0000895665
2011-08-01
0000895665
2011-04-03
2011-07-02
0000895665
2010-04-04
2010-07-03
0000895665
2011-01-02
2011-07-02
0000895665
2010-01-03
2010-07-03
0000895665
2011-07-02
0000895665
2010-12-31
0000895665
2011-01-01
2011-07-02
0000895665
2010-01-01
2010-07-03
0000895665
2009-12-31
0000895665
2010-07-03
iso4217:USD
xbrli:shares
xbrli:shares
iso4217:USD
SUPERCONDUCTOR TECHNOLOGIES INC
0000895665
--12-31
No
No
Yes
Smaller Reporting Company
10-Q
false
2011-07-02
Q2
2011
34700000
33032066
1101000
1738000
2704000
4072000
15000
631000
32000
1712000
1116000
2369000
2736000
5784000
1265000
1968000
2934000
4354000
15000
375000
30000
1009000
1361000
1342000
3349000
2491000
1679000
1932000
3335000
3715000
4320000
5617000
9648000
11569000
-3204000
-3248000
-6912000
-5785000
127000
168000
2000
1000
4000
2000
7000
7000
14000
14000
-3209000
-3127000
-6922000
-5629000
-0.10
-0.14
-0.22
-0.26
32184816
21870717
31196697
21839430
12715000
6069000
109000
108000
2303000
2230000
300000
344000
15427000
8751000
1619000
1334000
22158000
21948000
1503000
2274000
2295000
2494000
206000
210000
18755000
12569000
508000
548000
734000
517000
14000
31000
1256000
1096000
608000
577000
1864000
1673000
1000
1000
.001
.001
2000000
2000000
611523
611523
611523
611523
33000
28000
.001
.001
250000000
250000000
33032066
27217408
33032066
27217408
261412000
248500000
-244555000
-237633000
16891000
10896000
18755000
12569000
-6922000
-5629000
410000
517000
818000
516000
-770000
180000
168000
1000
128000
73000
96000
-44000
3000
46000
151000
-3000
-9000
191000
869000
-4806000
-4084000
647000
176000
-647000
-176000
303000
573000
12402000
12099000
-573000
6646000
-4833000
10365000
5532000
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 1 - us-gaap:OrganizationConsolidationAndPresentationOfFinancialStatementsDisclosureTextBlock-->
<div align="left" style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<!-- xbrl,ns -->
<!-- xbrl,nx -->
<div align="left">
</div>
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b>
</div>
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>1. General</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Superconductor Technologies Inc. (together with our subsidiaries, “we” or “us”) was
incorporated in Delaware on May 11, 1987. We maintain our headquarters in Santa Barbara,
California. We develop and produce high temperature superconducting (HTS) materials and associated
technologies. We have generated more than 100 patents and patent applications as well as
proprietary trade secrets and manufacturing expertise, providing interference elimination and
network enhancement solutions to the commercial wireless industry. In addition, we are now
leveraging our key enabling technologies, including radio frequency filtering, HTS materials and
cryogenics, to pursue emerging opportunities in the electrical grid and in equipment platforms that
utilize electrical circuits.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">From 1987 to 1997, we were engaged primarily in research and development and generated
revenues primarily from government research contracts. Since then, we have provided solutions for
wireless infrastructure in the telecommunications industry. Our commercial product offerings are
divided into the following three areas: SuperLink<sup style="font-size: 85%; vertical-align: text-top">®</sup> (high-temperature superconducting filters),
AmpLink<sup style="font-size: 85%; vertical-align: text-top">®</sup> (high performance, ground-mounted amplifiers) and SuperPlex (high performance
multiplexers). In addition, we have strategic initiatives for an HTS wire platform, RF filters and
cryocoolers.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">For the six months ended July 2, 2011 and July 3, 2010, commercial revenues accounted for 99%
and 70%, respectively, of our net revenues.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our research and development contracts are used as a source of funds for our commercial
technology development. We continue to be involved as either contractor or subcontractor on a
number of contracts with the U.S. government. For the six months ended July 2, 2011 and July 3,
2010, government related contracts accounted for 1% and 30%, respectively, of our net revenues.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The unaudited condensed consolidated financial information furnished herein has been prepared
in accordance with accounting principles generally accepted in the United States of America (GAAP)
and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion
of management, are necessary for a fair statement of the financial
position and results of operations for the periods
presented.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The preparation of the condensed consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and the accompanying notes. Actual results could differ from
those estimates and such differences may be material to the condensed consolidated financial
statements. This quarterly report on Form 10-Q should be read in conjunction with our Form 10-K
for 2010. The results of operations for the six months ended July 2, 2011 are not necessarily
indicative of the results for of the full year 2011.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 2 - us-gaap:SignificantAccountingPoliciesTextBlock-->
<div align="left" style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>2. Summary of Significant Accounting Policies</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Basis of Presentation</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">For the six months ended July 2, 2011, we incurred a net loss of $6.9 million and negative
cash flows from operations of $4.8 million. For of the full year 2010, we incurred a net loss of
$12.0 million and had negative cash flows from operations of $9.4 million.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At July 2, 2011, we had $12.7 million in cash and cash equivalents. We believe our cash
resources will be sufficient to fund our planned operations for at least the next nine months. We
believe the key factors to our liquidity will be our ability to successfully use our expertise and
our technology to generate revenues in various ways, including commercial operations, government
contracts, joint ventures and licenses. Because of the uncertainty of these factors, we may need to
raise funds to meet our working capital needs. If we require additional financing, we cannot assure
you that additional financing will be available on acceptable terms or at all. If we issue
additional equity securities to raise funds, the ownership percentage of our existing stockholders
would be reduced. New investors may demand rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise any needed funds, we might be forced to make
further substantial reductions in our operating expenses, which could adversely affect our ability
to implement our current business plan and ultimately our viability as a company.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our condensed consolidated financial statements do not include any adjustments that might
result from this uncertainty and have been prepared assuming that we will continue as a going
concern.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Principles of Consolidation</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The interim condensed consolidated financial statements include the accounts of Superconductor
Technologies Inc. and its wholly owned subsidiaries. All significant intercompany transactions have
been eliminated from the condensed consolidated financial statements.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Cash and Cash Equivalents</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Cash and cash equivalents consist of highly liquid investments with original maturities of
three months or less. Cash and cash equivalents are maintained with what we believe to be quality
financial institutions and from time to time exceed FDIC limits. Historically, we have not
experienced any losses due to such concentration of credit risk.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Accounts Receivable</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We sell predominantly to entities in the wireless communications industry and to entities of
the U.S. government. We grant uncollateralized credit to our customers. We perform usual and
customary credit evaluations of our customers before granting credit. Trade accounts receivable
are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts
is our best estimate of the amount of probable credit losses in our existing accounts receivable.
We determine the allowance based on historical write-off experience. Past due balances are
reviewed for collectibility. Accounts balances are charged off against the allowance when we deem
it is probable the receivable will not be recovered. We do not have any off -balance sheet credit
exposure related to our customers.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Revenue Recognition</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Commercial revenues are principally derived from the sale of our SuperLink, AmpLink and
SuperPlex family of products and are recognized once all of the following conditions have been met:
a) an authorized purchase order has been received in writing, b) customer’s credit worthiness has
been established, c) shipment of the product has occurred, d) title has transferred, and e) if
stipulated by the contract, customer acceptance has occurred and all significant vendor
obligations, if any, have been satisfied.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Contract revenues are principally generated under research and development contracts.
Contract revenues are recognized utilizing the percentage-of-completion method measured by the
relationship of costs incurred to total estimated contract costs. If the current contract estimate
were to indicate a loss, utilizing the funded amount of the contract, a provision would be made for
the total anticipated loss. Revenues from research related activities are derived primarily from
contracts with agencies of the U.S. Government. Credit risk related to accounts receivable arising
from such contracts is considered minimal. These contracts include cost-plus, fixed price and cost
sharing arrangements and are generally short-term in nature.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">All payments to us for work performed on contracts with agencies of the U.S. Government are
subject to adjustment upon audit by the Defense Contract Audit Agency. Contract audits through
2003 are closed. Based on historical experience and review of current projects in process, we
believe that the audits will not have a significant effect on our financial position, results of
operations or cash flows.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Shipping and Handling Fees and Costs</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Shipping and handling fees billed to customers are included in net commercial product
revenues. Shipping and handling fees associated with freight are generally included in cost of
commercial product revenues.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Warranties</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We offer warranties generally ranging from one to five years, depending on the product and
negotiated terms of purchase agreements with our customers. Such warranties require us to repair
or replace defective product returned to us during such warranty period at no cost to the customer.
An estimate by us for warranty related costs is recorded by us at the time of sale based on our
actual historical product return rates and expected repair costs. Such costs have been within our
expectations.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Guarantees</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In connection with the sales and manufacturing of our commercial products, we indemnify,
without limit or term, our customers and contract manufacturers against all claims, suits, demands,
damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged
infringement or misappropriation of any intellectual property relating to our products or other
claims arising from our products. We cannot reasonably develop an estimate of the maximum potential
amount of payments that might be made under our guarantees because of the uncertainty as to whether
a claim might arise and how much it might total. Historically, we have not incurred any expenses
related to these guarantees.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Research and Development Costs</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Research and development costs are charged to expense as incurred and include salary,
facility, depreciation and material expenses. Research and development costs incurred solely in
connection with research and development contracts are charged to government and other contract
expense.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Inventories</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Inventories are stated at the lower of cost or market, with costs primarily determined using
standard costs, which approximate actual costs utilizing the first-in, first-out method. We review
inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess
and obsolete inventory and/or vendor cancellation charges related to purchase commitments. If the
results of the review determine that a write-down is necessary, we recognize a loss in the period
in which the loss is identified, whether or not the inventory is retained. Our inventory reserves
establish a new cost basis for inventory and are not reversed until we sell or dispose of the
related inventory. Such provisions are established based on historical usage, adjusted for known
changes in demands for such products, or the estimated forecast of product demand and production
requirements. Costs associated with idle capacity are charged to expense immediately.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Property and Equipment</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Property and equipment are recorded at cost. Equipment is depreciated using the straight-line
method over their estimated useful lives ranging from three to seven years. Leasehold improvements
and assets financed under capital leases are amortized over the shorter of their useful lives or
the lease term. Furniture and fixtures are depreciated over seven years. Expenditures for
additions and major improvements are capitalized. Expenditures for minor tooling, repairs and
maintenance and minor improvements are charged to expense as incurred. When property or equipment
is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from
the accounts. Gains or losses from retirements and disposals are recorded in selling, general and
administrative expenses.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Patents, Licenses and Purchased Technology</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Patents and licenses are recorded at cost and are amortized using the straight-line method
over the shorter of their estimated useful lives or approximately seventeen years. Purchased
technology acquired through the acquisition of Conductus, Inc. in 2002 was recorded at our
estimated fair value and was amortized using the straight-line method over seven years ending in
2009.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Long-Lived Assets</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The realizability of long-lived assets is evaluated periodically as events or circumstances
indicate a possible inability to recover the carrying amount. Long-lived assets that will no
longer be used in business are written off in the period identified since they will no longer
generate any positive cash flows for us. Long-lived assets that will continue to be used by us are
periodically evaluated for recoverability. Such evaluation is based on various analyses, including
cash flow and profitability projections. The analyses necessarily involve significant management
judgment. In the event the projected undiscounted cash flows are less than net book value of the
assets, the carrying value of the assets is written down to its estimated fair value. We tested
our long lived assets for recoverability during 2010 and did not believe that there was any
impairment.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">While we believe the expected cash flows from these long-lived assets, including intangible
assets, exceed the carrying amounts, materially different assumptions regarding future performance
and discount rates could result in future impairment losses. In particular, if we no longer believe
we will achieve our long-term projected sales or operating expenses, we may conclude, in connection
with any future impairment tests, that the estimated fair value of our long-lived assets, including
intangible assets, is less than the book value and recognize an impairment charge. Any impairment
charge would adversely affect our earnings.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Other Investments</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">From time to time we may pursue joint ventures with other entities to commercialize our
technology. In 2007, we formed a joint venture with Hunchun BaoLi Communication Co. Ltd. to
manufacture and sell our SuperLink interference elimination solution in China. We use the equity
method of accounting for our 45 percent joint venture interest. The joint venture agreement called
for our joint venture partner to supply the capital and local expertise, and for us to provide a
license of certain technology and supply key parts for manufacturing. Since 2007, we have been
conducting lab and field trials in the existing China 2G market using our TD-SCDMA and SuperLink
solutions. Although those activities continue, the parties have not completed their contributions
to the joint venture, including most of the funding and our license, within the two year period
specified by the agreement and Chinese law. The future of the joint venture, including any
commencement of manufacturing and the transfer of our processes, will depend on product demand in
China, completion of funding by our joint venture partner, as well as a number of other conditions,
including certain critical approvals from the Chinese and U.S. governments. There continues to be
no assurance that these conditions will be met. We incurred no
expenses in the six months ended July 2, 2011 or in the full year 2010 as a result of this joint
venture.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Loss Contingencies</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In the normal course of our business we are subject to claims and litigation, including
allegations of patent infringement. Liabilities relating to these claims are recorded when it is
determined that a loss is probable and the amount of the loss can be reasonably estimated. The
costs of our defense in such matters are expensed as incurred. Insurance proceeds recoverable are
recorded when deemed probable.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Income Taxes</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We recognize deferred tax liabilities and assets based on the differences between the
financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax
rates in effect in the years the differences are expected to reverse. Deferred income tax benefit
(expense) results from the change in net deferred tax assets or deferred tax liabilities. A
valuation allowance is recorded when it is more likely than not that some or all deferred tax
assets will not be realized. The guidance further clarifies the accounting for uncertainty in
income taxes and sets a consistent framework to determine the appropriate level of tax reserve to
maintain for uncertain tax positions. This interpretation uses a two-step approach wherein a tax
benefit is recognized if a position is more-likely-than-not to be sustained. The amount of the
benefit is then measured to be the highest tax benefit that is greater than 50% likely to be
realized and sets out disclosure requirements to enhance transparency of our tax reserves. The
adoption of this guidance has not had a material impact on our consolidated financial statements as
we concluded our tax positions are highly certain of being settled at 100% of the benefit
claimed. Guidance is also provided on the accounting for the related interest and
penalties, financial statement and disclosure. We are currently not under examination by any taxing
authority nor have we been notified of an impending examination. The oldest tax year that remains
open to possible evaluation and interpretation of our tax position is 1996.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">As of December 31, 2010, we had net operating loss carryforwards for federal and state income
tax purposes of approximately $303.1 million and $191.9 million<b>, </b>respectively, which expire in the
years 2011 through 2030. However, during 2010 we concluded that under the Internal Revenue Code
change of control limitations, a maximum of $81.9 million and $55.0 million, respectively, would be
available for reduction of taxable income and reduced both the deferred tax asset and valuation
allowance accordingly. Due to the uncertainty surrounding their realization, we recorded a full
valuation allowance against our net deferred tax assets. Accordingly, no deferred tax asset has
been recorded in the accompanying condensed consolidated balance sheets.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Marketing Costs</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">All costs related to marketing and advertising our products are charged to expense as incurred
or at the time the advertising takes place. Advertising costs were not material in each of the
three and six months ended July 2, 2011 and July 3, 2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Net Loss Per Share</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Basic and diluted net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding in each year. Outstanding
stock options and unvested restricted stock awards are not included in the calculation of diluted
loss per share because their effect is anti-dilutive.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Stock-based Compensation</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We grant both restricted stock awards and stock options to our key employees, directors
and consultants. For the three and six months ended July 2, 2011 and July 3, 2010, the weighted
average fair value of options was estimated at the date of the grant using the Black-Scholes
option-pricing model. The following are the significant weighted average assumptions used for
estimating the fair value under our stock option plans:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three months ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six months ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 3, 2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 3, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td colspan="17"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Expected life in years
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4.0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4.0</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4.0</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Risk free interest rate
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">2.04</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">1.52</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">2.04</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Expected volatility
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">117</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">111</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">117</td>
<td nowrap="nowrap">%</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Dividend yield
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0</td>
<td nowrap="nowrap">%</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">0</td>
<td nowrap="nowrap">%</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The expected life was based on the contractual term of the options and expected employee
exercise behavior. Typically, options to our employees have a 2 to 4 year vesting term and a 10
year contractual term. The risk-free interest rate is based on U.S. Treasury zero-coupon issues
with a remaining term equal to the expected option life assumed at the grant date. The future
volatility is based on our 4 year historical volatility. We used an expected dividend yield of 0%
because we have never paid a dividend and do not anticipate paying dividends. We assumed a 10%
forfeiture rate based on our historical stock option cancellation rates over the last 4 years.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The stock-based compensation expense for our restricted stock awards is measured at fair
value on the date of grant based on the number of shares expected to vest and the quoted market
price of our common stock. We also assumed a 10% forfeiture rate for our restricted stock awards
based on our historical cancellation rates over the last 4 years.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following table presents details of total stock-based compensation expense that is
included in each functional line item on our condensed consolidated statements of operations:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="44%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three months ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six months ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 3, 2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 3, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cost of revenue
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">4,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">8,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">11,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Research and development
</div></td>
<td> </td>
<td> </td>
<td align="right">130,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">81,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">244,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">137,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Selling, general and administrative
</div></td>
<td> </td>
<td> </td>
<td align="right">289,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">195,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">566,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">368,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total stock-based compensation expense
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">423,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">282,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">818,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">516,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Use of Estimates</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The preparation of the condensed consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting periods. The significant estimates in the preparation of the condensed consolidated
financial statements relate to the assessment of the carrying amount of accounts receivable,
inventory, fixed assets, intangibles, estimated provisions for warranty costs, contract revenues,
income taxes and disclosures related to litigation. Actual results could differ from those
estimates and such differences may be material to the condensed consolidated financial statements.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Fair Value of Financial Instruments</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have estimated the fair value amounts of our financial instruments using the available
market information and valuation methodologies considered appropriate. We determined the book value
of our cash and cash equivalents, accounts receivable, inventory, prepaid expenses and other
current assets, lines of credit and other current liabilities as of July 2, 2011 approximate fair
value.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Comprehensive Income</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have no items of other comprehensive income in any period and consequently have not
included a Statement of Comprehensive Income.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Segment Information</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We operate in a single business segment, the research, development, manufacture and marketing
of high performance products used in cellular base stations to maximize the performance of wireless
telecommunications networks by improving the quality of uplink signals from mobile wireless
devices. We currently derive net commercial product revenues primarily from the sales of our
SuperLink, AmpLink and SuperPlex products. We currently sell most of our products directly to
wireless network operators in the United States. Net revenues derived principally from government
research and development contracts are presented separately on the condensed consolidated statement
of operations for all periods presented.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Certain Risks and Uncertainties</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Our long-term prospects are dependent upon the continued and increased market acceptance for
the products.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We currently sell most of our products directly to wireless network operators in the United
States and our product sales have historically been concentrated in a small number of customers. At
July 2, 2011, we had two customers that represented 84% and 10% of total net revenues and 48% of
accounts receivable. In 2010, these two customers represented 58% and 12% of total net revenues and
31% of accounts receivable. The loss of or reduction in sales, or the inability to collect
outstanding accounts receivable, from any of these customers could have a material adverse effect
on our business, financial condition, results of operations and cash flows.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We currently rely on a limited number of suppliers for key components of our products. The
loss of any of these suppliers could have material adverse effect on our business, financial
condition, results of operations and cash flows.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In connection with the sales of our commercial products, we indemnify, without limit or term,
our customers against all claims, suits, demands, damages, liabilities, expenses, judgments,
settlements and penalties arising from actual or alleged infringement or misappropriation of any
intellectual property relating to our products or other claims arising from our products. We cannot
reasonably develop an estimate of the maximum potential amount of payments that might be made under
our indemnity obligations because of the uncertainty as to whether a claim might arise and how much
it might total.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 3 - us-gaap:ShortTermDebtTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>3. Short Term Borrowings</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We had a line of credit with a bank. The agreement was structured as a sale of accounts
receivable and provided for the sale of up to $3.0 million of eligible accounts receivable, with
advances to us totaling 80% of the receivables sold. At July 2, 2011 we were in compliance with
all covenants of the agreement and there was no amount outstanding under this borrowing facility.
We have not used this line of credit for several years and therefore allowed it to expire without
renewal on July 11, 2011.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 4 - us-gaap:StockholdersEquityNoteDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>4. Stockholders’ Equity</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following is a summary of stockholders’ equity transactions for the six months ended July 2, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="35%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="1%"> </td>
<td width="6%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Convertible</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Capital in</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Preferred Stock</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Common Stock</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Excess of</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Accumulated</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Shares</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amount</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Shares</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Amount</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Par Value</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Deficit</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Total</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Balance at December 31, 2010</b>
</div></td>
<td> </td>
<td> </td>
<td align="right">611,523</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">27,217,408</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">28,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">248,500,000</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(237,633,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">10,896,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Issuance of common stock, net
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">5,443,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">5,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">12,397,000</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">12,402,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Repurchase of common stock to
satisfy tax withholding obligations
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(179,636</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(303,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(303,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Issuance of awards and stock based
compensation
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">551,294</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">818,000</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">818,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Net loss
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(6,922,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(6,922,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Balance at July 2, 2011</b>
</div></td>
<td> </td>
<td> </td>
<td align="right">611,523</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">33,032,066</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">33,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">261,412,000</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(244,555,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td align="left">$</td>
<td align="right">16,891,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Equity Offering</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In a registered direct offering completed in February 2011 we raised proceeds of $12.4
million, net of offering costs of $933,000, from the sale of 5,443,000 shares of common stock at
$2.45 per share based on a negotiated discount to market.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Stock Options</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">At July 2, 2011, we had three equity award option plans, the 1998 and 1999 Stock Option Plans
and the 2003 Equity Incentive Plan (collectively, the “Stock Option Plans”) although we can only
grant new options under the 2003 Equity Incentive Plan. Under the 2003 Equity Incentive Plan,
stock awards may be made to our directors, key employees, consultants, and non-employee directors
and may consist of stock options, stock appreciation rights, restricted stock awards, performance
awards, and performance share awards. Stock options must be granted at prices no less than the
market value on the date of grant. There were no stock option exercises during the three or six
months ended July 2, 2011 or during the three or six months ended July 3, 2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The impact to the condensed consolidated statements of operations was $191,000 and $362,000
and $0.01 and $0.01 on basic and diluted earnings per share for the three and six months ended July
2, 2011, respectively, compared to $135,000 and $264,000 and $0.01 and $0.01 on basic and diluted
earnings per share for the three and six months ended July 3, 2010, respectively. No stock
compensation cost was capitalized during either period. The total compensation cost related to
nonvested awards not yet recognized was $1.3 million and the weighted-average period over which the
cost is expected to be recognized was 1.5 years at July 2, 2011.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The following is a summary of stock option transactions under our stock option plans at
July 2, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="30%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Average</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Number of</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Average</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Number of</b></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Exercise</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Options</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Exercise</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Shares</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Price Per Share</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Price</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Exercisable</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Price</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at December
31, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">1,083,366</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td nowrap="nowrap" align="right">1.43 - $79.38</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6.43</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">830,552</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">7.57</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Granted
</div></td>
<td> </td>
<td> </td>
<td align="right">618,932</td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="right">1.58 - 2.86</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1.81</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Exercised
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Canceled
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(48,671</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="right">1.58 - 79.38</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7.00</td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance at July 2, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">1,653,627</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td nowrap="nowrap" align="right">1.43 - $74.50</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">4.68</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">918,700</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">6.89</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The outstanding options expire on various dates through the end of January 2021. The
weighted-average contractual term of options outstanding is 7.2 years and the weighted-average
contractual term of stock options currently exercisable is 5.4 years. The exercise prices for these
options range from $1.43 to $74.50 per share, for an aggregate exercise price of approximately $7.7
million. At July 2, 2011, outstanding options covering 532,000 shares, with an intrinsic value of
$386,000, had an exercise price less than the current market value and 10,700 of these shares, with
an intrinsic value of $6,000 were exercisable.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Restricted Stock Awards</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The grant date fair value of each share of our restricted stock awards is equal to the fair
value of our common stock at the grant date. Shares of restricted stock under awards all have
service conditions and vest over one to four years. Some of our grants also have performance
conditions. The following is a summary of our restricted stock award transactions at July 2, 2011:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Weighted</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Number of</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Average Grant</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Shares</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Date Fair Value</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance nonvested at December 31, 2010
</div></td>
<td> </td>
<td> </td>
<td align="right">720,723</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1.84</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Granted
</div></td>
<td> </td>
<td> </td>
<td align="right">588,932</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1.69</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Vested
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(466,611</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">1.34</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Forfeited
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(37,638</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">2.06</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Balance nonvested at July 2, 2011
</div></td>
<td> </td>
<td> </td>
<td align="right">805,406</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">2.01</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">For the majority of restricted stock awards granted, the number of shares
issued on the date the restricted stock awards vest is net of the minimum statutory withholding
requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees.
During the three and six months ended July 2, 2011 we withheld 8,983 and 179,636 shares,
respectively, to satisfy $25,000 and $303,000 of employees’ tax obligations. During the three
months ended July 3, 2010 we withheld no shares and during the six months ended July 3, 2010 we
withheld 181,982 shares to satisfy $573,000 of employees’ tax obligations.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The impact to the condensed consolidated statements of operations was $231,000 and $456,000
and $0.01 and $0.01 on basic and diluted earnings per share for the three and six months ended July
2, 2011, respectively and $147,000 and $252,000 and $0.01 and $0.01 on basic and diluted earnings
per share for the three and six months ended July 3, 2010, respectively. No stock compensation cost
was capitalized during the period. The total compensation cost related to nonvested awards not yet
recognized was $942,000 and the weighted-average period over which the cost is expected to be
recognized was 10 months.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Warrants</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We had no warrants outstanding at July 2, 2011.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 5 - us-gaap:EarningsPerShareTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>5. Earnings Per Share</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Basic and diluted earnings (loss) per share is based on the weighted-average number of common
shares outstanding.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Since their impact would be anti-dilutive, our loss per common share does not include the
effect of the assumed exercise or vesting of the following shares:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 3, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Outstanding stock options
</div></td>
<td> </td>
<td> </td>
<td align="right">1,653,627</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,149,998</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Unvested restricted stock awards
</div></td>
<td> </td>
<td> </td>
<td align="right">805,406</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">782,997</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Outstanding warrants
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">618,237</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total
</div></td>
<td> </td>
<td> </td>
<td align="right">2,459,033</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,551,232</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 6 - us-gaap:CommitmentsAndContingenciesDisclosureTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>6. Commitments and Contingencies</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Operating Leases</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We lease our offices and production facilities under a non-cancelable operating lease that
expires in November 2016. This lease contains escalation clauses for increases in annual renewal
options and requires us to pay utilities, insurance, taxes and other operating expenses.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">For the three and six months ended July 2, 2011 rent expense was $274,000 and $551,000,
respectively, and for the three and six months ended July 3, 2010 rent expense was $259,000 and
$545,000, respectively.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Patents and Licenses</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have entered into various licensing agreements requiring royalty payments ranging from
0.13% to 2.5% of specified product sales. Certain of these agreements contain provisions for the
payment of guaranteed or minimum royalty amounts. In the event that we fail to pay minimum annual
royalties, these licenses may automatically become non-exclusive or be terminated. These royalty
obligations terminate at various times from 2011 to 2018. Royalty expense totaled $44,000 and
$87,000 in the second quarter and year to date in 2011, respectively, compared to $46,000 and
$92,000 in the second quarter and year to date in 2010, respectively. Under the terms of certain
royalty agreements, royalty payments made may be subject to audit. There have been no audits to
date and we do not expect future audit adjustments to be significant.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">The minimum lease payments under operating leases and license obligations are as
follows:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000"><b>Years ending December 31,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Licenses</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>Operating Leases</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom"><!-- Blank Space -->
<td colspan="9"> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Remainder of 2011
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">653,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">2012
</div></td>
<td> </td>
<td> </td>
<td align="right">25,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,336,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2013
</div></td>
<td> </td>
<td> </td>
<td align="right">25,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,368,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">2014
</div></td>
<td> </td>
<td> </td>
<td align="right">30,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,408,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">2015
</div></td>
<td> </td>
<td> </td>
<td align="right">45,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,448,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Thereafter
</div></td>
<td> </td>
<td> </td>
<td align="right">135,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,364,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Total payments
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">260,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">7,577,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">In March 2011, we decided to use certain of our own technologies and as a result we
voluntarily terminated a patent license we had with a third party along with certain other related
intangible assets. As a result, capitalized cost of $0.8 million was charged to expense during our
first quarter and a $1.35 million license obligation was terminated. The above table reflects that
termination.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 7 - scon:ContractualGuaranteesAndIndemnitiesTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>7. Contractual Guarantees and Indemnities</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">During our normal course of business, we make certain contractual guarantees and indemnities
pursuant to which we may be required to make future payments under specific circumstances. We have
not recorded any liability for these contractual guarantees and indemnities in the accompanying
condensed consolidated financial statements.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Warranties</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We establish reserves for future product warranty costs that are expected to be incurred
pursuant to specific warranty provisions with our customers. Our warranty reserves are established
at the time of sale and updated throughout the warranty period based upon numerous factors
including historical warranty return rates and expenses over various warranty periods.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Intellectual Property Indemnities</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We indemnify certain customers and our contract manufacturers against liability arising from
third-party claims of intellectual property rights infringement related to our products. These
indemnities appear in development and supply agreements with our customers as well as manufacturing
service agreements with our contract manufacturers, are not limited in amount or duration and
generally survive the expiration of the contract. Given that the amount of potential liabilities
related to such indemnities cannot be determined until an infringement claim has been made, we are
unable to determine the maximum amount of losses that we could incur related to such
indemnifications.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>Director and Officer Indemnities and Contractual Guarantees</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have entered into indemnification agreements with our directors and executive officers
which require us to indemnify such individuals to the fullest extent permitted by Delaware law.
Our indemnification obligations under such agreements are not limited in amount or duration.
Certain costs incurred in connection with such indemnities may be recovered under certain
circumstances under various insurance policies. Given that the amount of any potential liabilities
related to such indemnities cannot be determined until a lawsuit has been filed against a director
or executive officer, we are unable to determine the maximum amount of losses that we could incur
relating to such indemnities. Historically, any amounts payable pursuant to such director and
officer indemnities have not had a material negative effect on our business, financial condition or
results of operations.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We have also entered into severance and change in control agreements with certain of our
executives. These agreements provide for the payment of specific compensation benefits to such
executives upon the termination of their employment with us.
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt"><i>General Contractual Indemnities/Products Liability</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">During the normal course of business, we enter into contracts with customers where we agree to
indemnify the other party for personal injury or property damage caused by our products. Our
indemnification obligations under such agreements are not generally limited in amount or duration.
Given that the amount of any potential liabilities related to such indemnities cannot be determined
until a lawsuit has been filed, we are unable to determine the maximum amount of losses that we
could incur relating to such indemnities. Historically, any amounts payable pursuant to such
indemnities have not had a material negative effect our business, financial condition or results of
operations. We maintain general and product liability insurance as well as errors and omissions
insurance which may provide a source of recovery to us in the event of an indemnification claim.
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 8 - scon:DetailsOfCertainFinancialStatementComponentsAndSupplementalDisclosuresOfCashFlowInformationAndNonCashActivitiesTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>8. Details of Certain Financial Statement Components and Supplemental Disclosures of Cash Flow
Information and Non-Cash Activities</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%"><i>Balance Sheet Data</i>:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Accounts receivable:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Accounts receivable-trade
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">103,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">36,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">U.S. government accounts receivable-billed
</div></td>
<td> </td>
<td> </td>
<td align="right">8,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">74,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Less: allowance for doubtful accounts
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(2,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(2,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>109,000</b></td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1<b>08,000</b></td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Inventories:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Raw materials
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">1,324,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,499,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Work-in-process
</div></td>
<td> </td>
<td> </td>
<td align="right">605,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">511,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Finished goods
</div></td>
<td> </td>
<td> </td>
<td align="right">1,452,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,316,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Less inventory reserve
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,078,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,096,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>2,303,000</b></td>
<td> </td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>2,230,000</b></td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Property and Equipment:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Equipment
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">16,601,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">16,092,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:45px; text-indent:-15px">Leasehold improvements
</div></td>
<td> </td>
<td> </td>
<td align="right">6,780,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,786,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:45px; text-indent:-15px">Furniture and fixtures
</div></td>
<td> </td>
<td> </td>
<td align="right">396,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">404,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right">23,777,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">23,282,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Less: accumulated depreciation and amortization
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(22,158,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(21,948,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>1,619,000</b></td>
<td> </td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>1,334,000</b></td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Depreciation expense amounted to $181,000 and $363,000, respectively, for the three and six month
periods ended July 2, 2011 and $231,000 and $464,000, respectively, for the three and six month
periods ended July 3, 2010.
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Patents and Licenses:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Patents pending
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">648,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,110,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Patents issued
</div></td>
<td> </td>
<td> </td>
<td align="right">1,444,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,382,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Less accumulated amortization
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(589,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(554,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Net patents issued
</div></td>
<td> </td>
<td> </td>
<td align="right">855,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">828,000</td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Licenses Pending
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Licenses Issued
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">563,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Less accumulated amortization
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(234,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Net licenses
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">329,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Purchased technology
</div></td>
<td> </td>
<td> </td>
<td align="right">1,706,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,706,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Less accumulated amortization
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,706,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,706,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Net purchased technology
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom"><!-- Blank Space -->
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>1,503,000</b></td>
<td> </td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>2,274,000</b></td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">Amortization expense related to these items totaled $18,000 and $47,000, respectively, for the
three and six month periods ended July 2, 2011 and $29,000 and $53,000, respectively, for the three
and six month periods ended July 3, 2010. Amortization expenses are expected to total $45,000 for
the remainder of 2011 and $89,000 in each of 2012 and 2013.
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>December 31, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Accrued Expenses and Other Long Term
Liabilities:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Salaries Payable
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">196,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">116,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Compensated Absences
</div></td>
<td> </td>
<td> </td>
<td align="right">343,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">246,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Compensation related
</div></td>
<td> </td>
<td> </td>
<td align="right">58,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">27,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Warranty reserve
</div></td>
<td> </td>
<td> </td>
<td align="right">287,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">289,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Deferred rent
</div></td>
<td> </td>
<td> </td>
<td align="right">408,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">391,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Other
</div></td>
<td> </td>
<td> </td>
<td align="right">64,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">56,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right"><b>1,356,000</b></td>
<td> </td>
<td> </td>
<td> </td>
<td align="right"><b>1,125,000</b></td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Less current portion
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(748,000</b></td>
<td nowrap="nowrap"><b>)</b></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right"><b>(548,000</b></td>
<td nowrap="nowrap"><b>)</b></td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Long term portion
</div></td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>608,000</b></td>
<td> </td>
<td> </td>
<td align="left"><b>$</b></td>
<td align="right"><b>577,000</b></td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="72%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>For the six months ended,</b></td>
<td> </td>
</tr>
<tr style="font-size: 10pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 2, 2011</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>July 3, 2010</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Warranty Reserve Activity:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Beginning balance
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">289,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">255,000</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Additions
</div></td>
<td> </td>
<td> </td>
<td align="right">2,000</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">58,000</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Deductions
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(4,000</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(6,000</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Ending balance
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">287,000</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">307,000</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
</div>
<!--DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd" -->
<!-- Begin Block Tagged Note 9 - us-gaap:SubsequentEventsTextBlock-->
<div style="font-family: 'Times New Roman',Times,serif; margin-left: 0in; ">
<div align="left" style="font-size: 10pt; margin-top: 10pt"><b>9. Subsequent Events</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 10pt; text-indent: 4%">We evaluated subsequent events through the date the accompanying condensed consolidated
financial statements were issued. Pursuant to the requirements of Accounting Standards Codification
855, <i>Subsequent Events</i>, we have included all accounting and disclosure requirements related to
subsequent events in our condensed consolidated financial statements.
</div>
</div>