decreased by approximately $489,000. This was due to several factors including (a) in 2007 we changed to a direct employee model for calling on customers
as compared to primarily using manufacturers representatives in 2006, (b) 2007 severance costs were lower by $794,000 as compared to 2006 due to lower level of workforce reduction in 2007 as
compared to 2006, (c) we expensed an intangible asset that no longer had value for $637,000 in 2006 which did not re-occur in 2007, and (d) $1.2 million of lower
professional service expense in 2007 as we continued to tightly manage these costs. These decreases were partially offset by an increase of $981,000 in SFAS 123R stock compensation expense.

The
increase in expense during 2006 resulted from a $656,000 increase in stock compensation expense related to the adoption of SFAS 123R, $637,000 intangible asset write off
related to our decision to
cease the use of the Telenexus trademark and trade names intangible assets in favor of using the WJ Communications brand to market our RFID products, $102,000 increase in salaries and wages due to
increases in staffing, $353,000 increase in bonuses, a $386,000 increase in professional service fees, $253,000 increase in travel expenses due to increased focus on our customers, $219,000 increase
in recruiting fees related to staffing, and partially offset by $448,000 decrease in severance payments to realign our workforce to our current objectives.

After
the completion of our test and planning transfer to the Philippines by the end of the first quarter of 2008 we are also anticipating $50,000 per quarter of selling and
administrative expense savings.

Acquired In-process Research and Development Expenses

During 2005, $3.4 million of the purchase price for the acquisition of Telenexus, Inc. was allocated to acquired in-process research and
development expense ("IPRD"). Projects that qualify as in-process research and development represent those that have not yet reached technological feasibility and have no future
alternative use. Technological feasibility is defined as being equivalent to a beta-phase working prototype in which there is minimal remaining risk relating to the development which these
projects did not possess at the time of the acquisition. The value assigned to IPRD charge comprised the following projects: multi-protocol readers ($1.3 million), Smart readers ($900,000) and
Class 3 readers ($1.2 million). The value of these projects was determined by estimating the discounted net cash flows from the sale of the products resulting from the completion of the
projects, reduced by the portion of the revenue attributable to developed technology and the percentage of completion of the

48

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project.
As of December 31, 2006, these projects were substantially completed within our estimated cost.

Restructuring Charges

On October 30, 2006, we committed to a restructuring plan to close and exit our Milpitas fabrication facility ("fab") during the first quarter of 2007. The
Milpitas fab had produced a substantial portion of our gallium arsenide semiconductor products and had substantial excess capacity. We completed the closure of the Milpitas fab at the end of March
2007 and completed the final charges under the restructuring program in the fourth quarter of 2007. This restructuring program is now completed as of the end of 2007. We incurred costs of $672,000 and
$174,000 in 2007 and 2006, respectively.

On
May 23, 2007 we entered into an Asset Purchase Agreement with AmpTech to sell certain wafer fabrication equipment from our closed Milpitas fabrication facility. The
consideration received by us
consisted of cash in the amount of $1.8 million and a warrant to purchase 200,000 shares of AmpTech common stock. The fair value of the warrant was $1,400 and was not recorded as an asset due
to uncertainty of realization in the future. We recorded a gain on the sale of the wafer fabrication equipment of approximately $901,000, net of sales tax provision of $149,000 and property tax of
$80,000, which was included in the income from operations in the consolidated statements of operations. The agreement also obligates AmpTech to reimburse us for certain expenses, of which AmpTech has
made partial payment of $160,000 during 2007. In connection with the agreement the parties also entered into a one year Wafer Manufacturing and Supply Agreement which provides for AmpTech to
manufacture and supply wafers to us utilizing our wafer production processes and for us to purchase such wafers. AmpTech is not currently producing wafers for us and is expected to complete the wafer
qualification tests and begin to deliver wafers to us in April 2008. We also entered into a License Agreement whereby we license to AmpTech certain of our proprietary process technologies subject to
certain restrictions. The License Agreement provides for AmpTech to pay us a royalty of 5% of its gross revenue from third parties, up to $750,000, and 3% of gross revenue thereafter for the seven
year term. Products produced for us using our proprietary technology will not bear a royalty.

We
have strategic foundry relationships with GCS and AmpTech, Inc., and with the closure of our Milpitas fab GCS is currently the sole source for the manufacture and supply of our
GaAs and InGaP HBT wafers. AmpTech will provide an additional source after AmpTech starts its wafer fabrication line. The foundry agreements with AmpTech and GCS will provide us with two qualified
foundries.

On
August 4, 2007 we committed to an offshore program that will result in the transition of our final test and support operations to the Philippines. The operations are currently
located in our San Jose, California facility. We incurred restructuring costs associated with the implementation of this plan of approximately $149,000 as well as approximately $380,000 in dual
staffing and start-up costs in 2007. The transition is expected to be completed in the first quarter of 2008 and we anticipate cost savings of approximately $400,000 per quarter beginning
in the second quarter of 2008.

During
the third quarter of 2007, we initiated a restructuring plan for our Texas facility to cover the lease abandonment of the unused portion of our Texas facility and accrued $142,000
for this restructuring cost. During the fourth quarter of 2007, we reached an early lease termination agreement with the landlord and turned the facility over to the landlord late in December which
completed this restructuring program. Total costs associated with this program were restructuring costs of $142,000 and operating costs of $7,000.

The
restructuring expense for the year 2007 was a credit of $171,000 which consisted of charges of $675,000 for the Fab Closure restructuring plan for professional services, lease
termination costs and other expenses towards closure of our Milpitas fab, accruals and charges of $149,000 for the Philippines Offshore Restructuring Plan for severance, charges of $142,000 for the
Texas Restructuring Plan for the

49

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lease
abandonment at our Texas facility, charges of $90,000 for the Q2 2007 restructuring plan primarily for partial severance payments, and a credit of $1.2 million for the Q3 2001 and Q3 2002
restructuring plans primarily from adjustment of estimates based on new subleases and lower utility costs.

Gain On The Sale Of Assets Held For Sale

As described above in Restructuring Charges, on May 23, 2007 the Company entered into an Asset Purchase Agreement with AmpTech to sell certain wafer
fabrication equipment from its recently closed Milpitas fabrication facility which resulted in a gain on the sale of the wafer fabrication equipment of approximately $901,000.

Interest Income, net

Interest income represents interest earned on cash equivalents and short-term available-for-sale investments. In 2007 our
interest income was $793,000, a decrease of $448,000 or 36% compared to 2006. This decline was primarily due to the decline in our average funds available for investment. In 2006 our interest income
was $1.2 million, an increase of $193,000 or 18% as compared with interest income of $1.0 million in 2005. This increase resulted from an increase in interest rates offsetting a decrease
in average funds available for investment.

Interest Expense

Interest expense for 2007 was $78,000, a decrease of $5,000 from 2006. Interest expense in 2006 was $83,000, a decrease of $13,000 or 14% as compared with
interest expense of $96,000 in 2005. Interest expense for all periods relates to fees associated with our revolving credit facility and outstanding letters of credit

Other Income, net

Other income primarily consisted of the settlement of an insurance claim for a theft loss of approximately $118,000.

Income Tax

An income tax benefit of $338,000 was recorded in 2007 compared to a tax benefit of $1.4 million in 2006. The tax benefit of $338,000 in 2007 resulted from
income being taxed in foreign jurisdictions as well state taxes, reduced by certain prior period tax exposures that were no longer expected to have any cash effect. The tax benefit of
$1.4 million in 2006 resulted as the statute of limitations had expired on certain estimated state tax exposures. Our effective tax rate differs from the U.S. federal statutory tax rate of 35%
primarily due the recording of income related taxes in our international operations, reduced by certain prior period liabilities with no cash effect, and a full valuation allowance recorded against
the losses for U.S. federal and California state taxes. In 2005 we also recorded a tax benefit of $120,000 that resulted as the statute of limitations had expired on certain estimated federal tax
exposures. As of December 31, 2007, the balance of the contingent income tax liability was $54,000.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments at December 31, 2007 were $16.7 million, a decrease of $8.7 million or 34%
compared to the balance of $25.4 million at December 31, 2006.

On
January 23, 2007, WJ Communications, Inc. (the "Company") entered into a fifth amendment which extended the maturity date from January 21, 2007 to June 30,
2008 of its Amended and Restated Loan and Security Agreement (the "Credit Facility") between Comerica Bank and the Company dated September 23, 2003 and as amended June 13, 2005,
July 12, 2005, September 28, 2005, and

50

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December 27,
2005. Comerica also provided the Company with a letter agreement that, starting on January 22, 2007, the Company had a 30-day grace period until the credit
facility automatically expired during which period the credit facility remained in full force without lapse or termination. Interest rates on outstanding borrowings are periodically adjusted based on
certain financial ratios and are initially set, at our option, at LIBOR plus 2.0% or Prime less 0.25%. The Revolving Facility requires us to maintain certain financial ratios, (such as a minimum
unrestricted cash balance and a minimum tangible net worth), and contains limitations on, among other things, our ability to incur indebtedness, pay dividends and make acquisitions without the bank's
permission. The Revolving Facility is secured by substantially all of our assets. We were in compliance with the covenants as of December 31, 2007. As of December 31, 2007, the
borrowings available to the Company under the Revolving Facility were $10 million. As of December 31, 2007 and December 31, 2006, there were no outstanding borrowings under the
Revolving Facility. We have letters of credit of $3.8 million issued under the credit facility as of December 31, 2007 that are being used as collateral on our leased facilities and our
previously self funded workers compensation plan.

Net Cash Used by Operating Activities

Net cash used by operations was $8.4 million, $4.8 million and $10.4 million in 2007, 2006 and 2005, respectively. Net loss in 2007, 2006 and
2005 was $7.0 million, $8.4 million and $21.0 million, respectively.

The
most significant cash item impacting the difference between net loss and cash flows used in operations in 2007 was $7.8 million used by working capital. The
$7.8 million used by working capital primarily relates to a $3.9 million decrease in restructuring liabilities, a $1.4 million decrease in accruals and accounts payable, a
$1.2 million increase in inventories and a $1.2 million increase in receivables. The $3.9 million decrease in restructuring liabilities primarily relates to payments against the
remaining lease loss accrual and severance payments. The $1.2 million increase in inventories which resulted from inventory put in place to assure the continuity of supply during the transition
to fabless business model and longer cycle time from our fab vendors compared to our internal cycle time and a high level of piece part inventory. The $1.2 million increase in receivables
relates to increased level of shipments timing at the end of our year. Non-cash items included in net loss in 2007 included $3.5 million of depreciation and amortization and
$3.9 million of stock-based compensation expense.

The
most significant cash item impacting the difference between net loss and cash flows used in operations in 2006 was $2.4 million used by working capital. The
$2.4 million used by working capital primarily relates to a $2.6 million decrease in restructuring liabilities and a $455,000 increase in inventories. The $2.6 million decrease in
restructuring liabilities primarily relates to payments against the remaining lease loss accrual. The $455,000 increase in inventories resulted from higher shipment
activity levels. Non-cash items included in net loss in 2006 included $3.6 million of depreciation and amortization, $2.3 million of stock-based compensation expense and
$637,000 of intangible asset impairment.

The
most significant cash item impacting the difference between net loss and cash flows used in operations in 2005 was $2.9 million used by working capital. The
$2.9 million used by working capital primarily relates to a $2.7 million decrease in restructuring liabilities which were partially offset by a $1.6 million increase in accruals
and accounts payable and a $516,000 decrease in inventories. The $2.7 million decrease in restructuring liabilities primarily relates to payments against the remaining lease loss accrual. The
$1.6 million increase in accruals and accounts payable relates primarily to the timing of payments within terms. Non-cash items included in net loss in 2005 included
$3.1 million of depreciation and amortization and $3.4 million of IPRD related to our acquisition of Telenexus, Inc.

51

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Net Cash Provided (Used) by Investing Activities

Net cash provided (used) by investing activities was $5.2 million, $5.8 million and ($1.5) million in 2007, 2006 and 2005, respectively. In 2007, we
realized $15.6 million in proceeds from the sale and maturities of our short term investments and $1.6 million in proceeds from the disposal of property, plant and equipment which was
partially offset by $9.9 million used to purchase short-term investments and $2.2 million to invest in property, plant and equipment. In 2006, we realized
$29.6 million in proceeds from the sale and maturities of our short term investments which was partially offset by $21.9 million used to purchase short-term investments and
$2.1 million to invest in property, plant and equipment. In 2005, we used $34.9 million to purchase short-term investments, $3.2 million to acquire
Telenexus, Inc. including associated acquisition costs and $1.5 million to purchase equipment which was partially offset by $37.6 million in proceeds we realized from the sale and
maturities of our short-term investments. During 2008, we expect to invest approximately $1.0 million in capital expenditures. We have funded our capital expenditures from cash,
cash equivalents and short-term investments and expect to continue to do so during 2008.

Net Cash Provided by Financing Activities

Net cash provided by financing activities totaled $190,000, $1.8 million and $1.7 million in 2007, 2006 and 2005, respectively. In 2007, we received
net proceeds of $793,000 million from the sale of our common stock to employees through our employee stock purchase and options plans which was partially offset by $552,000 used to repurchase
our common stock from employees to cover the income tax witholdings. In 2006, we received net proceeds of $2.1 million from the sale of our common stock to employees through our employee stock
purchase and options plans which was partially offset by $252,000 used to repurchase our common stock from employees to cover the income tax witholdings. In 2005, we received net proceeds of
approximately $1.9 million from the sale of our common stock to employees through our employee stock purchase and option plans which was partially offset by $250,000 used to repurchase our
common stock from employees to cover the income tax withholdings.

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

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Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2007 and the effect those obligations are expected to have on our liquidity and
cash flow over the next five years (in thousands):

|                                  |  | Payments due by Period
|--------------------------------- |  | ----------------------
|
|
|Operating lease obligations(1)(3) |  | $                     
|Purchase obligations(2)           |  |                       
|Wafer purchase obligations(4)     |  |                       
|                                  |  |                       
|Total(5)                          |  | $                     
|                                  |  |                       

---

53

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For
purposes of the table above, obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current
manufacturing needs and are typically fulfilled by our vendors within short time horizons. We have additional purchase orders (not included in the table above) that represent authorizations to
purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected
requirements.

The
expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the
time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet financing arrangements except for operating leases as discussed in Note 10 to
the consolidated financial statements included elsewhere in this Form 10-K.

Change in Filer Status

Commencing with the 2006 annual report and continuing this annual report on Form 10-K we are not deemed to be an accelerated filer because our
public float was below the required threshold as of the last business day of our 2006 second fiscal quarter and most recently completed second fiscal quarter. As a result of becoming a
non-accelerated filer, we are permitted to elect to suspend Sarbanes-Oxley Section 404 obligations to provide a management's report on internal control over financial reporting and
related auditor attestation report. As we are still a non-accelerated filer in 2007, we are permitted to suspend the auditor attestation report for fiscal year 2007. We have elected to
suspend our reporting obligations under Section 404 which election was approved by the Audit Committee. During the period we are permitted to suspend our reporting obligations under
Section 404, we estimate that such election will save approximately $175,000 annually in external costs.

Other Matters

Recent Accounting PronouncementsIn June 2006, the FASB issued FIN 48, Accounting for Uncertainty
in Income Taxesan interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized under SFAS No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as
derecognition, interest and penalties and disclosure. Upon adoption of FIN 48 on January 1, 2007, the Company recognized a cumulative adjustment to the liability for unrecognized income
tax benefits in the amount of $825,000, which was accounted for as a reduction to the January 1, 2007 net deferred tax asset and valuation allowance balances.

In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157") and related FASB statements of position, which provides guidance for using fair
value to measure assets and liabilities. The pronouncements clarifies (1) the extent to which companies measure assets and liabilities at fair value; (2) the information used to measure
fair value; and (3) the effect that fair value measurements have on earnings. SFAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at
fair value. SFAS 157 is effective for the Company as of January 1, 2008. The adoption did not have a material impact on its consolidated results of operations and financial condition.

54

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In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS No. 159 permits companies
to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been
elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The Company does not
expect the adoption of SFAS 159 to have a significant impact on its financial position or results of operations.

Environmental MattersOf our former production facilities, two have known environmental liabilities of significance, the
Scotts Valley site and the Palo Alto site. Prior to the recapitalization merger, we entered into and funded fixed price remediation contracts, as well as cost overrun and unknown pollution conditions
liability coverage, with respect to both these sites. For a more detailed description, see "BusinessEnvironmental Matters."

LitigationFrom time to time we are involved in litigation, regulatory proceedings and claims that are incidental to the
conduct of our business in the ordinary course. While we currently believe that any adverse outcome of such matters would not materially affect our business or financial condition, there can be no
assurance that this will ultimately be the case (See Item 3 for further information regarding our legal proceedings).

Item 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the
forward-looking statements. We are exposed to market risk related to changes in interest rates. We do not use derivative financial instruments for speculative or trading purposes.

Cash, Cash Equivalents and InvestmentsCash and cash equivalents consist of money market funds and commercial paper acquired
with original maturity or remaining maturity at date of purchase of 90 days or less and are stated at cost plus accrued interest which approximates market value. Short-term
investments consist primarily of high-grade debt securities (A rating or better) with maturity greater than 90 days from the date of acquisition and are classified as
available-for-sale. Short-term investments classified as available-for-sale are reported at fair market value with unrealized gains or
losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax, until realized. Our short-term investments are in fixed income securities and money
market funds. These available-for-sale securities are subject to interest rate risk and will rise or fall in value if market interest rates change. They are also subject to
short-term market risk. We have the ability to hold our fixed income investments until maturity, and therefore we would not expect our operating results or cash
flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

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

Expected Maturity Dates

Expected Maturity
Amounts

Weighted
Average Interest
Rate(in thousands)Cash equivalents:2007

$
9,870

4.13
%Short-term investments:2007


2,698

5.16
%Fair value at December 31, 2007

$
12,568


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Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                        |  | Page
|------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm |  | 57  
|Consolidated Balance Sheets                             |  | 58  
|Consolidated Statements of Operations                   |  | 59  
|Consolidated Statements of Comprehensive Loss           |  | 60  
|Consolidated Statements of Stockholders' Equity         |  | 61  
|Consolidated Statements of Cash Flows                   |  | 63  
|Notes to Consolidated Financial Statements              |  | 64  

56

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
WJ Communications, Inc.:

We
have audited the accompanying consolidated balance sheets of WJ Communications, Inc. and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the
financial statement schedule listed in the Index at Item 15(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of WJ Communications and subsidiaries at December 31, 2007
and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As
discussed in Note 2 to the consolidated financial statements effective January 1, 2006, the Company changed its method of accounting for stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment". Effective January 1, 2007, the Company also changed its method of accounting for
uncertainties in income taxes in accordance with Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn interpretation of FASB
Statement No. 109".



57

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except share and per share amounts)

|                                     |                                                                                                                                                     | December 31, |       
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------
|
|ASSETS                               |                                                                                                                                                     |              |       
|CURRENT ASSETS:                      |                                                                                                                                                     |              |       
|                                     | Cash and cash equivalents                                                                                                                           |              | $     
|                                     | Short-term investments                                                                                                                              |              |       
|                                     | Receivables (net of allowances of $440 and $417, respectively)                                                                                      |              |       
|                                     | Inventories                                                                                                                                         |              |       
|                                     | Other current assets                                                                                                                                |              |       
|                                     |                                                                                                                                                     |              |       
|                                     | Total current assets                                                                                                                                |              |       
|                                     |                                                                                                                                                     |              |       
|PROPERTY, PLANT AND EQUIPMENT, net   |                                                                                                                                                     |              | 5,511 
|Goodwill                             |                                                                                                                                                     |              | 6,834 
|Intangible assets, net               |                                                                                                                                                     |              | 692   
|Other assets                         |                                                                                                                                                     |              | 179   
|                                     |                                                                                                                                                     |              |       
|                                     |                                                                                                                                                     | $            | 44,496
|                                     |                                                                                                                                                     |              |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                     |              |       
|CURRENT LIABILITIES:                 |                                                                                                                                                     |              |       
|                                     | Accounts payable                                                                                                                                    |              |       
|                                     | Accrued liabilities                                                                                                                                 |              |       
|                                     | Income tax contingency liability                                                                                                                    |              |       
|                                     | Deferred margin on distributor inventory                                                                                                            |              |       
|                                     | Restructuring accrual                                                                                                                               |              |       
|                                     |                                                                                                                                                     |              |       
|                                     | Total current liabilities                                                                                                                           |              |       
|                                     |                                                                                                                                                     |              |       
|Restructuring accrual                |                                                                                                                                                     |              | 7,941 
|Other long-term obligations          |                                                                                                                                                     |              | 597   
|                                     |                                                                                                                                                     |              |       
|                                     | Total liabilities                                                                                                                                   |              |       
|                                     |                                                                                                                                                     |              |       
|STOCKHOLDERS' EQUITY:                |                                                                                                                                                     |              |       
|                                     | Preferred stock, $0.01 par value10,000,000 shares authorized, no shares issued and outstanding                                                     |              |       
|                                     | Common stock, $0.01 par value100,000,000 shares authorized, 70,932,414 and 69,354,888 shares issued and outstanding in 2007 and 2006, respectively |              |       
|                                     | Treasury stock2,410,814 shares in 2007 and 2,039,743 shares in 2006                                                                                |              |       
|                                     | Additional paid-in capital                                                                                                                          |              |       
|                                     | Accumulated deficit                                                                                                                                 |              |       
|                                     |                                                                                                                                                     |              |       
|                                     | Total stockholders' equity                                                                                                                          |              |       
|                                     |                                                                                                                                                     |              |       
|                                     |                                                                                                                                                     | $            | 44,496
|                                     |                                                                                                                                                     |              |       

See
notes to consolidated financial statements.

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

|                                            |                                      | Year Ended                                   |                         
|------------------------------------------- | ------------------------------------ | -------------------------------------------- | ------------------------
|
|Consolidated Statements of Operations Data: |                                      |                                              |                         
|                                            | Sales, net                           |                                              | $                       
|                                            | Cost of goods sold                   |                                              |                         
|                                            |                                      |                                              |                         
|                                            | Gross profit                         |                                              |                         
|                                            | Operating expenses:                  |                                              |                         
|                                            |                                      | Research and development                     |                         
|                                            |                                      | Selling and administrative                   |                         
|                                            |                                      | Acquired in-process research and development |                         
|                                            |                                      | Restructuring credits                        |                         
|                                            |                                      | Gain on the sale of assets held for sale     |                         
|                                            |                                      |                                              |                         
|                                            |                                      |                                              | Total operating expenses
|                                            |                                      |                                              |                         
|                                            | Loss from operations                 |                                              |                         
|                                            | Interest income                      |                                              |                         
|                                            | Interest expense                     |                                              |                         
|                                            | Other income (expense)net           |                                              |                         
|                                            |                                      |                                              |                         
|                                            | Loss before income taxes             |                                              |                         
|                                            | Income tax benefit                   |                                              |                         
|                                            |                                      |                                              |                         
|                                            | Net loss                             |                                              | $                       
|                                            |                                      |                                              |                         
|                                            | Basic and diluted net loss per share |                                              |                         
|                                            |                                      |                                              |                         
|                                            | Basic and diluted average shares     |                                              |                         
|                                            |                                      |                                              |                         

See
notes to consolidated financial statements.

59

---





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

|                           |                                                                                                            | Year Ended |       
|-------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------- | ------
|
|Net loss                   |                                                                                                            | $          | (6,887
|Other comprehensive gains: |                                                                                                            |            |       
|                           | Unrealized holding gains on securities arising during period net of reclassification adjustments and taxes |            |       
|                           |                                                                                                            |            |       
|Comprehensive loss         |                                                                                                            | $          | (6,887
|                           |                                                                                                            |            |       

See
notes to consolidated financial statements.

60

---





WJ COMMUNICATIONS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands, except share amounts)

|                           |                                                                            | Common Stock |           | Treasury Stock |     |    |           
|-------------------------- | -------------------------------------------------------------------------- | ------------ | --------- | -------------- | --- | -- | ----------
|
|
|Balance, December 31, 2004 |                                                                            | 62,936,760   |           |                | 629 |    | (1,769,772
|                           | Net loss                                                                   |              |          |                |     |   |           
|                           | Common stock issued                                                        |              | 3,141,143 |                |     | 32 |           
|                           | Exercise of stock options                                                  |              | 1,377,942 |                |     | 14 |           
|                           | Shares repurchased for tax withholding on employee stock transactions      |              |          |                |     |   |           
|                           | Amortization of deferred stock compensation                                |              |          |                |     |   |           
|                           | Elimination of deferred compensation related to stock options forfeited    |              |          |                |     |   |           
|                           | Unrealized holding gains on securities                                     |              |          |                |     |   |           
|                           |                                                                            |              |           |                |     |    |           
|Balance, December 31, 2005 |                                                                            | 67,455,845   |           |                | 675 |    | (1,922,063
|                           | Net loss                                                                   |              |          |                |     |   |           
|                           | Common stock issued                                                        |              | 676,648   |                |     | 6  |           
|                           | Exercise of stock options                                                  |              | 1,222,395 |                |     | 12 |           
|                           | Shares repurchased for tax withholding on employee stock transactions      |              |          |                |     |   |           
|                           | Stock-based compensation                                                   |              |          |                |     |   |           
|                           | Reclassification of deferred stock compensation upon adoption of SFAS 123R |              |          |                |     |   |           
|                           | Unrealized holding gains on securities                                     |              |          |                |     |   |           
|                           |                                                                            |              |           |                |     |    |           
|Balance, December 31, 2006 |                                                                            | 69,354,888   |           | $              | 693 |    | (2,039,743
|                           | Net loss                                                                   |              |           |                |     |    |           
|                           | Common stock issued                                                        |              | 1,321,285 |                |     | 13 |           
|                           | Exercise of stock options                                                  |              | 256,241   |                |     | 3  |           
|                           | Shares repurchased for tax withholding on employee stock transactions      |              |          |                |     |   |           
|                           | Stock-based compensation                                                   |              |          |                |     |   |           
|                           |                                                                            |              |           |                |     |    |           
|Balance, December 31, 2007 |                                                                            | 70,932,414   |           | $              | 709 |    | (2,410,814
|                           |                                                                            |              |           |                |     |    |           

See
notes to consolidated financial statements.

61

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)

(In thousands, except share amounts)

|                           |                                                                            | Accumulated
Deficit |          | Other
Comprehensive
Loss |   | Deferred
Stock
Compensation |   | Total
Stockholders'
Equity |     
|-------------------------- | -------------------------------------------------------------------------- | ------------------- | -------- | ------------------------ | - | --------------------------- | - | -------------------------- | ----
|Balance, December 31, 2004 |                                                                            |                     | (154,531 | )                        |   | (12                         | ) |                            | (365
|                           | Net loss                                                                   |                     |          | (20,988                  | ) |                             |  |                            |     
|                           | Common stock issued                                                        |                     |          |                         |   |                             |  |                            |     
|                           | Exercise of stock options                                                  |                     |          |                         |   |                             |  |                            |     
|                           | Shares repurchased for tax withholding on employee stock transactions      |                     |          |                         |   |                             |  |                            |     
|                           | Amortization of deferred stock compensation                                |                     |          |                         |   |                             |  |                            |     
|                           | Elimination of deferred compensation related to stock options forfeited    |                     |          |                         |   |                             |  |                            |     
|                           | Unrealized holding gains on securities                                     |                     |          |                         |   |                             | 3 |                            |     
|                           |                                                                            |                     |          |                          |   |                             |   |                            |     
|Balance, December 31, 2005 |                                                                            |                     | (175,519 | )                        |   | (9                          | ) |                            | (663
|                           | Net loss                                                                   |                     |          | (8,404                   | ) |                             |  |                            |     
|                           | Common stock issued                                                        |                     |          |                         |   |                             |  |                            |     
|                           | Exercise of stock options                                                  |                     |          |                         |   |                             |  |                            |     
|                           | Shares repurchased for tax withholding on employee stock transactions      |                     |          |                         |   |                             |  |                            |     
|                           | Stock-based compensation                                                   |                     |          |                         |   |                             |  |                            |     
|                           | Reclassification of deferred stock compensation upon adoption of SFAS 123R |                     |          |                         |   |                             |  |                            |     
|                           | Unrealized holding gains on securities                                     |                     |          |                         |   |                             | 9 |                            |     
|                           |                                                                            |                     |          |                          |   |                             |   |                            |     
|Balance, December 31, 2006 |                                                                            | $                   | (183,923 | )                        | $ |                            |   | $                          |    
|                           | Net loss                                                                   |                     |          | (6,887                   | ) |                             |  |                            |     
|                           | Common stock issued                                                        |                     |          |                         |   |                             |  |                            |     
|                           | Exercise of stock options                                                  |                     |          |                         |   |                             |  |                            |     
|                           | Shares repurchased for tax withholding on employee stock transactions      |                     |          |                         |   |                             |  |                            |     
|                           | Stock-based compensation                                                   |                     |          |                         |   |                             |  |                            |     
|                           |                                                                            |                     |          |                          |   |                             |   |                            |     
|                           | Balance, December 31, 2007                                                 |                     | $        | 190,810                  |   | $                           |  |                            | $   
|                           |                                                                            |                     |          |                          |   |                             |   |                            |     

See
notes to consolidated financial statements.

62

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

|                                                     |                                                                                 | Year Ended                                                     |                                         
|---------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------
|
|OPERATING ACTIVITIES:                                |                                                                                 |                                                                |                                         
|                                                     | Net loss                                                                        |                                                                | $                                       
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities      |                                                                |                                         
|                                                     |                                                                                 | Depreciation and amortization                                  |                                         
|                                                     |                                                                                 | Acquired in-process research and development                   |                                         
|                                                     |                                                                                 | Amortization of deferred financing costs                       |                                         
|                                                     |                                                                                 | Gain (loss) on sale of assets held for sale                    |                                         
|                                                     |                                                                                 | Gain (loss) on sale of assets                                  |                                         
|                                                     |                                                                                 | Restructuring charges (credits)                                |                                         
|                                                     |                                                                                 | Intangible assets impairment                                   |                                         
|                                                     |                                                                                 | Stock based compensation                                       |                                         
|                                                     |                                                                                 | Allowance for doubtful accounts                                |                                         
|                                                     |                                                                                 | Asset retirement obligations                                   |                                         
|                                                     |                                                                                 | Amortization of (premiums) discounts on short-term investments |                                         
|                                                     |                                                                                 | Net changes in:                                                |                                         
|                                                     |                                                                                 |                                                                | Receivables                             
|                                                     |                                                                                 |                                                                | Inventories                             
|                                                     |                                                                                 |                                                                | Other assets                            
|                                                     |                                                                                 |                                                                | Accruals and accounts payable           
|                                                     |                                                                                 |                                                                | Income tax contingency liability        
|                                                     |                                                                                 |                                                                | Deferred margin on distributor inventory
|                                                     |                                                                                 |                                                                | Restructuring liabilities               
|                                                     |                                                                                 |                                                                |                                         
|                                                     | Net cash used in operating activities                                           |                                                                |                                         
|                                                     |                                                                                 |                                                                |                                         
|INVESTING ACTIVITIES:                                |                                                                                 |                                                                |                                         
|                                                     | Purchase of short-term investments                                              |                                                                |                                         
|                                                     | Proceeds from sale and maturities of short-term investments                     |                                                                |                                         
|                                                     | Purchases of property, plant and equipment                                      |                                                                |                                         
|                                                     | Proceeds on disposal of property, plant and equipment                           |                                                                |                                         
|                                                     | Acquisition of Telenexus and related costs                                      |                                                                |                                         
|                                                     | Acquisition of EiC and related costs                                            |                                                                |                                         
|                                                     |                                                                                 |                                                                |                                         
|                                                     | Net cash provided by (used in) investing activities                             |                                                                |                                         
|                                                     |                                                                                 |                                                                |                                         
|FINANCING ACTIVITIES:                                |                                                                                 |                                                                |                                         
|                                                     | Principal payments on capital lease                                             |                                                                |                                         
|                                                     | Payments on long-term borrowings                                                |                                                                |                                         
|                                                     | Repurchase of common stock                                                      |                                                                |                                         
|                                                     | Net proceeds from issuances of common stock                                     |                                                                |                                         
|                                                     |                                                                                 |                                                                |                                         
|                                                     | Net cash provided by financing activities                                       |                                                                |                                         
|                                                     |                                                                                 |                                                                |                                         
|Net (decrease)/increase in cash and cash equivalents |                                                                                 |                                                                | (3,006                                  
|Cash and cash equivalents at beginning of period     |                                                                                 |                                                                | 17,024                                  
|                                                     |                                                                                 |                                                                |                                         
|Cash and cash equivalents at end of period           |                                                                                 | $                                                              | 14,018                                  
|                                                     |                                                                                 |                                                                |                                         
|Other cash flow information:                         |                                                                                 |                                                                |                                         
|                                                     | Income taxes paid                                                               |                                                                | $                                       
|                                                     | Interest paid                                                                   |                                                                |                                         
|Noncash investing and financing activities:          |                                                                                 |                                                                |                                         
|                                                     | Increase in accounts payable related to property, plant and equipment purchases |                                                                |                                         
|                                                     | Issuance of common stock for Telenexus                                          |                                                                |                                         

See notes to consolidated financial statements.

63

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS OF THE COMPANY

WJ Communications, Inc. (formerly Watkins Johnson Company, "we", "us", "our" or the "Company") was formed after a recapitalization merger with Fox Paine on
January 31, 2000. We were originally incorporated in California and reincorporated in Delaware in August 2000.

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

2. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATIONThe consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all
intercompany balances and transactions.

CASH,
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTSCash and cash equivalents consist of money market funds and commercial paper acquired with original maturity or
remaining maturity at date of purchase of 90 days or less and are stated at cost plus accrued interest which approximates market value. Short-term investments consist primarily of
high-grade debt securities (A rating or better) with maturities greater than 90 days from the date of acquisition and are classified as available-for-sale.
Short-term investments classified as available-for-sale are reported at fair market value with unrealized gains or losses excluded from earnings and reported as
other comprehensive income (loss), a separate component of stockholders' equity, net of tax, until realized. Net realized gains and losses are included in the accompanying consolidated statements of
operations as other income.

FAIR
VALUE OF FINANCIAL INSTRUMENTSThe carrying value of cash and cash equivalents, receivables and accounts payable are a reasonable approximation of their fair market
value due to the short-term maturities of those instruments. Short-term investments are classified as available-for-sale and reported at fair market
value with unrealized gains or losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax, until realized.

INVENTORIESInventories
are stated at the lower of cost, using average-cost basis, or market. Cost of inventory items is based on purchase and production cost
including labor and overhead. Write-downs, when required, are made to reduce excess inventories to their estimated net realizable values. Such estimates are based on assumptions regarding future
demand and market conditions. These write-downs amounted to approximately $1.0 million, $1.6 million and $1.0 million for the years ended December 31, 2007, 2006 and 2005,
respectively. If actual conditions become less favorable than the

64

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

assumptions
used, an additional inventory write-down may be required. Inventories, at December 31, 2007 and 2006 consisted of the following (in thousands):

December 31,2007

2006Finished goods

$
1,495

$
1,661Work in progress


976


1,808Raw materials and parts


3,972


1,812$
6,443

$
5,281


PROPERTY,
PLANT AND EQUIPMENTProperty, plant and equipment are stated at cost. Provision for depreciation and amortization is primarily based on the
straight-line method over the assets' estimated useful lives ranging from four to ten years. Leasehold improvements are amortized over the shorter of the remaining lease term or the
asset's useful life. Costs incurred to maintain property, plant and equipment that do not increase the useful life of the underlying asset are expensed as incurred. Asset retirement obligations are
amortized over the useful life of the related asset.

At
December 31, 2007 and 2006 property, plant and equipment consisted of the following (in thousands):

December 31,Estimated Useful Life

2007

2006Buildings and leasehold improvements

4 - 10 years

$
3,664

$
5,109Machinery and equipment

5 -   7 years


17,598


25,28921,262


30,398Accumulated depreciation and amortization




(15,751
)

(23,166
)Property, plant and equipmentnet



$
5,511

$
7,232


Depreciation
expenses were $3.5 million, $3.6 million and $3.1 million in 2007, 2006 and 2005, respectively.

IMPAIRMENT
OF LONG-LIVED ASSETSIn accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not
be recoverable. Factors the Company considers that could trigger an impairment review include the following: significant underperformance relative to expected historical or projected, future operating
results; significant changes in the manner of use of the acquired assets or the strategy for the overall business; significant negative industry or economic trends; or significant technological
changes, which would render equipment and manufacturing processes obsolete. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of these assets to future
undiscounted cash flows expected to be generated by these assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets The Company recognized an impairment loss of $637,000 in 2006 relating to

65

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

certain
acquired intangible assets that the Company discontinued using in 2006 (see Note 5). No impairment losses were incurred in 2007 and 2005.

REVENUE
RECOGNITIONThe Company recognizes revenue in accordance with SEC Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition." SAB 104 requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed
or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee
charged for products delivered and the collectibility of those fees. Effective the second quarter ended July 3, 2005, the Company changed the application of its revenue recognition policy
regarding its distributors. The Company had previously recognized revenue upon shipment to its distributors less estimated reserves for distributor right of return, authorized price reductions for
specific end customer sales opportunities and price protection based on known events and historical trends. Effective for the second quarter ended July 3, 2005, the Company recognizes revenue
from its distribution channels when its distributors have sold the product to the end customer. Revenue is deferred until resale, title of products sold to distributors transfers upon shipment.
Accordingly, shipments to distributors are reflected in the consolidated balance sheets as accounts receivable and a reduction of inventories at the time of shipment. Deferred revenue and the
corresponding cost of sales on shipments to distributors are reflected in the consolidated balance sheet on a net basis as "Deferred margin on distributor inventory."

As
this change in the application of the Company's revenue recognition policy is the result of a change in current facts and circumstances, in accordance with Accounting Principles Board
Opinion No. 20 "Accounting Changes" paragraph 8, the Company accounted for the change within its second quarter ended July 3, 2005.

Authorized Price Reductions for Specific End Customer Sales Opportunities ("Ship & Debit Allowance"):Beginning in
September 2003, the Company entered into a program where the distributor would receive a credit if it sold specific product at a reduced price to specific end customers pre-authorized by
the Company. Through the quarter ended April 3, 2005, the Ship &
Debit Allowance was recognized as an offset to revenue in the period such pre-authorization occurred. Since the Company began recognizing revenue from its distributor channels only when
the Company's distributors sold the product to the end customers, the Ship & Debit Allowance will offset revenue only when the products with pre-authorized price reductions have
been shipped to the end customer otherwise it will offset "Deferred margin on distributor inventory". As of December 31, 2007, 2006 and 2005, the Company's Ship & Debit Allowance was
$207,000, $249,000 and $34,000, respectively.

Distributor Right of Return:In accordance with Financial Accounting Standards Board ("FASB") Statement No. 48
"Revenue Recognition When Right of Return Exists", the Company accrued a reserve based on its reasonable estimate of future returns based on historical trends and contractual limitations. Per
contractual agreement, the distributor may return product three times per year under certain conditions. Due to the Company's change in application of its revenue recognition policy regarding its
distributors, the Company no longer accrues a distributor stock rotation reserve.

Distributor Price Protection:If the Company reduces the prices of its products as negotiated with the distributor, the
distributor may receive a credit for the difference between the price paid by the distributor and the reduced price on applicable unsold products remaining in the distributor's inventory

66

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

on
the effective date of the price reduction assuming that inventory is less than 24 months old as determined by the original invoice date. When the Company recognized revenue for the shipment
to its distributors, the Company reserved for distributor price protection per issue 4 of EITF 01-9 based on specific identification of its initiated price reductions and the
associated reported distributor inventory. There were no such price reductions in 2007, 2006 or 2005. Effective the second quarter of 2005, the Company recognizes revenue from its distribution
channels when its distributors have sold the product to the end customer.

Development Contracts:The Company may enter into contracts to perform research and development for others meeting the
requirements of Statement of Financial Accounting Standards No. 68 "Research and Development Arrangements". Revenue under these development agreements is recognized when applicable contractual
non-refundable milestones have been met, including deliverables, and does not exceed the amount that would be recognized using the percentage-of-completion accounting method based on the
actual physical completion of work performed and the ratio of costs incurred to total estimated costs to complete the contract are also followed. Given the duration and nature of these development
contracts, the Company believes that recognizing revenue under the percentage completion method best represents the legal and economic results of contract performance on a timely basis. Losses on
contracts are recognized when determined. Revisions in estimates are reflected in the period in which the conditions become known. These development contracts with customers have enabled the Company
to accelerate its own product development efforts. Such development revenues have only partially funded its product development activities, and the Company generally retains ownership of the products
developed under these arrangements. As a result, the Company classifies all development costs related to these contracts as research and development expenses. The achievement of contractual milestones
is evidenced by written documentation provided by the customer in accordance with the applicable terms and conditions of each contract. In any period,
progress on the contract is based on input measures (direct labor dollars, direct material costs and direct outside processing costs) in the ratio of costs incurred to total estimated costs. Estimated
costs to complete are provided by engineering personnel directly involved in the development program and are reviewed by management and finance personnel for reasonableness given the known facts and
circumstances. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes. If
different conditions were to prevail such that accurate estimates could not be made, then the use of the completed contract method would be required and the recognition of all revenue and costs would
be deferred until the project was completed. If we bill the customer prior to performing services under the development agreement, the amounts are recorded as deferred revenue. The Company recorded
revenue of $338,000, $770,000 and $832,000 under development agreements in 2007, 2006 and 2005, respectively. The Company recorded deferred revenue of $36,000 and $424,000 at December 31, 2007
and 2006, respectively. No comparable amounts were recorded in 2005.

PRODUCT
WARRANTYThe Company generally sells products with a limited warranty of product quality and a limited indemnification of customers against intellectual property
infringement claims related to the Company's products. Such warranty generally ranges from 12 to 24 months. The Company accrues for known warranty and indemnification issues if a loss is
probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical activity. The Company estimates the cost of warranty based on the warranty
period for the product, the historical field return rates for a given product or family of products and the average cost required to

67

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

repair
or replace the product. Components of the reserve for warranty costs during 2007, 2006 and 2005 consisted of the following (in thousands):

December 31,2007

2006

2005Beginning balance

$
30

$
40

$
54Additions related to current period sales


29


21


22Warranty costs incurred in the current period


(45
)

(35
)

(24
)Adjustments to accruals related to prior period sales


20


4


(12
)Ending balance

$
34

$
30

$
40


INCOME
TAXESIn accordance with SFAS No. 109, "Accounting for Income Taxes," the consolidated financial statements include provisions for deferred income taxes using
the liability method for transactions that are reported in one period for financial accounting purposes and in another period for income tax purposes. Deferred tax assets, net are recognized when
management believes realization of future tax benefits of temporary differences is more likely than not. In estimating future tax consequences, generally all expected future events are considered
(including available carryback claims), other than enactment of changes in the tax law or rates. Valuation allowances are established to reduce deferred tax assets to the amount that is more likely
than not to be realized.

On
January 1, 2007, the Company adopted the Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes" and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. As a result of the implementation of FIN 48, the Company recognized a cumulative adjustment to the liability for unrecognized income tax benefits in the amount of
$825,000, which was accounted for as a reduction to the January 1, 2007 net deferred tax asset and valuation allowance balances. At the adoption date of January 1, 2007, the Company had
$1.2 million of unrecognized tax benefits, $24,000 of which would affect its effective tax rate if recognized. At December 31, 2007, the Company had $1.5 million of unrecognized
tax benefits.

LOSS
PER SHARE INFORMATIONBasic loss per share is computed using the daily weighted average number of common shares outstanding for the period. Diluted loss per share
includes the above and reflects the potential dilution that could occur if stock options whose exercise price are less than the average share price for the period were exercised or converted into
common stock and shares related to contributions under the Employee Stock Purchase Plan for pending purchases, however, such adjustments are excluded when they are anti-dilutive. In
determining the dilutive effect of the stock options, the number of shares resulting from the assumed exercise of the options is reduced by the number of shares that could have been purchased by the
Company with the proceeds from the exercise of such options including excess tax benefits and unamortized deferred stock compensation.

68

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

CONCENTRATION
OF CREDIT RISKFinancial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and trade receivables. The Company maintains cash in bank deposit accounts, which usually exceeds federally insured limits. The Company has not experienced any
losses in such accounts. The Company invests in a variety of financial instruments such as money market funds, commercial paper and high quality corporate bonds, and, by policy, limits the amount of
credit exposure with any one financial institution or commercial issuer. At December 31, 2007, three customers represented 45%, 20% and 15% of the total accounts receivable balance. At
December 31, 2006, two customers represented 23% and 20% of the total accounts receivable balance. The Company maintains an allowance for doubtful accounts based upon the expected
collectibility of receivables.

USE
OF ESTIMATESThe preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses
during the reporting period. Key estimates include allowance for doubtful accounts, reserves for sales returns, write-down of excess and obsolete inventories, income tax contingency
reserves, valuation of deferred tax assets and restructuring accruals. Actual results could differ from those estimates.

STOCK-BASED
COMPENSATIONEffective January 1, 2006, the Company adopted the provisions of, and accounts for stock-based compensation in accordance with the Financial
Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment", ("SFAS 123R"). Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over
the requisite service period, which is the vesting period. The Company elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation
provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding
as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures which included adjustments for
estimated forfeitures. See Note 8 for further information regarding our stock-based compensation assumptions and expenses.

Prior
to the adoption of SFAS 123R, the Company recognized the estimated compensation cost of restricted stock over the vesting term. The estimated compensation cost is based on
the fair value of the Company's common stock on the date of grant. We will continue to recognize the compensation cost, net of estimated forfeitures, over the vesting term.

On
November 10, 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. SFAS 123 (R)-3,Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The alternative transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool ("APIC pool") related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and
consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123R. The Company has adopted this simplified
method.

RECENT
ACCOUNTING PRONOUNCEMENTSIn July 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, ("FIN 48") as an
interpretation of

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SIGNIFICANT ACCOUNTING POLICIES (Continued)

FASB
Statement No. 109, Accounting for Income Taxes ("SFAS 109"). The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 was effective for us beginning January 1, 2007. Differences between the amounts recognized in the statements of financial position
prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of adoption, the Company recognized a cumulative adjustment to the liability for unrecognized income tax benefits
in the amount of $825,000, which was accounted for as a reduction to the January 1, 2007 net deferred tax asset and valuation allowance balances.

In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157") and related FASB statements of position, which provides guidance for using fair
value to measure assets and liabilities. The pronouncements clarifies (1) the extent to which companies measure assets and liabilities at fair value; (2) the information used to measure
fair value; and (3) the effect that fair value measurements have on earnings. SFAS 157 will apply whenever another standard requires (or permits) assets or liabilities to be measured at
fair value. SFAS 157 is effective for the Company as of January 1, 2008. The Company does not expect the adoption of SFAS 157 to have a significant impact on its financial
position or results of operations.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS No. 159 permits companies
to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been
elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008. The Company does not expect the adoption of SFAS 159 to
have a significant impact on its financial position or results of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INVESTMENTS

Available-for-Sale Investments

Investments, which are classified as available-for-sale, are summarized below for December 31, 2007 and 2006 (in thousands):

|                        |  |   |        |  |   |   |  |   |   | Classified on
Balance Sheet as:
|----------------------- |  | - | ------ |  | - | - |  | - | - | -------------------------------
|
|As of December 31, 2007 |  |   |        |  |   |   |  |   |   |                                
|Fixed income securities |  | $ | 9,869  |  | $ |  |  | $ |  |                                
|Money market funds      |  |   | 2,678  |  |   |  |  |   |  |                                
|                        |  |   |        |  |   |   |  |   |   |                                
|Total                   |  | $ | 12,567 |  | $ |  |  | $ |  |                                
|                        |  |   |        |  |   |   |  |   |   |                                
|As of December 31, 2006 |  |   |        |  |   |   |  |   |   |                                
|Fixed income securities |  | $ | 11,695 |  | $ |  |  | $ |  |                                
|Money market funds      |  |   | 12,750 |  |   |  |  |   |  |                                
|                        |  |   |        |  |   |   |  |   |   |                                
|Total                   |  | $ | 24,445 |  | $ |  |  | $ |  |                                
|                        |  |   |        |  |   |   |  |   |   |                                

As
of December 31, 2007 and 2006, $9.8 million and $11.7 million of fixed income securities had contractual maturities of six months or less, respectively. There
were no fixed income securities that had a contractual maturity beyond six months.

Impairment of Investments

The Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fair value and
the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. In order to determine
whether a decline in value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying
value; the financial condition of and business outlook for the Company, including key operational and cash flow metrics, current market conditions and future trends in the Company's industry; the
Company's relative competitive position within the industry; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair
value.

Risk Management

The Company generally places its investments with high-credit-quality counterparties and, by policy, all financial instruments and counterparties must
maintain the following minimally acceptable credit ratings: commercial deposits and corporate obligations A2/A, commercial paper A-1/P-1, municipal notes MIG 1/S and
P-1, municipal bonds AAA and asset back securities AAA. The Company, by policy, also limits the amount of credit exposure with any one financial institution or commercial issuer. No
significant concentration of credit risk existed at December 31, 2007.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. BUSINESS COMBINATIONS

EiC Acquisition

On June 18, 2004, the Company completed its acquisition of the wireless infrastructure business and associated assets from EiC. The aggregate purchase
price was $13.3 million. In connection with the acquisition, $1.5 million in cash and 294,118 shares of common stock were held in escrow as security against certain financial
contingencies. The $1.5 million in cash was released to EiC on May 4, 2005. On May 25, 2006, 147,059 shares of the 294,118 shares held in the escrow account were released and the
remaining 147,059 shares were released from escrow on June 16, 2006 to EiC.

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

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

The
acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations" ("SFAS No. 141"), and accordingly the
Company's consolidated financial statements from June 18, 2004 include the impact of the acquisition. The following table summarizes the allocation of the total purchase price of the EiC
acquisition, as of the date of the acquisition (in thousands):

Property and equipment

$
1,124Inventory


2,038In-process research and development


8,500Developed technology


200Goodwill


1,405Total purchase price

$
13,267


The
acquisition was accounted for as a purchase transaction, and accordingly, the assets of EiC were recorded at their estimated fair values at the date of the acquisition. With the
exception of the goodwill and acquired in-process research and development ("IPRD"), the identified intangible assets will be amortized on a straight-line basis over their
estimated useful lives, with a weighted average life of approximately five years.

A
portion of the purchase price, $8.7 million, was allocated to developed and core technology and in-process research and development ("IPRD"). Developed and core
technology and IPRD were identified and valued through extensive interviews, analysis of data provided by EiC Corporation concerning developmental products, their stage of development, the time and
resources needed to complete them, their expected income generating ability, target markets and associated risks. The

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. BUSINESS COMBINATIONS (Continued)

income
method was the primary technique utilized in valuing the developed and core technology and IPRD. Under the income method, fair value reflects the present value of the projected cash flows that
are expected to be generated by the products incorporating the current technologies.

Developmental
projects that reached technological feasibility were classified as developed and core technology, and the $200,000 value assigned to developed technology was capitalized to
be amortized using the straight-line method over a weighted-average period of five years. Developmental projects that had not reached technological feasibility, and had no future
alternative uses were classified as IPRD. The $8.5 million value allocated to projects that were identified as IPRD was charged to acquired in-process research and development in
2004. The value assigned to IPRD comprises the following projects: 12 V heterojunction bipolar transistor ("HBT") power amplifiers ($1.5 million) and 28 V HBT high power amplifiers
($7.0 million).

The
nature of the efforts required to develop the acquired IPRD into commercially viable products principally relate to the completion of planning, designing, prototyping, verification
and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technical performance requirements.

In
valuing the IPRD, the Company considered, among other factors, the importance of each project to the overall development plan, the projected incremental cash flows from the projects
when completed and any associated risks. The projected incremental cash flows were discounted back to their present
value using an after-tax discount rate of 25%. This discount rate was determined after consideration of the Company's weighted average cost of capital and the weighted average return on
assets. Associated risks include the inherent difficulties and uncertainties in completing each project and thereby achieving technological feasibility, anticipated levels of market acceptance and
penetration, market growth rates and risks related to the impact of potential changes in future target markets.

As
part of the acquisition, the Company entered into a sublease with EiC Corporation for 28,160 square feet of space at their facility in Fremont, California. This sublease expired in
December 2004 and converted into a month to month lease thereafter. At the end of January 2005 the Company moved the wafer fabrication facility from the Fremont location to its facility in Milpitas,
California and ended this sublease.

Telenexus Acquisition

On January 28, 2005, the Company completed its acquisition of Telenexus, Inc. ("Telenexus"). Pursuant to an Agreement and Plan of Merger, dated
January 19, 2005, by and between the Company, WJ Newco, LLC (the "WJ Sub"), Telenexus and Richard J. Swanson, Wilfred K. Lau, David Fried, Kurt Christensen and Mark Sutton (collectively
the "Shareholders"), Telenexus merged with and into the WJ Sub effective on January 29, 2005. The WJ Sub was the survivor in the merger and is a wholly owned subsidiary of the Company. By
virtue of the merger, the Company purchased through the WJ Sub all of the assets necessary for the conduct of the radio frequency identification ("RFID") business of Telenexus, consisting primarily
of, and including, but not limited to RFID modules, baseband processing algorithm technology, applications software and realizations of several reader product designs.

The
consideration paid by the Company on the closing date in connection with the merger consisted of cash in the amount of $3.0 million and 2,333,333 shares of the Company's
common stock

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. BUSINESS COMBINATIONS (Continued)

valued
at $8.2 million at the closing date. Including acquisition costs of $230,000, the aggregate purchase price for the net assets of Telenexus totaled $11.4 million. The fair value of
the Company's common stock was determined based on the average closing price per share of the Company's common stock over a 5-day period beginning two trading days before and ending two
trading days after the amended terms of the acquisition were agreed to and announced (January 31, 2005).

In
addition to the closing consideration, the sellers could have been entitled to further compensation of up to $2.5 million in cash and up to 833,333 shares of the Company's
common stock if the Company achieved certain revenue targets by July 28, 2006. The Company determined that the revenue targets were not met and communicated its conclusion to the selling
shareholders. The acquisition was accounted for using the purchase method of accounting in accordance with SFAS No. 141, "Business
Combinations" ("SFAS No. 141"), and accordingly the Company's consolidated financial statements from January 28, 2005 include the impact of the acquisition.

In
accordance with SFAS No. 141, the total purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective
estimated fair values at the acquisition date with the excess purchase price allocated to goodwill. The Company determined that acquiring Telenexus, Inc. was a more cost effective means of
developing the RFID products and technology necessary to continue to enhance its RFID reader offerings to further capitalize on market opportunity than developing the products and technology
internally. The acquisition also offered the Company the opportunity to shorten the time it takes to bring additional RFID reader products and technology to market. The valuation of the identifiable
intangible assets acquired reflects management's estimates. The following table summarizes the allocation of the total purchase price of the Telenexus acquisition, as of the date of the acquisition
(in thousands):

Net tangible assets

$
579In-process research and development


3,400Amortizable intangible assets:Developed technology


40Customer relationships


900Trademarks and trade names


700Non-competition agreements


400Goodwill


5,401Total purchase price

$
11,420


With
the exception of the goodwill and IPRD, the identified intangible assets consisting of existing technology, customer relationships, trademarks and trade names and
non-competition agreements will be amortized on a straight-line basis over their estimated useful lives, with a weighted average life of approximately eight years. In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No. 142"), goodwill of $5.5 million will not be amortized and will be tested for impairment at least
annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with the Company's policy on impairment analysis.

Prior
to the acquisition, the Company and Telenexus had entered into an agreement to jointly design, develop and produce a Personal Computer Memory Card International Association
("PCMCIA") Type II Multi-Protocol RFID reader. The Company has evaluated the effective settlement

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. BUSINESS COMBINATIONS (Continued)

of
this preexisting executory contract and the associated reacquired right to the use of its technology in accordance with Emerging Issues Task Force ("EITF") 04-1 "Accounting for
Preexisting Relationships between the Parties to a Business Combination." The Company has determined that the effective settlement of the executory contract and the associated reacquired right to use
its technology was neither favorable nor unfavorable as the agreement represented fair value when compared to similar market transactions and there were no stated settlement provisions in the
contract.

A
portion of the purchase price, $3.4 million, was allocated to developed and core technology and IPRD. Developed and core technology and IPRD were identified and valued through
extensive interviews, analysis of data provided by Telenexus concerning developmental products, their stage of development, the time and resources needed to complete them, their expected income
generating ability, target markets and associated risks. The income method was the primary technique utilized in valuing the developed and core technology and IPRD. Under the income method, fair value
reflects the present value of the projected cash flows that are expected to be generated by the products incorporating the current technologies.

Developmental
projects that reached technological feasibility were classified as developed and core technology, and the $40,000 value assigned to developed technology was capitalized to
be amortized using the straight-line method over a weighted-average period of fourteen months. Developmental projects that had not reached technological feasibility, and had no future
alternative uses were classified as IPRD. The $3.4 million value allocated to projects that were identified as IPRD was charged to acquired in-process research and development in
the accompanying condensed consolidated statements of operations for the nine months ended October 2, 2005. The value assigned to IPRD comprises the following projects: multi-protocol readers
($1.3 million), Smart readers ($900,000) and Class 3 readers ($1.2 million). The value of these projects was determined by estimating the discounted net cash flows from the sale
of the products resulting from the completion of the projects, reduced by the portion of the revenue attributable to developed technology and the percentage of completion of the project.

In
valuing the IPRD, the Company considered, among other factors, the importance of each project to the overall development plan, the projected incremental cash flows from the projects
when completed and any associated risks. The projected incremental cash flows were discounted back to their present value using an after-tax discount rate of 25%. This discount rate was
determined after consideration of the Company's weighted average cost of capital and the weighted average return on assets. Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility, anticipated levels of market acceptance and penetration, market growth rates and risks related to the impact of potential
changes in future target markets.

5. GOODWILL AND INTANGIBLE ASSETS

The Company periodically evaluates its goodwill in accordance with SFAS No. 142 for indications of impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include significant under-performance relative to historical or
projected future operating results, significant changes in the manner of the Company's use of the acquired assets or the strategy for the Company's overall business, or significant negative industry
or economic trends. If these criteria indicate that the value of the goodwill may be impaired, an evaluation of the recoverability of the net carrying value is made. Irrespective of the aforementioned
circumstances where impairment indicators are present, the

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. GOODWILL AND INTANGIBLE ASSETS (Continued)

Company
is required by SFAS No. 142 to test its goodwill for impairment at least annually. The Company has chosen the end of its fiscal month of May as the date of its annual impairment test.
The Company has determined its goodwill was not impaired as of May 31, 2007 and as of December 31, 2007.

The
changes in the carrying value of goodwill as of December 31, 2007 are as follows (in thousands):

Balance as of December 31, 2005

$
6,806Adjustments to goodwill


28Balance as of December 31, 2006


6,834Adjustments to goodwill


Balance as of December 31, 2007

$
6,834


Intangible
assets are recorded at cost, less accumulated amortization. During the quarter ended April 2, 2006, the Company determined that it would no longer use the Telenexus
trademarks and trade names and would instead market its RFID products under the WJ Communications brand. As such, the remaining unamortized balance of $637,000 was expensed as "Selling and
administrative" which is reflected in the accompanying consolidated statements of operations for the year ended December 31, 2006.

The
following tables present details of the Company's purchased intangible assets (in thousands):

|                                   |                                |  |           | As of December 31, 2007 |       | As of December 31, 2006
|---------------------------------- | ------------------------------ |  | --------- | ----------------------- | ----- | -----------------------
|
|EiC acquisition                    |                                |  |           |                         |       |                        
|                                   | Purchased developed technology |  | 5 years   |                         | $     | 200                    
|Telenexus acquisition              |                                |  |           |                         |       |                        
|                                   | Purchased developed technology |  | 1.2 years |                         |       | 40                     
|                                   | Customer relationships         |  | 7 years   |                         |       | 900                    
|                                   | Non-competition agreements     |  | 4 years   |                         |       | 400                    
|                                   |                                |  |           |                         |       |                        
|Total identified intangible assets |                                |  |           | $                       | 1,540 |                        
|                                   |                                |  |           |                         |       |                        

For
the year ended December 31, 2007, 2006 and 2005, amortization of purchased intangible assets included in cost of goods sold was approximately $40,000, $48,000 and $72,000,
respectively. For the year ended December 31, 2007, 2006 and 2005, amortization of purchased intangible assets included in operating expense was approximately $229,000, $238,000 and $264,000,
respectively. Amortization is computed using the straight-line method over the estimated useful life of the intangible asset. The intangible assets related to purchased developed
technology is amortized to cost of goods sold. The intangible assets related to customer relationships, trademarks and trade names and non-competition

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. GOODWILL AND INTANGIBLE ASSETS (Continued)

agreements
with sales/engineering personnel are amortized to operating expense. The Company expects that annual amortization of acquired intangible assets to be as follows (in thousands):

EiC

Telenexus

TotalFiscal year:2008

$
40

$
229

$
2692009


20


136


1562010





129


1292011





128


1282012





10


10Total amortization

$
60

$
632

$
692


6. BORROWING ARRANGEMENTS

On January 23, 2007, the Company entered into a fifth amendment to extend the maturity date from January 21, 2007 to June 30, 2008 to its
Amended and Restated Loan and Security Agreement (the "Revolving Credit Facility") between Comerica Bank and the Company dated September 23, 2003.
Comerica also provided the Company with a letter agreement, starting on January 22, 2007, that the Company had a 30-day grace period until the credit facility automatically expired
during which period the credit facility remained in full force without lapse or termination. Interest rates on outstanding borrowings are periodically adjusted based on certain financial ratios and
are initially set, at our option, at LIBOR plus 2.0% or Prime less 0.25%. The Revolving Facility requires the Company to maintain certain financial ratios, (such as a minimum unrestricted cash balance
and a minimum tangible net worth), and contains limitations on, among other things, the Company's ability to incur indebtedness, pay dividends and make acquisitions without the bank's permission. The
Revolving Facility is secured by substantially all of the Company's assets. The Company was in compliance with the covenants as of December 31, 2007. As of December 31, 2007, the
borrowings available to the Company under the Revolving Facility was $10 million. As of December 31, 2007 and December 31, 2006, there were no outstanding borrowings under the
Revolving Facility. We have letters of credit of $3.8 million available as of December 31, 2007 that are being used as collateral on our leased facilities and workers compensation
obligations.

7. OTHER LONG-TERM OBLIGATIONS

Long-term obligations, excluding amounts due within one year, consist of the following (in thousands):

December 31,2007

2006Environmental remediation (Note 10)

$
48

$
56Deferred rent


520


496Long-term advances and deposits


29


29Total

$
597

$
581


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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY

On January 28, 2004, the Company completed a secondary underwritten public offering of 2,000,000 shares of common stock at $5.75 per share, resulting in
net proceeds of $10.1 million.

In
March 2003, the Company's Board of Directors (the "Board") authorized the repurchase of up to $2.0 million of the Company's common stock. In October 2003, the Board approved an
additional $2.0 million to expand this existing share repurchase program increasing the total amount authorized to $4.0 million. Purchases under this stock repurchase program were made
in the open market, through
block trades or otherwise. Depending on market conditions and other factors, these purchases were commenced or suspended at any time or from time-to-time without prior notice.
During the year ended December 31, 2003, $2.8 million was utilized to purchase 1,340,719 shares of the Company's common stock at a weighted average purchase price of $2.08 per share. All
of the purchases were made on the NASDAQ Global Market at prevailing open market prices using general corporate funds. This stock repurchase program ended as of the annual shareholder meeting on
July 22, 2004. On July 27, 2004 the Company announced that its Board of Directors authorized a new repurchase program of up to $2.0 million of the Company's common stock. This new
program was effective July 27, 2004 and replaced all previous repurchase programs. Under this new program, $920,000 was utilized to purchase 429,053 shares of the Company's common stock at a
weighted average purchase price of $2.12 per share. This program expired on July 26, 2005. The repurchases reduced the Company's cash and interest income during the period and correspondingly
reduced the number of the Company's outstanding shares of common stock.

STOCK
OPTION PLANSDuring 2000, the Company's "2000 Stock Incentive Plan" and "2000 Non-Employee Director Stock Compensation Plan" (collectively the "Plans") were
adopted and approved by the Board and the Company's stockholders. Under the Plans, the Company may grant incentive awards in the form of options to purchase shares of the Company's common stock,
restricted shares, common stock and stock appreciation rights to participants, which include non-employee directors, officers and employees of and consultants to the Company and its
affiliates. On May 22, 2002, the Board approved the adoption of an amendment to the Company's "2000 Stock Incentive Plan" to increase the number of shares of common stock authorized for
issuance from 16,500,000 to 19,000,000 shares.

This
plan amendment did not affect any other terms of the "2000 Stock Incentive Plan." On May 29, 2003, the Board approved the adoption of an amendment to the Company's "2000
Non-Employee Director Compensation Plan" to increase the number of shares of common stock authorized for issuance from 570,000 to 800,000, which was approved by the Company's stockholders
on July 15, 2003 at the Company's Annual Meeting of Stockholders. Also on May 29, 2003, the Board approved the adoption of a second amendment to the Company's "2000 Stock Incentive Plan"
so that options granted to employees under the "2000 Stock Incentive Plan" will qualify as performance-based compensation under Internal Revenue Code Section 162(m) and thereby not be subject
to a deduction limitation. Particularly, the amendment to the "2000 Stock Incentive Plan" provides that no employee or prospective employee shall be granted one or more options within any fiscal year
which in the aggregate are for the purchase of more than 3,000,000 shares. On June 1, 2006, the Company's Board of Directors approved the adoption of an amendment to the Company's "Amended and
Restated 2000 Non-Employee Director Compensation Plan" to increase the number of shares of common stock authorized for issuance from 800,000 to 1,000,000, which was approved by the
Company's stockholders on July 20, 2006 at the Company's Annual Meeting of Stockholders. The total number of shares of common stock authorized for issuance pursuant to the Plans is 22,000,000
shares.

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY (Continued)

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

In
fiscal 2006, the Compensation Committee of the Board of Directors awarded 1,977,990 Performance Accelerated Restricted Stock Units to employees (PARSUs). 1,403,640 of the PARSUs were
issued under the "Amended and Restated 2000 Stock Incentive Plan" and 574,350 of the PARSUs were issued under the "2001 Employee Stock Incentive Plan". The PARSUs vest upon the achievement of
performance targets that are determined by the Compensation Committee of the Board of Directors. Any PARSUs that do not vest upon the achievement of performance targets cliff vest at the end of four
years. During 2007 the Compensation Committee of the Board of Directors awarded 3,187,238 PARSUs to employees.

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

The
Company's Board of Directors approved the adoption of an amendment to the Company's "Amended and Restated 2000 Non-Employee Director Compensation Plan" to increase the
number of shares of common stock authorized for issuance from 1,000,000 to 1,250,000, which was approved by the Company's stockholders on July 19, 2007 at the Company's Annual Meeting of
Stockholders.

The
Company's stock option plans provide that options granted under the stock option plans will have a term of no more than 10 years. Options granted under the stock option plans
have vesting periods ranging from two to four years. The provisions of the stock option plans provide that under certain circumstances, such as a change in control, the achievement of certain
performance objectives, or certain liquidity events, the outstanding option may be subject to accelerated vesting. As of December 31, 2007 the number of shares available for future grants under
the above plans was 3,206,895. Stock options may include incentive stock options, nonqualified stock options or both, in each case, with or without stock appreciation rights and PARSUs.

STOCK-BASED COMPENSATION

Effective January 1, 2006, the Company adopted SFAS 123R. During the fiscal year 2007, the Company granted only PARSUs to employees and stock
options to the Board of Directors. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of
the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company's stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include

79

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY (Continued)

the
Company's expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected
dividends.

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

The
weighted average fair value of stock-based awards granted in fiscal years 2007, 2006 and 2005 reported below have been estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions:

2007

2006

2005Employee Stock Option Plans:Fair value

$
0.74

$
1.33

$
0.88Dividend yield


0.0
%

0.0
%

0.0
%Volatility


81.1
%

84.9
%

82.1
%Risk free interest rate at the time of grant


4.9
%

4.6
%

4.1
%Expected term to exercise (in months from the grant date)


53


51


48Employee Stock Purchase Plan:Fair value

$
0.55

$
0.56

$
0.70Dividend yield


0.0
%

0.0
%

0.0
%Volatility


78.1
%

64.4
%

75.4
%Risk free interest rate at the time of grant


3.9
%

4.7
%

2.7
%Expected term to exercise (in months from the grant date)


6


6


6


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

2007

2006

2005Cost of goods sold

$
687

$
520

$
62Research and development


908


485


161Selling and administrative


2,306


1,324


697$
3,901

$
2,329

$
920


80

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY (Continued)

The
amounts included in the years ended December 31, 2007 and 2006 reflect the adoption of SFAS 123R. In accordance with the modified prospective transition method, the
Company's consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. The impact on basic and diluted net loss per
share for the years ended December 31, 2007 and 2006 from the adoption of SFAS 123R was $0.06 and $0.04, respectively.

The
following table illustrates the effect for periods prior to the adoption of SFAS 123R on net loss had compensation cost for all of the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these plans, and amortized to expense over the vesting period of the awards consistent with the methodology prescribed under
SFAS 123, "Accounting for Stock-Based Compensation" (in thousands except per share amounts):

Year Ending December 31, 2005Reported net loss

$
(20,988
)Add: Total stock-based employee compensation expense included in reported net loss


920Deduct: Total stock-based employee compensation expense under fair value based method for all awards


(1,116
)Pro forma loss

$
(21,184
)Reported net loss per basic and diluted share

$
(0.33
)Pro forma net loss per basic and diluted share

$
(0.33
)


Activity
under the stock option plans during 2007, 2006 and 2005 are set forth below:

Shares

Weighted Average Exercise Price2005Granted (weighted average fair value of $0.88 per option)

1,728,000

$
1.43Exercised

(1,377,942
)
$
1.06Cancelled

(4,710,695
)
$
3.08At December 31:Outstanding

9,366,759

$
1.87Exercisable

5,225,843

$
2.02


|
|

Shares

Weighted Average Exercise Price2006Granted (weighted average fair value of $1.33 per option)

4,109,990

$
1.08Exercised

(1,222,395
)
$
1.35Cancelled

(3,366,074
)
$
2.34At December 31:Outstanding

8,888,280

$
1.40Exercisable

2,919,621

$
1.71


81

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY (Continued)

|
|

Shares

Weighted Average Exercise Price2007Granted (weighted average fair value of $0.74 per option)

3,331,238

$
0.07Exercised

(591,610
)
$
0.59Cancelled

(1,267,707
)
$
1.39At December 31:Outstanding

10,360,201

$
1.02Exercisable

3,768,739

$
1.70


The
total intrinsic value of options exercised during 2007, 2006 and 2005 was $637,000, $682,000 and $777,000, respectively.

The
aggregate intrinsic value of options and PARSUs outstanding and options and PARSUs exercisable as of December 31, 2007 was $3.1 million and $0, respectively. The
intrinsic value is calculated as the difference between the market value as of December 31, 2007 and the exercise price of shares that were in the money at December 31, 2007. The market
value of as December 31, 2007 was $0.74 as reported by NASDAQ.

As
of December 31, 2007, the weighted average remaining contractual life of stock options and PARSUs outstanding and exercisable was 6.8 years and 5.0 years
respectively.

The
following table summarizes information concerning currently outstanding and exercisable options at December 31, 2007:

|                 |  | Options Outstanding |  | Options Exercisable
|---------------- |  | ------------------- |  | -------------------
|
|$0.00 to $0.01   |  | 4,173,563           |  | 8.7                
|$0.02 to $1.00   |  | 743,500             |  | 7.7                
|$1.01 to $1.50   |  | 2,989,988           |  | 3.3                
|$1.51 to $2.00   |  | 990,750             |  | 8.2                
|$2.01 to $3.00   |  | 1,179,000           |  | 7.8                
|$3.01 to $5.00   |  | 275,000             |  | 6.4                
|$5.01 to $15.00  |  | 5,000               |  | 2.9                
|$15.01 to $26.75 |  | 3,400               |  | 2.8                
|                 |  |                     |  |                    
|                 |  | 10,360,201          |  | 6.8                
|                 |  |                     |  |                    

As
of December 31, 2007, there was $4.3 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards
granted to employees and non-employee members of the Board of Directors. The unrecognized compensation cost is expected to be recognized over a weighted average period of 2.7 years.
If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation
expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that the Company grants additional equity awards to employees or assumes unvested
equity awards in connection with acquisitions.

82

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCKHOLDERS' EQUITY (Continued)

Restricted
(i.e., non-vested) stock activity under the Company's stock incentive plans during the year ended December 31, 2007 and 2006 is set forth below, (in
thousands except per share amounts):

Shares

Weighted Average Grant Date Fair Value per ShareUnvested at December 31, 2005

430,560

$
1.49Grants

670,000

$
1.71Vested

(316,656
)
$
1.57Unvested at December 31, 2006

783,904

$
1.65Grants



$
Vested

(586,656
)
$
1.68Unvested at December 31, 2007

197,248

$
1.56


The
total intrinsic value of restricted stock vested during the year ended December 31, 2007 was $348,000 based on the vest date intrinsic value.

As
of December 31, 2007, there was $144,000 of unrecognized compensation cost related to unvested restricted stock awards which is expected to be recognized over a weighted
average period of 0.6 years. In addition, additional compensation cost may be recognized on performance based restricted stock awards if the performance targets become probable of achievement.

EMPLOYEE
STOCK PURCHASE PLAN ("ESPP")In May 2001, the Company's stockholders approved the adoption of the Company's 2001 Employee Stock Purchase Plan (the "Purchase Plan").
Up to 1,500,000 shares of Common Stock may be issued under the Purchase Plan. Under the plan, all eligible employees may purchase shares of the Company's common stock at six-month
intervals at 85% of fair market value (calculated in the manner provided
under the plan). Employees purchase such stock using payroll deductions, which may not exceed 15% of their total cash compensation. The plan imposes certain limitations upon an employee's right to
acquire common stock, such as no employee may be granted rights to purchase more than $25,000 worth of common stock for each calendar year in which such rights are at any time outstanding. On
June 1, 2006, the Company's Board of Directors approved the adoption of an amendment to the Company's Purchase Plan to increase the number of shares of common stock authorized for issuance from
1,500,000 to 2,250,000, which was approved by the Company's stockholders on July 20, 2006 at the Company's Annual Meeting of Stockholders.

In
fiscal 2007, 168,936 and 230,324 shares were issued under this Purchase Plan at an average price of $1.44 and $0.83 for the Purchase Plan intervals ended May 2007 and November 2007,
respectively. In fiscal 2006, 222,762 and 137,230 shares were issued under this Purchase Plan at an average price of $1.13 and $1.56 for the Purchase Plan intervals ended April 2006 and October 2006,
respectively. In fiscal 2005, 142,453 shares and 267,417 shares were issued under this Purchase Plan at an average price of $1.99 and $1.11 for the Purchase Plan intervals ended April 2005 and October
2005, respectively. At December 31, 2007, 537,322 shares were available for future issuance under the Purchase Plan.

As
of December 31, 2007, there was $37,000 of unamortized compensation cost related to the Purchase Plan. The unamortized compensation cost is expected to be recognized over a
weighted average period of 0.5 year.

83

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES

The components of income (loss) before income taxes consist of the following (in thousands):

Year ended December 31,2007

2006

2005Loss before income taxes:United States

$
(7,160
)
$
(9,770
)
$
(21,108
)Foreign


(65
)




$
(7,225
)
$
(9,770
)
$
(21,108
)


The
expense (benefit) from federal and state income taxes is as follows. Foreign income (loss) before income taxes was insignificant for all years.

2007

2006

2005(in thousands)Current:Federal

$
(83
)
$
(1,373
)
$
(123
)State


(301
)

7


3Foreign


46





Total current


(338
)

(1,366
)

(120
)Deferred:Federal








State








ForeignTotal deferred








Total

$
(338
)
$
(1,366
)
$
(120
)


In
2007 we recorded a net tax benefit of $338,000 primarily related to prior period exposures that were no longer expected to have any cash effect, partially offset by state and foreign
taxes. In 2006, we recorded a net tax benefit of $1.4 million as the statute of limitations had expired on certain estimated state tax exposures. The tax benefit for 2005 of $120,000 resulted
as the statute of limitations expired on certain estimated federal tax exposures.

84

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

The
differences between the effective income tax rate as applied to loss from operations and the statutory federal income tax rate are as follows:

2007

2006

2005Statutory federal tax rate

(35.0
)%
(35.0
)%
(35.0
)%Research and development credit

(8.9
)
(6.7
)
(3.0
)State taxes, net of federal tax benefit

(5.6
)
(5.7
)
(5.7
)Foreign taxes

0.6



In-process research and development





6.6Expired foreign tax credit





2.1Other

1.3

0.7

1.6Prior period tax exposures with no cash effect

(5.6
)


Tax reserve no longer required



(14.1
)
(0.6
)Change in valuation allowance

48.5

46.8

33.4Effective tax rate

(4.7
)%
(14.0
)%
(0.6
)%


Deferred
tax assets are recognized when management believes realization of future tax benefits of temporary differences is more likely than not. In estimating future tax consequences,
all expected future events are considered (including available carryback claims), other than enactment of changes in the tax law or rates. Valuation allowances are established to reduce deferred tax
assets to the amount that is more likely than not to be realized. Deferred tax amounts are comprised of the following at December 31 (in thousands):

2007

2006Net operating loss

$
30,032

$
24,609Restructuring accrual


4,533


6,201Depreciation and amortization


10,042


11,706Accounts receivable valuation


179


189Inventory valuation


1,893


2,411Stock related compensation


1,611


679Tax credits


8,438


8,815Employee benefit related accruals


348


360Other


772


536Total deferred tax assets


57,848


55,506Valuation allowance


(57,848
)

(55,506
)Total deferred tax assets

$


$
Income tax contingency liability

$
54

$
1,818


As
of December 31, 2007, the Company had $1.7 million in federal minimum tax credit carryforwards which are available indefinitely. The Company also had federal R&D tax
credit carryforwards of $5.6 million, which begin to expire in 2012. Additionally, the Company had state tax

85

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

credit
carryforwards of $3.2 million of which $0.6 million begin to expire in 2009 and $2.6 million are available indefinitely.

At
December 31, 2007 the Company had $71.5 million of federal net operating loss carryforwards which will expire beginning in 2023. The Company also had state net operating
loss carryforwards of $93.0 million, which begin to expire in 2013. $7.5m of the federal losses and $7.5m of state losses relate to stock option deductions, and when recognized, the income tax
benefit of these losses will be accounted for as a credit to stockholders' equity on the Balance Sheet rather than the Statement of Operations.

Current
federal and state tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an "ownership change" of a corporation.
Accordingly, the Company's ability to utilize net operating loss and tax credit carryforwards may be limited as a result of such an ownership change. Such a limitation could result in the expiration
of carry forwards before they are utilized.

On
January 1, 2007, the Company adopted the Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income TaxesAn
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes" and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of the implementation of
FIN 48, the Company recognized a cumulative adjustment to the liability for unrecognized income tax benefits in the amount of $825,000, which was accounted for as a reduction to the
January 1, 2007 net deferred tax asset and valuation allowance balances. At the adoption date of January 1, 2007, the Company had $1.2 million of unrecognized tax benefits,
inclusive of interest and penalties, $24,000 of which would affect its effective tax rate if recognized. At December 31, 2007, the Company had $1.5 million of unrecognized tax benefits,
inclusive of interest and penalties, $30,000 of which would affect its effective tax rate if recognized.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized Tax Benefits(in thousands)Balance at January 1, 2007

$
1,240Additions for Tax Positions of Current Period


200Additions for Tax Positions of Prior Years


30Balance at December 31, 2007

$
1,470


86

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. INCOME TAXES (Continued)

The
total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate is $22,000, exclusive of interest, as of December 31, 2007. The Company
recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accrued interest and penalties of
approximately $2,000 and $8,000 at January 1, 2007 and December 31, 2007, respectively.

The
Company files income tax returns in the U.S. federal jurisdiction, a few states and foreign jurisdictions. As of December 31, 2007, the federal returns for the years ended
2004 through the current
period and certain state returns for the years ended 2003 through the current period are still open to examination. However, due to the fact the Company had net operating losses and credits carried
forward in most jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through an adjustment to tax attributes carried
forward to open years.

The
reconciliation of the unrecognized gross tax benefit of $1.5 million on the balance sheet is as follows: $30,000 in the income taxes payable, and $1.4 million as a
reduction to deferred tax assets. The total amount of unrecognized tax benefit, net of federal benefit for the deduction of such items as interest that, if recognized, would affect the effective tax
rate is $30,000.

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

10. COMMITMENTS AND CONTINGENCIES

Commitments

The Company leases its facilities under various non-cancelable operating leases expiring through January 2011. See Note 12 for a discussion of
restructuring charges recorded related to these leases.

Minimum
lease commitments as of December 31, 2007 under non-cancelable leases are as follows (in thousands):

Operating LeasesLease payments:2008

$
4,4682009


4,6352010


4,7622011


1,044Remaining years


Total

$
14,909


Rent
expense in 2007, 2006 and 2005 was $3.0 million, $3.3 million and $3.1 million, respectively.

The
Company subleases to third parties approximately 31,800 square feet of its abandoned leased space under non-cancelable operating leases expiring through January 2011.
This sublease income is incorporated in the restructuring charges related to our lease loss accruals (see Note 12).

87

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. COMMITMENTS AND CONTINGENCIES (Continued)

Minimum
sublease income commitments as of December 31, 2007 under non-cancelable leases are as follows (in thousands):

Operating LeasesSublease rental income:2008

$
5082009


2492010


2512011


21Remaining years


Total

$
1,029


Sublease
rental income earned in 2007, 2006 and 2005 was $666,000, $533,000 and $424,000, respectively.

On
May 23, 2007, we entered into a one year wafer manufacturing and supply agreement with AmpTech which provides for AmpTech to manufacture and supply wafers to us utilizing our
wafer production processes and for us to purchase such wafers. During the initial term of the agreement, we are required to provide AmpTech with orders for a minimum quantity of wafers periodically,
beginning after AmpTech is able to consistently deliver wafers. AmpTech is in process of passing qualifications and is expected to start delivering wafers by April of 2008 and thereafter we estimate
our obligation to purchase wafers during the agreement term to be approximately $250,000.

We
recently have reached a licensing agreement in principle with the The Lemelson Foundation to resolve the four beam processing and LOCOS patents issue described in litigation, for a
total fee of $115,000.

We
have recorded a liability of $426,000 for cancellation charges for product which we subsequently determined we were unable to use.

Environmental Remediation

Our current operations are subject to federal, state and local laws and regulations governing the use, storage, disposal of and exposure to hazardous materials,
the release of pollutants into the environment and the remediation of contamination. The Company has an accrued liability of $54,000 as of December 31, 2007 to offset estimated program
oversight, remediation actions and record retention costs. In 2005 the accrued liability was reduced by $100,000 when it was determined that the probability of an assessment for a prior violation was
remote. Expenditures charged against the provision totaled $8,000, $5,000 and $9,000 in 2007, 2006 and 2005, respectively.

The
Company continues to be in compliance with the remedial action plans being monitored by various regulatory agencies at its former Palo Alto and Scotts Valley sites. The Company has
entered into funded fixed price remediation contracts and obtained cost-overrun and unknown pollution conditions insurance coverage. The Company believes that it is remote that it would
incur any significant liability beyond which it has recorded. The Company does ultimately retain responsibility for

88

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. COMMITMENTS AND CONTINGENCIES (Continued)

these
environmental liabilities and in the unlikely event that the environmental firm and the insurance company do not meet their obligations.

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

Indemnification

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

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

As
permitted under Delaware law, the Company has agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was
serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has director and officer insurance coverage that reduces its exposure and
enables it to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is not
significant.

89

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. COMMITMENTS AND CONTINGENCIES (Continued)

Other Contingencies

From time to time, the Company is involved in various legal actions which arise in the ordinary course of its business activities. Management does not currently
believe that any adverse outcome from these matters would ultimately have a material impact on the Company's results of operations or financial position. However, there can be no assurance that this
will ultimately be the case.

11. EMPLOYEE BENEFIT PLANS

The Company has an Employees' Investment 401(k) Plan that covers substantially all U.S. employees and provides that the Company match employees' salary deferrals
up to 3% of eligible employee compensation. The amounts charged to operations were $377,000, $403,000 and $414,000 in 2007, 2006 and 2005, respectively.

90

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. RESTRUCTURING CHARGES

The following table summarizes restructuring accrual activity recorded during the years 2005 though December 31, 2007 (in thousands):

|                                |  | Restructuring Plans |  
|------------------------------- |  | ------------------- | -
|
|Balance at January 1, 2005      |  | 11,192              |  
|2005 additional charge          |  | 46                  |  
|Cash payments                   |  | (1,420              | )
|                                |  |                     |  
|Balance at December 31, 2005    |  | 9,818               |  
|2006 additional charge (credit) |  | 27                  |  
|Cash payments                   |  | (1,291              | )
|                                |  |                     |  
|Balance at December 31, 2006    |  | 8,554               |  
|2007 additional charge (credit) |  | (1,213              | )
|Cash payments                   |  | (1,390              | )
|                                |  |                     |  
|Balance at December 31, 2007    |  | 5,951               |  
|                                |  |                     |  

---

Twelve Months EndedDecember 31, 2007

December 31, 2006Restructuring PlansQ3 2001 Lease Loss

$
(1,213
)
$
27Q3 2002 Lease Loss


15


(487
)Q4 2002 Fab Closure


(1
)

174Q2 2007 Personnel


90


Q3 2007 Restructure


291


(818
)

(286
)Expensed as incurred


647


$
(171
)
$
(286
)


91

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. RESTRUCTURING CHARGES (Continued)

Third Quarter 2007 Restructuring Plans

During the third quarter of 2007 the Company committed to two restructuring plans: 1) transitioning of certain operations to the Philippines and
2) partial abandonment of its lease from its Texas facility.

On
August 4, 2007 the Company committed to an offshore program that will result in the transition of the Company's final test and support operations to the Philippines. The
program was commenced during the third quarter of 2007 and is expected to be completed by the end of the first quarter of 2008. The operations were located in the Company's San Jose, California
facility. The restructuring plan covers the severance expense of approximately $149,000.

During
the third quarter of 2007, we implemented a restructuring plan for our Texas facility to cover the lease abandonment of the unused portion of our Texas facility and $142,000 was
accrued for this restructuring cost. During the fourth quarter of 2007, we reached an early lease termination agreement with the landlord and turned the facility over the landlord late in December
which completed this restructuring program. Total costs associated with this program were restructuring costs of $142,000 and operating costs of $7,000.

Second Quarter 2007 Restructuring Plan

The Q2 2007 Restructuring Plan covers the restructuring expenses primarily related to severance payments of approximately $90,000 associated with the reduction of
personnel. All expenses under this plan have been settled during the second and third quarters of 2007.

Fourth Quarter 2006 Restructuring Plan

On October 30, 2006, the Company committed to a restructuring plan to close and exit the Company's Milpitas fabrication facility ("fab") during the first
quarter of 2007. The Company completed the closure of the Milpitas fab at the end of March 2007. The Milpitas fab produced some of the Company's gallium arsenide semiconductor products and had
substantial excess capacity. The Company's lease of the fab building expired on November 14, 2006 and in accordance with the terms of the lease the Company had continued the lease on a
month-to-month basis until the closure of the sale of the fab equipment to AmpTech, Inc ("AmpTech") as described below. AmpTech then entered into a lease agreement with the
owner of the building for the Company's former Milpitas facility.

On
May 23, 2007 the Company entered into an Asset Purchase Agreement with AmpTech to sell certain wafer fabrication equipment from its recently closed Milpitas fabrication
facility. The consideration received by the Company consisted of cash in the amount of $1,800,000 and a warrant to purchase 200,000 shares of AmpTech common stock. The fair value of the warrant was
$1,400 and was not recorded as an asset due to uncertainty of realization in the future. The company ceased manufacturing at the wafer fabrication facility at the end of March 2007 and subsequently in
April 2007 decided to classify the wafer fabrication equipment as held-for sale, with a carrying value of approximately $671,000. The company recorded a gain on the sale of the wafer
fabrication equipment of approximately $901,000, net of sales tax provision of $149,000 and property tax of $80,000, which was included in the income from operations in the condensed consolidated
statements of operations. The agreement also obligates AmpTech to reimburse the Company for certain expenses. In connection with the agreement, the parties also entered into a one year Wafer
Manufacturing and Supply Agreement

92

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WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. RESTRUCTURING CHARGES (Continued)

which
provides for AmpTech to manufacture and supply wafers to the Company utilizing the Company's wafer production processes and for the Company to purchase such wafers. AmpTech is not currently
producing wafers for the company and is expected to start delivering in April of 2008. The Company also entered into a License Agreement whereby the Company licensed to AmpTech certain of the
Company's proprietary process technologies subject to certain restrictions. The License Agreement provides for AmpTech to pay the Company a royalty of 5% of its gross revenue from third parties, up to
$750,000, and 3% of gross revenue thereafter for the seven year term. Products for the Company produced using the Company's proprietary technology will not bear a royalty.

The
Company has a strategic foundry relationship with Global Communication Semiconductors, Inc. ("GCS"), and with the closure of the Company's Milpitas fab, GCS is currently the
sole source for the supply of its GaAs and InGaP HBT wafers. The Company has entered into a wafer manufacturing and supply agreement with AmpTech to provide an additional source of supply for its GaAs
and InGaP HBT wafers, after AmpTech qualifies its wafer fabrication line.

2002 and 2001 Restructuring Plans

During fiscal 2002 and 2001, the Company recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses
and the costs of downsizing the Company's business. Such charges were established in accordance with Emerging Issues Task Force Issue 94-3 ("EITF 94-3") "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" and Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges." These charges include abandoned leased properties comprised of future lease payments net of anticipated sublease income, broker commissions and other facility
costs, and asset impairment charges on tenant improvements deemed no longer realizable. In determining these estimates, the Company made certain assumptions with regards to its ability to sublease the
space and reflect offsetting assumed sublease income in line with it's best estimate of current market conditions. These plans are discussed below.

Third Quarter 2002 Restructuring Plan

Lease LossIn the third quarter of 2002, the Company decided to abandon a portion of its leased
facility based on revised anticipated demand for its products and current market conditions. This excess space, for which the Company had a remaining eight year commitment, is located on the first
floor of the Company's current corporate headquarters and originally housed a portion of the Company's optics and integrated assemblies manufacturing operations. This decision resulted in a lease loss
of $11.8 million, comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and an asset impairment charge of $3.2 million for
tenant improvements deemed no longer realizable. In determining this estimate, the Company made certain assumptions with regards to its ability to sublease the space and reflected offsetting assumed
sublease income in line with the Company's best estimate of current market conditions.

During
the fourth quarter of 2002, based on a continuing deterioration in the real estate market and difficulties subleasing its available space, the Company revised its assumptions
regarding sublease occupancy rates and market rates downward resulting in an additional lease loss of $674,000.

During
the fourth quarter of 2003, after reviewing current information regarding continuing deterioration in the real estate market, difficulties subleasing its available space and
facility costs, the

93

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. RESTRUCTURING CHARGES (Continued)

Company
revised its lease loss assumptions. $23,000 of the lease loss was reversed as reduced facility costs (mainly property taxes and utilities) were largely offset by reductions in estimated
sublease occupancy and market rates.

During
the third quarter of 2004, after reviewing current information regarding reduced facility operating costs (predominantly building maintenance costs), the Company revised its lease
loss assumptions resulting in a reversal of $377,000 of the lease loss.

During
the fourth quarter of 2006, after reviewing current information regarding reduced facility operating costs, the Company revised its lease loss assumptions resulting in a reversal
of $487,000 of the lease loss.

During
2007, after reviewing current information regarding extension of sub-lease for the facility,the Company revised its lease loss assumptions resulting in a reversal of
$15,000 of the lease loss.

As
of December 31, 2007, the maximum potential amount of the lease loss for this property is $5.1 million.

Third Quarter 2001 Restructuring Plan

Lease Loss and Leasehold ImpairmentInSeptember 2001, the Company decided to abandon a leased
facility based on revised anticipated demand for its products and current market conditions. This excess facility, for which the Company had a ten year commitment, is located adjacent to the Company's
current corporate headquarters and was originally developed to house additional administrative and corporate offices to accommodate planned expansion. This decision resulted in a lease loss of
$7.4 million, comprised of future lease payments net of anticipated sublease income, broker commissions and other facility costs, and an asset impairment charge of $2.6 million on tenant
improvements deemed no longer realizable. In determining this estimate, the Company made certain assumptions with regards to its ability to sublease the space and reflected offsetting assumed sublease
income in line with the Company's best estimate of current market conditions.

During
the third and fourth quarters of 2002, based on an overall deteriorating real estate market and difficulties subleasing its available space, the Company revised its assumptions
regarding sublease occupancy rates and market rates downward resulting in additional lease loss accruals of $4.5 million and $1.8 million, respectively.

During
the fourth quarter of 2003, after reviewing current information regarding continuing deterioration in the real estate market, difficulties subleasing its available space and
facility costs, the Company revised its lease loss assumptions. $203,000 of additional lease loss was accrued as reductions in estimated sublease occupancy and market rates were partially offset by
reduced facility costs (mainly property taxes and utilities).

During
the third quarter of 2004, after reviewing current information regarding continuing deterioration in the real estate market, difficulties subleasing its available space and
increasing facility operating costs, the Company revised its lease loss assumptions resulting in $538,000 of additional lease loss. During 2005 and 2006 the Company reassessed the subleasing market
and determined that the circumstances had not significantly changed during that time.

94

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. RESTRUCTURING CHARGES (Continued)

During
2007, after reviewing current information regarding extension of sub-leases for the facility when two of our sublease tenants entered into multi-year
renewals, the Company revised its lease loss assumptions resulting in a reversal of $1.2 million of the lease loss.

As
of December 31, 2007, the maximum potential amount of the lease loss for this property is $7.1 million which is partially offset by $1.0 million of minimum
sublease income commitments under non-cancelable sublease rental agreements and $123,000 of estimated net sublease income.

13. BUSINESS SEGMENT REPORTING

In 1997, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." As an integrated products provider, the
Company currently has one reportable segment. The Company's Chief Operating Decision Maker ("CODM") is the CEO. While the Company's CODM monitors the sales of various products, operations are managed
and financial performance evaluated based upon the sales and production of multiple products employing common manufacturing and research and development resources; sales and administrative support;
and facilities. This allows the Company to leverage its costs in an effort to maximize return. Management believes that any allocation of such shared expenses to various products would be impractical,
and currently does not make such allocations internally. As such, the Company considers itself a single reporting unit.

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

Year EndedDecember 31, 2007

December 31, 2006

December 31, 2005Richardson Electronics, Ltd(1)

$
17,646

$
21,278

$
14,194Celestica


6,842


8,224


4,060Motorola(2)


4,621










95

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. BUSINESS SEGMENT REPORTING (Continued)



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

Year EndedDecember 31, 2007

December 31, 2006

December 31, 2005United States

$
23,950

$
23,500

$
17,800Export Sales from United States:Europe


2,581


5,048


1,632Thailand


4,718


4,984


1,667Republic of Korea


903


2,203


1,775China


8,388


9,877


6,777Other


3,404


3,167


1,946Total

$
43,944

$
48,779

$
31,597


The
following is a summary of long-lived assets by geographic area (in thousands):

December 31, 2007

December 31, 2006United States

$
3,973

$
6,870Philippines


1,473


311Other


65


51$
5,511

$
7,232


14. LOSS PER SHARE CALCULATION

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

Year Ended December 31,2007

2006

2005Net loss (numerator)

$
(6,887
)
$
(8,404
)
$
(20,988
)Denominator for basic and diluted net loss per share:Weighted average shares outstanding


68,011


66,408


64,162Basic and diluted net loss per share from operations

$
(0.10
)
$
(0.13
)
$
(0.33
)


For
the years ended December 31, 2007, 2006 and 2005, the incremental shares from the assumed exercise of 10,360,206, 8,888,280 and 9,366,759 stock options, respectively, and
77,790, 64,648 and 65,936 shares for the years ended December 31, 2007, 2006 and 2005, respectively, related to contributions under the Employee Stock Purchase Plan for pending purchases were
not included in computing the dilutive per share amounts because operations resulted in a loss and the effect of such assumed exercise would be anti-dilutive.

96

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. RELATED PARTY TRANSACTIONS

On January 31, 2000, the Company entered into a management agreement with Fox Paine & Company, LLC ("Fox Paine"). Fox Paine was the majority
stockholder in the Company at that time. Under that agreement, the Company would pay Fox Paine a management fee in the amount of 1% of the prior year's income before interest expense, interest income,
income taxes, depreciation and amortization and equity in earnings (losses) of minority investments, calculated without regard to the fee. Due to the Company's losses incurred in 2006, 2005 and 2004,
no management fee was paid to Fox Paine for the years ended December 31, 2007, 2006 and 2005, respectively. In exchange for its management fee, Fox Paine would assists the Company with its
strategic planning, budgets and financial projections and help the Company identify possible strategic acquisitions and to recruit qualified management personnel. Fox Paine would also help develop and
enhance customer and supplier relationships on behalf of the Company and consult with management on various matters including tax planning and public relations strategies, economic and industry trends
and executive compensation. In connection with this agreement, the Company has agreed to indemnify Fox Paine against various liabilities that may arise as a result of the management services it
performs. The Company has also agreed to reimburse Fox Paine for its expenses incurred in providing these services. The Company paid Fox Paine $2,000, $29,000 and $29,000 for the reimbursement of
expenses incurred by Fox Paine in 2007, 2006 and 2005, respectively. The Company also paid Fox Paine $700,000 in July of 2004 for investment banking services rendered in connection with the EiC
Acquisition that was completed on June 18, 2004 (see Note 4).

97

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. QUARTERLY FINANCIAL DATAUNAUDITED

The following table sets forth, for the periods presented, selected data from our consolidated statements of operations on a quarterly basis. The consolidated
statements of operations data have been derived from our unaudited consolidated financial statements. In the opinion of management, these statements have been prepared on substantially the same basis
as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the
periods presented. This information should be read in conjunction with the consolidated financial statements and notes to those financial statements included elsewhere in this filing.

|                                            |                                          | Three Months Ended       |       
|------------------------------------------- | ---------------------------------------- | ------------------------ | ------
|
|
|Consolidated Statements of Operations Data: |                                          |                          |       
|Net sales                                   |                                          | $                        | 10,757
|Cost of goods sold                          |                                          |                          | 5,988 
|                                            |                                          |                          |       
|Gross profit                                |                                          |                          | 4,769 
|                                            |                                          |                          |       
|Operating expenses:                         |                                          |                          |       
|                                            | Research and development                 |                          |       
|                                            | Selling and administrative               |                          |       
|                                            | Restructuring charges (credits)          |                          |       
|                                            | Gain on the sale of assets held for sale |                          |       
|                                            |                                          |                          |       
|                                            |                                          | Total operating expenses |       
|                                            |                                          |                          |       
|Loss from operations                        |                                          |                          | (4,770
|Interest income                             |                                          |                          | 263   
|Interest expense                            |                                          |                          | (14   
|Other income (expense)net                  |                                          |                          | 120   
|                                            |                                          |                          |       
|Loss before income taxes                    |                                          |                          | (4,401
|Income tax expense (benefit)                |                                          |                          |      
|                                            |                                          |                          |       
|Net loss                                    |                                          | $                        | (4,401
|                                            |                                          |                          |       
|Basic and diluted net loss per share        |                                          | $                        | (0.07 
|                                            |                                          |                          |       
|Basic and diluted average weighted shares   |                                          |                          | 67,484
|                                            |                                          |                          |       

98

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. QUARTERLY FINANCIAL DATAUNAUDITED (Continued)

|
|

|                                            |                     | Three Months Ended         |                         
|------------------------------------------- | ------------------- | -------------------------- | ------------------------
|
|
|Consolidated Statements of Operations Data: |                     |                            |                         
|                                            | Sales               |                            | $                       
|                                            | Cost of goods sold  |                            |                         
|                                            |                     |                            |                         
|                                            | Gross profit        |                            |                         
|                                            | Operating expenses: |                            |                         
|                                            |                     | Research and development   |                         
|                                            |                     | Selling and administrative |                         
|                                            |                     | Restructuring credits      |                         
|                                            |                     |                            |                         
|                                            |                     |                            | Total operating expenses
|                                            |                     |                            |                         
|Loss from operations                        |                     |                            | (4,311                  
|Interest income                             |                     |                            | 292                     
|Interest expense                            |                     |                            | (30                     
|Other income (expense)net                  |                     |                            | 3                       
|                                            |                     |                            |                         
|Loss from operations before income taxes    |                     |                            | (4,046                  
|Income tax benefit                          |                     |                            | (1,289                  
|                                            |                     |                            |                         
|Net loss                                    |                     | $                          | (2,757                  
|                                            |                     |                            |                         
|Basic and diluted net loss per share        |                     | $                          | (0.04                   
|                                            |                     |                            |                         
|Basic and diluted average shares            |                     |                            | 65,707                  

17. SUBSEQUENT EVENTS

The Company entered into an Agreement and Plan of Merger (the "Merger Agreement") dated March 9, 2008 with TriQuint Semiconductor, Inc., a Delaware
corporation ("Parent") and its wholly owned subsidiary, ML Acquisition, Inc., a Delaware corporation ("Merger Sub").

Pursuant
to the terms of the Merger Agreement, Merger Sub will merge with and into the Company, with the Company as the surviving corporation of the merger (the "Merger"). In the Merger,
each share of common stock of the Company, other than those shares with respect to which appraisal rights are properly exercised, will be converted into the right to receive $1.00 per share in cash
(the "Merger Consideration"). In addition, each award of restricted stock ("Restricted Stock") and performance accelerated restricted stock units ("PARSUs") that are vested will be converted into the
right to receive cash in an amount equal to the Merger Consideration and all outstanding options to acquire shares of Company common stock will vest at the effective time of the Merger and holders of
such options will receive an amount in cash equal to the excess, if any, of the Merger Consideration over the exercise price per share of the option. Each outstanding award of Restricted Stock and
PARSUs that has not vested will continue in effect following the Merger, provided that instead of a right to receive Company stock, the right to receive cash equal to the Merger consideration will be
substituted therefor.

99

---



WJ COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. SUBSEQUENT EVENTS (Continued)

The
Company's Board of Directors, unanimously approved the Merger Agreement and determined that the Merger Agreement and the Merger are advisable and both fair to and in the best
interest of the Company's stockholders.

Completion
of the Merger is subject to customary closing conditions including approval by the Company's stockholders. The consideration is expected to be paid by Parent from cash on hand
and the transaction is not subject to a financing condition. The parties currently expect that the Merger will be completed in the second quarter of 2008.

The
Merger Agreement contains certain termination rights for both the Parent and the Company. In the event that (A) prior to the termination of the Merger Agreement, any
alternative proposal or the bona fide intention of any person to make an alternative proposal is publicly proposed or publicly disclosed or otherwise made known to us prior to the time of such
termination; (B) either (1) the Merger Agreement is terminated by Parent or the Company because after a special meeting (including any adjournments) stockholder approval was not obtained
or (2) the Merger Agreement is terminated by Parent because the Company has breached or failed to perform any material covenant, agreement, representations or warranties of the Merger
Agreement; and (C) concurrently with or within nine months after such termination, any definitive agreement providing for a qualifying transaction has been entered into and consummated, the
Company is required to pay to Parent a termination fee of $2.45 million (the "Termination Fee").

If
the Company terminates the Merger Agreement prior to obtaining stockholder approval as a result of the board of directors concluding that in light of a superior proposal, it would be
inconsistent with the directors' exercise of their fiduciary obligations to the Company's stockholders under applicable law to not withdraw its recommendation or effect a change in its recommendation
that the Company's stockholders approve the Merger Agreement in a manner adverse to Parent or because the Company's
board of directors shall have approved or recommended a change of recommendation with respect to the Merger Agreement, the Company must pay the Termination Fee to Parent.

100

---





Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9a.    CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2007, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles due to the
material weakness described below (the results of management's assessment were reviewed with the Audit Committee). Not withstanding the material weakness, we believe that the consolidated financial
statements included in this report fairly present, in all material respects, our consolidated financial position as of, and the consolidated results of operations for the year ended,
December 31, 2007.

In
connection with the preparation of our financial statements for the year ended December 31, 2007, we have identified a material weakness in our internal control over financial
reporting as of
December 31, 2007. We did not maintain a sufficient number of qualified resources with the required proficiency to apply our accounting policies in accordance with generally accepted accounting
principles of the United States of America. This control deficiency resulted in adjustments, including audit adjustments recorded in the financial statements, affecting our tax provision and operating
expenses. This control deficiency could result in misstatements of our financial statements and disclosures that could result in a material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. We were unable to remedy this material weakness due to our previously announced offshore program and strategic alternatives process which we believe
limited our ability to hire qualified staff. Furthermore, on March 10, 2008, we announced a merger agreement with TriQuint Semiconductors and we believe that we will continue to be unable to
attract and hire additional qualified resources until after the merger is completed and may suffer turnover of our existing staff during this period which we expect will require us to implement
additional compensating controls.

Subsequent
to the issuance of our December 31, 2006 financial statements, we had determined we had not properly recorded the restructuring accrual that was established in 2001 and
2002. As a result, we had concluded in 2007, after discussions with the Audit Committee of our Board of Directors, that we should restate our previously filed financial statements for the fiscal year
ended December 31, 2006 in order to correct this error. As a result of our determination that the errors should be corrected and that previously filed financial statements should be restated,
management had concluded that there was a material weakness in our internal control over financial reporting. We have already taken actions to remediate the material weakness described in this
paragraph, however the effectiveness of the steps we have taken to date is subject to continued management review, as well as Audit Committee oversight.

We
cannot guarantee that any additional material weaknesses will not arise in the future.

101

---



Changes in Internal Control Over Financial Reporting

Other than the material weakness described above, there has been no change in our internal control over financial reporting during the fourth quarter of 2007 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures or its
internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Commencing
with the 2006 annual report and continuing this annual report on Form 10-K the Company is not deemed to be an accelerated filer because its public float was
below the required threshold as of the last business day of its 2006 second fiscal quarter and most recently completed second fiscal quarter. As a result of becoming a non-accelerated
filer, the Company is permitted to elect to suspend Sarbanes-Oxley Section 404 obligations to provide a management's report on internal control over financial reporting and related auditor
attestation report. As the Company is still a non-accelerated filer in 2007, it is permitted to suspend the auditor attestation report for fiscal year 2007. The Company has elected to
suspend its reporting obligations under Section 404 which election was approved by the Audit Committee.

Item 9b.    OTHER INFORMATION

None.

102

---



PART III

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will be set forth in the registrant's Form 10-K/A and is incorporated herein by reference.

Item 11.    EXECUTIVE COMPENSATION

The information required by this item will be set forth in the registrant's Form 10-K/A and is incorporated herein by reference.

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will be set forth in the registrant's Form 10-K/A and is incorporated herein by reference.

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item will be set forth in the registrant's Form 10-K/A and is incorporated herein by reference.

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be set forth in the registrant's Form 10-K/A and is incorporated herein by reference.

103

---



PART IV

Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The
consolidated financial statements, and related notes thereto, of the Company, and the Report of Independent Registered Public Accounting Firm listed in the accompanying Index to
Consolidated Financial Statements on page 3 are filed as part of this Form 10-K.

The
following financial statement schedule of the Company is filed as part of this Form 10-K. All other schedules have been omitted because they are not applicable,
not required, or the information is included in the consolidated financial statements or notes thereto.

Schedule IIValuation
and Qualifying Accounts

The
exhibits listed on the following index to exhibits are filed as part of, or hereby incorporated by reference into, this Form 10-K.

|      |  |                                                                                                                                                                                                                                                                                                                                                                                     |  | Incorporated by Reference |  |          
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ---------
|
|2.1   |  | Agreement and Plan of Merger, dated October 25, 1999, by and between FP-WJ Acquisition Corp. and the Registrant                                                                                                                                                                                                                                                                     |  | 8-K                       |  | 1-5631   
|2.2** |  | Asset Purchase Agreement by and between AmpTech Inc. and WJ Communications, Inc. dated May 23, 2007. (The schedules, exhibits and annexes to the Asset Purchase Agreement which are identified in the Asset Purchase Agreement have been
omitted and the Company will furnish supplementally copies of the omitted schedules, exhibits and annexes to the Commission upon request.) |  | 8-K                       |  | 000-31337
|2.3   |  | Agreement and Plan of Merger, dated March 9, 2008, by and between WJ Communications, Inc. and TriQuint Semiconductor, Inc., and its wholly owned subsidiary, ML Acquisition, Inc.,                                                                                                                                                                                                  |  | 8-K                       |  | 000-31337
|3.1   |  | Certificate of Incorporation of the Registrant                                                                                                                                                                                                                                                                                                                                      |  | S-1/A                     |  | 333-38518
|3.2   |  | By-Laws of the Registrant                                                                                                                                                                                                                                                                                                                                                           |  | S-1/A                     |  | 333-38518
|4.1   |  | Specimen of Common Stock Certificate                                                                                                                                                                                                                                                                                                                                                |  | 8-A                       |  | 000-31337

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|4.2*   |  | Shareholders' Agreement, dated as of January 31, 2000, by and among the Registrant, the Parties listed on the signature pages thereto and certain stockholders of the Registrant |  | S-1/A |  | 333-38518 |  | 4.2           |  | 7/26/00  |  | 
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | --------- |  | ------------- |  | -------- |  | 
|10.1*  |  | Employment Agreement, dated as of January 31, 2000, by and between the Registrant and Thomas R. Kritzer                                                                          |  | S-1/A |  | 333-38518 |  | 10.4          |  | 7/12/00  |  | 
|10.2*  |  | Employment Agreement, dated as of January 31, 2000, by and between the Registrant and Rainer N. Growitz                                                                          |  | S-1/A |  | 333-38518 |  | 10.6          |  | 7/12/00  |  | 
|10.3*  |  | WJ Communications, Inc. 2000 Stock Incentive Plan                                                                                                                                |  | S-1/A |  | 333-38518 |  | 10.8          |  | 7/12/00  |  | 
|10.4   |  | Lease (Phase I) dated March 24, 2000, by and between the Registrant and 401 River Oaks, LLC                                                                                      |  | S-1/A |  | 333-38518 |  | 10.9          |  | 7/12/00  |  | 
|10.5   |  | Lease (Phase II) dated March 24, 2000, by and between the Registrant and 401 River Oaks, LLC                                                                                     |  | S-1/A |  | 333-38518 |  | 10.10         |  | 7/12/00  |  | 
|10.6   |  | Management Agreement, dated as of January 31, 2000, by and between Registrant and Fox Paine & Company, LLC                                                                       |  | S-1/A |  | 333-38518 |  | 10.17         |  | 7/12/00  |  | 
|10.7   |  | WJ Communications, Inc. 2000 Non-Employee Director Stock Compensation Plan                                                                                                       |  | S-8   |  | 333-52408 |  | 99.2          |  | 12/21/00 |  | 
|10.8*  |  | Employment Agreement, by and between the Registrant and Michael R. Farese, Ph.D.                                                                                                 |  | 8-K   |  | 000-31337 |  | 10.1          |  | 11/15/04 |  | 
|10.9   |  | Amended and Restated WJ Communications, Inc. 2002 Non-Employee Director Stock Compensation Plan                                                                                  |  | 10-Q  |  | 000-31337 |  | 10.1 and 10.2 |  | 8/12/03  |  | 
|10.10* |  | Second Amendment to WJ Communications, Inc. 2000 Stock Incentive Plan                                                                                                            |  | 10-Q  |  | 000-31337 |  | 10.1 and 10.2 |  | 8/12/03  |  | 
|10.11  |  | Amended and Restated Loan and Security Agreement, dated September 29, 2003, by and among the Registrant and Comerica Bank                                                        |  | 10-Q  |  | 000-31337 |  | 10.1 and 10.2 |  | 10/30/03 |  | 
|10.12  |  | Intellectual Property Security Agreement, dated September 29, 2003, by and among the Registrant and Comerica Bank                                                                |  | 10-Q  |  | 000-31337 |  | 10.1 and 10.2 |  | 10/30/03 |  | 

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|10.13  |  | Acquisition related agreements by and between WJ Communications, Inc., EiC Corporation and EiC Enterprises Limited dated June 18, 2004                                                                                                                                                                                                                                                                                                                                    |  | 8-K   |  | 000-31337 |  | 2.1, 2.2, 4.1,
4.2 and 10.1 |  | 7/2/04   |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | --------- |  | --------------------------- |  | -------- |  | 
|10.14  |  | Acquisition related agreements by and among WJ Communications, Inc., WJ Newco, LLC, Telenexus, Inc. and Richard J. Swanson, Wilfred K. Lau, David Fried, Kurt Christensen and Mark Sutton dated January 28, 2005                                                                                                                                                                                                                                                          |  | 8-K   |  | 000-31337 |  | 2.1 and 4.1                 |  | 2/3/05   |  | 
|10.15+ |  | Employment Agreement by and between WJ Communications, Inc. and Richard J. Swanson dated January 28, 2005                                                                                                                                                                                                                                                                                                                                                                 |  | 8-K   |  | 000-31337 |  | 10.1                        |  | 2/3/05   |  | 
|10.16+ |  | Employment Agreement by and between WJ Communications, Inc. and Wilfred K. Lau dated January 28, 2005                                                                                                                                                                                                                                                                                                                                                                     |  | 8-K   |  | 000-31337 |  | 10.2                        |  | 2/3/05   |  | 
|10.17  |  | Employment agreement between the Registrant and Javed S. Patel                                                                                                                                                                                                                                                                                                                                                                                                            |  | 10-Q  |  | 000-31337 |  | 10.1                        |  | 5/18/05  |  | 
|10.18* |  | Employment agreement between the Registrant and Neil Morris, Ph.D.                                                                                                                                                                                                                                                                                                                                                                                                        |  | 10-Q  |  | 000-31337 |  | 10.2                        |  | 5/18/05  |  | 
|10.19* |  | Employment agreement between the Registrant and Robert J. Bayruns                                                                                                                                                                                                                                                                                                                                                                                                         |  | 10-Q  |  | 000-31337 |  | 10.3                        |  | 5/18/05  |  | 
|10.20  |  | Acquisition related agreements by and among WJ Communications, Inc., WJ Newco, LLC, Telenexus, Inc. and Richard J. Swanson, Wilfred K. Lau, David Fried, Kurt Christensen and Mark Sutton dated January 28, 2005 to refile
Exhibit 2.1 to include certain information that was previously redacted pursuant to a confidential treatment request. The Exhibit 2.1 attached hereto supersedes in its entirety the exhibit previously filed on Form 8-K on
February 3, 2005. |  | 8-K/A |  | 000-31337 |  | 2.1                         |  | 6/24/05  |  | 
|10.21  |  | Employment Agreement, dated as of June 28, 2005, by and between the Registrant and Bruce W. Diamond                                                                                                                                                                                                                                                                                                                                                                       |  | 8-K   |  | 000-31337 |  | 10.2                        |  | 7/1/05   |  | 
|10.22  |  | Employment agreement, dated October 19, 2005, by and between the Company and Haresh P. Patel                                                                                                                                                                                                                                                                                                                                                                              |  | 8-K   |  | 000-31337 |  | 10.1                        |  | 10/28/05 |  | 

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|10.23   |  | Amendment No. 4 to Loan and Security Agreement by and between the Company and Comerica Bank dated December 27, 2005     |  | 8-K  |  | 000-31337 |  | 10.1  |  | 1/3/06   |  | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ---- |  | --------- |  | ----- |  | -------- |  | 
|10.24*+ |  | Employment Agreement, dated as of December 21, 2005, by and between the Registrant and Mark S. Knoch                    |  | 10-K |  | 000-31337 |  | 10.27 |  | 3/31/06  |  | 
|10.25*  |  | Employment Agreement, dated as of January 13, 2006, by and between the Registrant and Morteza Saidi                     |  | 10-K |  | 000-31337 |  | 10.28 |  | 3/31/06  |  | 
|10.26*+ |  | Employment Agreement dated as of March 1, 2006, by and between the Registrant and R. Gregory Miller.                    |  | 10-Q |  | 000-31337 |  | 10.1  |  | 5/17/06  |  | 
|10.27*  |  | First Amendment to the Amended and Restated WJ Communications, Inc. 2000 Non-Employee Director Stock Compensation Plan. |  | 10-Q |  | 000-31337 |  | 10.1  |  | 8/10/06  |  | 
|10.28*  |  | Second Amendment to the WJ Communications, Inc. 2001 Employee Stock Purchase Plan.                                      |  | 10-Q |  | 000-31337 |  | 10.2  |  | 8/10/06  |  | 
|10.29+  |  | Wafer Manufacturing and Supply Agreement between Registrant and Global Communication Semiconductors, Inc.               |  | 10-Q |  | 000-31337 |  | 10.1  |  | 11/17/06 |  | 
|10.30   |  | Amended and Restated 2000 Stock Incentive Plan                                                                          |  | 10-Q |  | 000-31337 |  | 10.1  |  | 8/6/06   |  | 
|10.31   |  | Performance Accelerated Restricted Stock Unit Agreement (CIC)                                                           |  | 10-Q |  | 000-31337 |  | 10.2  |  | 8/6/06   |  | 
|10.32   |  | Performance Accelerated Restricted Stock Unit Agreement                                                                 |  | 10-Q |  | 000-31337 |  | 10.3  |  | 8/6/06   |  | 
|10.33   |  | Letter Agreement between the Company and Comerica Bank regarding the extension of the Credit Facility                   |  | 8-K  |  | 000-31337 |  | 10.1  |  | 1/4/07   |  | 
|10.34   |  | Fifth Amendment to Amended and Restated Loan and Security Agreement                                                     |  | 8-K  |  | 000-31337 |  | 10.1  |  | 1/29/07  |  | 
|10.35   |  | Letter Agreement with Comerica Bank                                                                                     |  | 8-K  |  | 000-31337 |  | 10.2  |  | 1/29/07  |  | 
|10.36+  |  | Wafer Manufacturing and Supply Agreement by and between AmpTech Inc. and WJ Communications, Inc. dated May, 23 2007.    |  | 10-Q |  | 000-31337 |  | 10.1  |  | 8/14/07  |  | 

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|10.37 |  | First Amendment to Amended and Restated 2000 Stock Incentive Plan, dated July 19, 2007.                                                                            |  | 10-Q |  | 000-31337 |  | 10.1 |  | 11/13/07 |  |  
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- |  | --------- |  | ---- |  | -------- |  | -
|10.38 |  | Second Amendment to Amended and Restated 2000 Non-Employee Director Stock Incentive Plan, dated July 19, 2007.                                                     |  | 10-Q |  | 000-31337 |  | 10.2 |  | 11/13/07 |  |  
|21.1  |  | Subsidiaries of the registrant                                                                                                                                     |  |      |  |           |  |      |  |          |  | X
|23.1  |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm                                                                                    |  |      |  |           |  |      |  |          |  | X
|24.1  |  | Power of Attorney (see signature page)                                                                                                                             |  |      |  |           |  |      |  |          |  | X
|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.          |  |      |  |           |  |      |  |          |  | X
|31.2  |  | Certification of R. Gregory Miller, Interim Chief Financial Officer (principal financial officer), pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. |  |      |  |           |  |      |  |          |  | X
|32.1  |  | Certification of Bruce W. Diamond, principal executive officer, Pursuant To 18 U.S.C. Section 1350.                                                                |  |      |  |           |  |      |  |          |  | X
|32.2  |  | Certification of R. Gregory Miller, principal financial officer, Pursuant To 18 U.S.C. Section 1350.                                                               |  |      |  |           |  |      |  |          |  | X

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 28th day of March 2008.

|                     |  | WJ COMMUNICATIONS, INC.(Registrant)
|-------------------- |  | -----------------------------------
|Date: March 28, 2008 |  | By:                                

POWER OF ATTORNEY

We, the undersigned officers and directors of WJ Communications, Inc., do hereby constitute and appoint Bruce W. Diamond, and
R. Gregory Miller, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in-fact and agents, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated:

|Signature                               |  | Title                                                                      |  | Date   
|--------------------------------------- |  | -------------------------------------------------------------------------- |  | -------
|                                        |  |                                                                            |  |        
|/s/BRUCE W. DIAMONDBruce W. Diamond     |  | President, Chief Executive Officer
(principal executive officer), Director |  | 3/27/08
|/s/R. GREGORY MILLERR. Gregory Miller   |  | Chief Financial Officer
(principal financial officer)                      |  | 3/27/08
|W. Dexter Paine, III                    |  | Chairman of the Board                                                      |  |        
|/s/LIANE J. PELLETIERLiane J. Pelletier |  | Director                                                                   |  | 3/27/08
|Jack G. Levin                           |  | Director                                                                   |  |        

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|/s/PATRICE M. DANIELSPatrice M. Daniels |  | Director |  | 3/27/08
|--------------------------------------- |  | -------- |  | -------
|/s/CATHERINE P. LEGOCatherine P. Lego   |  | Director |  | 3/27/08
|/s/ROBERT WHELTONRobert Whelton         |  | Director |  | 3/26/08
|/s/ANGELOS J. DASSIOSAngelos J. Dassios |  | Director |  | 3/27/08

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SCHEDULE II        WJ COMMUNICATIONS, INC. AND SUBSIDIARIES        VALUATION AND QUALIFYING ACCOUNTS AND RESERVES        FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005        (in thousands)

|Description                  |                               | Balance at
Beginning of
Period     |       | Charged (Credits)
to Costs and
Expenses |     | Recoveries/
(Write-offs) |   | Balance at
End of
Period
|---------------------------- | ----------------------------- | ---------------------------------- | ----- | --------------------------------------- | --- | ------------------------ | - | ------------------------
|Year ended December 31, 2007 |                               |                                    |       |                                         |     |                          |   |                         
|                             | Deducted from asset accounts: |                                    |       |                                         |     |                          |   |                         
|                             |                               | Allowance for doubtful accounts    |       | $                                       | 49  |                          | $ | 44                      
|                             |                               | Sales return allowance             |       |                                         | 119 |                          |   | 335                     
|                             |                               | Ship & debit allowance             |       |                                         | 249 |                          |   | 590                     
|                             |                               | Warranty reserve                   |       |                                         | 30  |                          |   | 29                      
|                             |                               |                                    |       |                                         |     |                          |   |                         
|                             |                               |                                    | Total |                                         | $   | 447                      |   | $                       
|                             |                               |                                    |       |                                         |     |                          |   |                         
|Year ended December 31, 2006 |                               |                                    |       |                                         |     |                          |   |                         
|                             | Deducted from asset accounts: |                                    |       |                                         |     |                          |   |                         
|                             |                               | Allowance for doubtful accounts    |       | $                                       | 15  |                          | $ | 54                      
|                             |                               | Sales return allowance             |       |                                         | 73  |                          |   | 528                     
|                             |                               | Ship & debit allowance             |       |                                         | 34  |                          |   | 504                     
|                             |                               | Warranty reserve                   |       |                                         | 40  |                          |   | 21                      
|                             |                               |                                    |       |                                         |     |                          |   |                         
|                             |                               |                                    | Total |                                         | $   | 162                      |   | $                       
|                             |                               |                                    |       |                                         |     |                          |   |                         
|Year ended December 31, 2005 |                               |                                    |       |                                         |     |                          |   |                         
|                             | Deducted from asset accounts: |                                    |       |                                         |     |                          |   |                         
|                             |                               | Allowance for doubtful accounts    |       | $                                       | 79  |                          | $ | 32                      
|                             |                               | Sales return allowance             |       |                                         | 74  |                          |   | 511                     
|                             |                               | Distributor stock rotation reserve |       |                                         | 338 |                          |   | 26                      
|                             |                               | Ship & debit allowance             |       |                                         | 5   |                          |   | 89                      
|                             |                               | Warranty reserve                   |       |                                         | 54  |                          |   | 22                      
|                             |                               |                                    |       |                                         |     |                          |   |                         
|                             |                               |                                    | Total |                                         | $   | 550                      |   | $                       
|                             |                               |                                    |       |                                         |     |                          |   |                         

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