The following discussion should be read in conjunction with the Consolidated Financial Statements, the related notes and the "Important Notice to Investors" that appear elsewhere in this report.

Overview

We are a supplier of high performance modules, components and foundry services for communications applications. Our focus is on the specialized expertise, materials and know-how of RF and other high and intermediate frequency applications. We enjoy diversity in our markets, applications, products, technology and customer base. Our products are designed on various wafer substrates, including compound semiconductor materials such as GaAs, GaN, and piezoelectric crystals such as LiTaO3. We use a variety of process technologies using GaAs substrates including HBT and pHEMT. Using various other substrates we also manufacture SAW and BAW products. Using these materials and our proprietary technology, we believe our products can offer key advantages such as steeper selectivity, lower distortion, higher power and power-added efficiency, reduced size and weight and more precise frequency control. For example, GaAs has inherent physical properties that allow its electrons to move up to five times faster than those of silicon. This higher electron mobility permits the manufacture of GaAs integrated circuits that operate at higher levels of performance than silicon devices. We believe that these advantages are a tremendous benefit to our customers, which include major communication companies worldwide.

Strategy and Industry Considerations

Our business strategy is to provide our customers with high-performance, low-cost solutions to applications in the handset, networks and military markets. Our mission is, "Connecting the Digital World to the Global Network™," and we accomplish this through a diversified product portfolio within the communications and military industries. In the handset market, we primarily provide transmit and power amplifier modules. In the networks markets, we are a supplier of both active GaAs and passive SAW components. We provide the military market with phased-array radar antenna components and in 2005 were chosen to be the prime contractor on a DARPA contract to develop high power wide band amplifiers in GaN, a next generation GaAs-derived technology. Subsequently, we have obtained additional funding from the Office of Naval Research to improve manufacturing methods of producing high-power, high-voltage S-band GaAs amplifiers.

Wafer and semiconductor manufacturing facilities require a significant level of fixed cost due to investments in plant and equipment, labor costs, and repair and maintenance costs. During periods of low demand, selling prices also tend to decrease which, when combined with high fixed manufacturing costs, can create an adverse impact on operating results. However, strong demand in 2008 increased equipment utilization in our Oregon factory to the extent that we decided to increase capital expenditures for equipment and increase the capacity of this factory in 2008. We raised capacity through these capital investments adding GaAs fabrication capacity in our Oregon factory as well as filter capacity in Florida in 2008. During the fourth quarter of 2008, demand slowed abruptly and as a result, we experienced a corresponding decrease in factory utilization. The lower factory utilization level created downward pressure on gross margins.

We experienced 21% revenue growth in 2008 compared to 2007 however the fourth quarter of 2008 brought a sudden decrease in demand. The market for handset RF components was strong in 2008 despite the fourth quarter slowdown. Even though handset revenue for the fourth quarter of 2008 declined 21% compared to the third quarter of 2008, handset revenue grew 19% in 2008 compared with 2007. This growth is primarily attributable to strong growth in 3G product revenues with an increase of 176% for 2008 compared to 2007. We believe the fundamental drivers of continued long-term growth in the handset market remain solid as the number of new users in developed countries grows and existing users are adopting 3G enabled handset that offer additional features and functionality as compared to a traditional 2G handset. These more sophisticated handsets, sometimes called Smartphones, which incorporate a variety of features, and offer wireless broadband access enabled by 3G technologies, represent one of the fastest growing portions of our market. This transition to more sophisticated handsets increases the RF content in each device, increasing our addressable market. Further,

China, India and other emerging countries with improving economies are growing the traditional 2G market by introducing a new customer base. In the past, however, during times of growing demand we have also experienced significant selling price pressure on some of our highest volume products. The current demand for increased RF content required for the higher data rates and increased functionality of 3G handset devices has allowed average selling prices to stabilize. Our opportunity in a 3G phone, which is quad band capable in the GPRS/GSM/EDGE mode and supports 3 bands in the wideband code division multiple access ("WCDMA") mode, is over $6.00 of content per unit. By comparison, our content for a low cost dual-band GSM/GPRS phone is approximately $1.20 per unit. Typical functional price erosion is 10-15% per year, offset by increasing content.

In our networks business, WLAN product revenues increased 51% for 2008 compared to 2007 despite decreased demand in the fourth quarter of 2008. RF content for WLAN has increased as a result of requirements for greater data rates and faster access. The market is also developing mobile devices that are taking on new forms, such as small laptop notebooks also referred to as "netbooks" and mobile internet devices ("MIDs"). These new forms, combined with traditional laptops and WLAN attachment to handsets, have created a significant growth opportunity. Additionally, the continued deployment of cellular systems in emerging markets such as India, Africa and in the rest of Asia has driven GSM/GPRS base station transceiver volumes to new record levels. We expect continued benefit in sales of our point-to-point radio products which have increased 17% in 2008 compared to 2007, largely resulting from build outs in developing countries and data demand increases in those areas of the world where wireless backhaul systems are prevalent.

Our networks market includes products that support the transfer of data at high rates across wireless or wired networks. Our products for this market include those related to base station, WLANs, worldwide interoperability for microwaved access ("WiMAX"), GPS, cable television, microwave radio, satellite, groundstation, and optical communications. We also support emerging wireless markets such as automotive and radio-frequency identification ("RFID"). We include our multi-market standard products in the networks category.

Revenues from the military market are generally for products in large scale programs with long lead-times. Once a component has been designed into an end-use product for a military application, the same component is generally used during the entire production life of the end-use product and, as a result, we tend to produce large volumes of these components. Currently, we are actively engaged with multiple military industry contractors in the development of next-generation phased-array systems and have key design wins in major projects such as the JSF, HTM4 airborne radar and Cobra Judy shipboard radar for detecting missile launches. In addition, in 2005 we entered into a multi-year contract with DARPA to develop high power, wide band amplifiers in GaN. We are currently executing phase III of our DARPA GaN contract which represents approximately $16 million of R&D investment over 2 years. From the Office of Naval Research, we were awarded a $4.5 million, 2 year contract to advance manufacturing methods in the production of GaAs technologies. We expect to continue to win government funding for advanced technologies in the future and we expect to participate in other large projects such as the B-2 radar upgrade, and hope to expand other programs in the future. In 2008, we launched a new family of GaN power amplifier products for the defense market and PowerBand, a disruptive new technology enabling wide bandwidth with output power and efficiency performance previously restricted to narrow band amplifiers. These products also have cross over application in our aerospace and networks markets.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The following accounting policies involve critical accounting estimates because they are particularly dependent on estimates and assumptions made by management about matters that are highly uncertain at the time the accounting estimates are made. While we have used our best estimates based on facts and circumstances available to us at the time, different estimates

reasonably could have been used. Changes in the accounting estimates we use are reasonably likely to occur from time to time, which may have a material impact on the presentation of our financial condition and results of operations.

Our most critical accounting estimates include revenue recognition; the valuation of inventory, which impacts gross margin; assessment of recoverability of long-lived assets, which primarily impacts operating expense when we impair assets or accelerate depreciation; valuation of investments and debt in privately held companies, which impacts net income when we record impairments; valuation of deferred income tax assets and liabilities, which impacts our tax provision; and stock-based compensation, which impacts cost of goods sold and operating expenses. We also have other policies that we consider to be key accounting policies, such as our policies for the valuation of accounts receivable, reserves for sales returns and allowances, reserves for warranty costs and our reserves for commitments and contingencies; however, these policies either do not meet the definition of critical accounting estimates described above or are not currently material items in our financial statements. We review our estimates, judgments, and assumptions periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. We believe that these estimates are reasonable; however, actual results could differ from these estimates.

Revenue Recognition

We derive revenues primarily from the sale of standard and customer-specific products and foundry services in the handset, networks and military markets. We also receive revenues from non-recurring engineering fees and cost-plus contracts for research and development work, which collectively have been less than 5% of consolidated revenues for any period. Our distribution channels include our direct sales staff, manufacturers' representatives and independent distributors. The majority of our shipments are made directly to our customers. Revenues from the sale of standard and customer-specific products are recognized when title passes to the buyer.

We receive periodic reports from customers who utilize inventory hubs and recognize revenues when the customers acknowledge they have pulled inventory from our hub, the point at which title to the product passes to the customer.

Revenues from foundry services and non-recurring engineering fees are recorded when the service is completed. Revenues from cost plus contracts are recognized as costs are incurred.

Revenues from our distributors are recognized when the product is sold to the distributors. Our distributor agreements provide selling prices that are fixed at the date of sale, although we offer price protections, which are specific, of a fixed duration and for which we reserve. Further, the distributor's payment obligation is not contingent on reselling the product. The distributors take title to the product and bear the risks of ownership, have economic substance and we have no significant obligations for future performance to bring about resale. We can reasonably estimate the amount of future returns. Sales to our distributors were approximately 10% to 15% of our total revenues for 2008, 2007 and 2006. We allow our distributors to return products for warranty reasons and stock rotation rights, within certain limitations, and reserve for such instances. Customers that are not distributors can only return products for warranty reasons. If we are unable to repair or replace products returned under warranty, we will issue a credit for a warranty return.

Inventories

We state our inventories at the lower of cost or market. We use a combination of standard cost and moving average cost methodologies to determine our cost basis for our inventories. This methodology approximates actual cost on a first-in, first-out basis. In addition to stating our inventory at the lower of cost or market, we also evaluate it each period for excess quantities and obsolescence. We analyze forecasted demand versus quantities on hand and reserve for the excess.

Long-Lived Assets

We evaluate long-lived assets for impairment of their carrying value when events or circumstances indicate that the carrying value may not be recoverable. Factors we consider in deciding when to perform an impairment review include significant negative industry or economic trends, significant changes or planned changes in our use of the assets, plant closure or production line discontinuance, technological obsolescence, or other changes in circumstances which indicate the carrying value of the assets may not be recoverable. If such an event occurs, we evaluate whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If this is the case, we recognize an impairment loss to the extent that carrying value exceeds fair value. Fair value is determined based on market prices or discounted cash flow analysis, depending on the nature of the asset and the availability of market data. Any estimate of future cash flows is inherently uncertain. The factors we take into consideration in making estimates of future cash flows include product life cycles, pricing trends, future capital needs, cost trends, product development costs, competitive factors and technology trends as they each affect cash inflows and outflows. If an asset is written down to fair value, that value becomes the asset's new carrying value and is depreciated over the remaining useful life of the asset.

Investments in Privately Held Companies

In previous years, we made a number of investments in small, privately held technology companies in which we held less than 20% of the capital stock or held notes receivable. We account for all of these investments at cost unless their value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. We review these investments periodically for impairment and make appropriate reductions in carrying value when an other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgment. During our review, we evaluate the financial condition of the issuer, market conditions, and other factors providing an indication of the fair value of the investments. Adverse changes in market conditions or operating results of the issuer that differ from expectation, could result in additional other-than-temporary losses in future periods.

In addition, as a result of the sale of our former optoelectronics operations, we received as partial consideration $4.5 million of preferred stock in CyOptics, Inc. ("CyOptics") and an unsecured promissory note from CyOptics for $5.6 million, that was discounted by $2.3 million to reflect the current market rate for similar debt of comparable companies. CyOptics paid $1.5 million towards the promissory note in 2008 and $1.1 million in 2007. On October 9, 2007, we participated in an additional bridge financing where we purchased $0.5 million of a subordinated convertible promissory note from CyOptics which converted into preferred stock on July 24, 2008. In December 2008, we received a letter of intent from Millennium Partners ("Millennium") and signed a definitive agreement to sell the preferred stock and debt to Millennium for approximately $3.8 million, inclusive of certain purchase adjustments. On February 13, 2009, we received notice from Millennium indicating that it no longer wished to pursue completion of the purchase of our preferred stock and that it believed it had the right to purchase the note for $1.0 million. We dispute Millennium's interpretation of the agreement and do not believe this outcome to be probable. We continue to pursue closure of the transaction in accordance with the agreement; however the ultimate outcome is uncertain. Based on the developments above, the review of CyOptics financial condition and operating results and other best available market information, we have written this investment down to $3.2 million resulting in a non-operating charge to earnings in 2008 of $2.5 million.

During 2006, a previously impaired investment was purchased by another company and our holdings in the investment were liquidated. As a result, we recorded a recovery on the impairment of this investment of $0.1 million. No impairment was recorded in 2007.

Income Taxes

We are subject to taxation from federal, state and international jurisdictions in which we operate and account for income taxes using the asset and liability method. A significant amount of management judgment is involved in preparing our annual provision for income taxes and the calculation of resulting deferred tax assets and liabilities.

Our provision for income taxes as of and for the years ended December 31, 2008, 2007 and 2006 were as follows (in millions):

Years ended December 31, 2008 2007 2006 Provision for income taxes $ 2.8 $ 1.5 $ 2.8

The provision for income taxes for 2008 and 2007 primarily consisted of domestic and foreign tax liabilities in US and Costa Rica of $2.8 million and $1.5 million, respectively. In January 2008 a $63.3 million dividend was paid from the Costa Rican subsidiary. Of the $63.3 million dividend, the majority was from previously taxed income and the remainder was taxable in 2008. No provision has been made for the U.S, state or additional foreign income taxes related to approximately $99.0 million of undistributed earnings of foreign subsidiaries which have been, or are, intended to be permanently reinvested. It is not practicable to determine the U.S. federal income tax liability, if any, which would be payable if such earnings were not permanently reinvested. In the event the Costa Rican or German subsidiaries remit these earnings to the U.S. parent, the earnings may be subject to U.S. federal and state income taxes.

In 2002, we determined that a valuation allowance should be recorded against all of our deferred tax assets based on the criteria of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. We record the valuation allowance to reduce deferred tax assets when it is more likely than not that some portion, or all of the deferred tax assets may not be realized. WJ recorded, and we maintained, a valuation allowance against its deferred tax assets. We consider future taxable income and prudent and feasible tax planning strategies in determining the need for a valuation allowance and evaluate the need for a valuation allowance on a regular basis. At December 31, 2008, we determined that it is more likely than not that the deferred tax assets will not be realized.

In assessing the realizability of our deferred tax assets, we considered the four sources of taxable income. Because we have no carryback ability and have not identified any viable tax planning strategies, two of the sources are not available. Reversing taxable temporary differences have been properly considered as the deferred tax liabilities reverse in the same period as existing deferred tax assets. However, reversing the deferred tax liabilities is insufficient to fully recover existing deferred tax assets. Therefore, future taxable income, the most subjective of the four sources, is the remaining source available for realization of our net deferred tax assets.

Significant operating losses in 2008, 2005 and prior years, modest earnings levels in recent years that are highly sensitive to changes in the business environment, instances of missed projections, the cyclical nature of our industry and the recent significant economic uncertainties in the market have been important in concluding that future taxable income would not be used as justification for the realization of deferred tax assets. For example, in 2008 we recorded a pre-tax loss that was below the original projected guidance. Subsequently, a number of events have made forecasting taxable income even more difficult. The acquisition of WJ, with a prior history of pre-tax losses, created a risk that we would not be able to improve this performance or would fail to integrate it successfully into our operations. The substantial slow down in the world economy has also heightened the risk of a material reduction in business levels. Our customers and competitors have noted similar uncertainties regarding the performance of our industry. In addition, during the second and third quarters of 2008, we added significant capacity and fixed costs to respond to growths in demand, adding more risk to taxable income should sales decline.

During the fourth quarter of 2008, we completed the integration of WJ into our operations. We also completed our 2009 operating budget in the first quarter of 2009. Completion of these two activities assisted our short-term understanding of future profitability. However, we are unable to predict the timing of improvements in the world economy which makes it difficult to accurately forecast taxable income. These factors indicate continued need for a valuation allowance.

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. We recognized no adjustment in the liability for unrecognized tax benefits upon

the adoption of FIN 48. The 2008 and 2007 unrecognized tax benefits totaled $25.1 million and $10.2 million including interest and penalty of $4.0 million and $3.6 million, respectively. The amount of the unrecognized tax benefits, if recognized, that would result in a favorable impact on the effective tax rate is $10.7 million. The FIN 48 amounts are based upon significant management estimates.

Stock-Based Compensation

On January 1 2006, we adopted SFAS No. 123(R), Share-Based Payment, and included stock-based compensation costs in our financial statements. We have elected to use the Black-Scholes option valuation model to value our options and employee stock purchase plan issuances.

The table below summarizes the stock-based compensation expense for 2008, 2007 and 2006, included in our consolidated statements of operations:

                                                              Year ended December 31,
(in millions)                                               2008         2007        2006
Cost of goods sold                                       $      4.3    $    3.2    $    2.9

Stock-based compensation expense included in cost of
goods sold                                                      4.3         3.2         2.9
Research, development and engineering                           2.7         1.5         1.7
Selling, general and administrative                             4.5         3.8         4.5

Stock-based compensation expense included in
operating expenses                                              7.2         5.3         6.2

Total stock-based compensation expense included in
income from operations                                   $     11.5    $    8.5    $    9.1

Acquisition of WJ Communications, Inc.

On May 22, 2008, we completed the acquisition of WJ Communications, Inc ("WJ"), RF semiconductor company that provides RF product solutions worldwide to communications equipment companies. The acquisition will enable us to combine RF power, switching and filtering in cost effective module solutions for base station and other infrastructure applications. We paid $72.0 million in cash on the closing date, and paid $0.6 million of direct acquisition costs for 100% of the shares of WJ.

We accounted for the WJ acquisition as a purchase in accordance with SFAS No. 141, "Business Combinations." Details of the purchase price are as follows (in millions):

                           Cash paid at closing   $ 72.0
                           Acquisition costs         0.6

                           Total                  $ 72.6

The total purchase price was allocated to WJ's assets and liabilities based upon fair values as determined by us.

                 Cash                                    $  10.8
                 Accounts receivables and other assets       7.5
                 Inventory                                  10.0
                 Property, plant and equipment               4.7
                 Intangible assets (Note 11)                31.0
                 In-process research and development         1.4
                 Goodwill (Note 11)                         29.0
                 Payables and other liabilities            (21.8 )

                 Total                                   $  72.6

We recognized goodwill of $29.0 million which represents payment in excess of the fair values of WJ's assets and liabilities. This acquisition provided a significant revenue stream and will enable us to combine RF power, switching and filtering in cost effective module solutions for base station and other infrastructure applications. The acquisition leverages WJ's radio frequency/ microwave design expertise with our technologies to expand our presence in the communications infrastructure market. The acquisition completes our RF front-end portfolio for cellular base stations, adds products which complement our current base station line-up, and provides us with a Silicon Valley based design center,.

The results of operations for the WJ business are included in our consolidated statements of operations for the period from May 23, 2008 through December 31, 2008. The following unaudited pro forma consolidated information gives effect to . . .