##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to _____________ 000-31635
(Commission file number)   ENDWAVE CORPORATION    Delaware
(State of incorporation)
    
    95-4333817
(I.R.S. Employer Identification No.)
 776 Palomar Avenue,
Sunnyvale, CA
(Address of principal executive offices)
    
    94085
(Zip code)
 (408) 522-3100
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ. The number of shares of the registrants Common Stock outstanding as of May 6, 2005 was 10,639,584
shares.




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ENDWAVE CORPORATION INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Qualitative and Quantitative Disclosure about Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 6.
    
    Exhibits
    
    
    27SIGNATURES
    
    
    29EXHIBITS
    
    
    30EXHIBIT 10.24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements ENDWAVE CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004(unaudited)
    
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,869
    
    
    $
    14,158Short-term investments
    
    
    15,891
    
    
    
    10,979Accounts receivable, net
    
    
    7,533
    
    
    
    8,673Accounts receivable from affiliates, net
    
    
    15
    
    
    
    15Inventories
    
    
    10,701
    
    
    
    7,866Other current assets
    
    
    661
    
    
    
    477Total current assets
    
    
    43,670
    
    
    
    42,168Property and equipment, net
    
    
    2,050
    
    
    
    2,394Other assets, net
    
    
    133
    
    
    
    125Goodwill and intangible assets
    
    
    5,252
    
    
    
    5,407$
    51,105
    
    
    $
    50,094LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,172
    
    
    $
    2,308Accounts payable to affiliates
    
    
    885
    
    
    
    1,279Accrued warranty
    
    
    4,503
    
    
    
    4,488Accrued compensation
    
    
    1,624
    
    
    
    1,370Restructuring liabilities, current
    
    
    173
    
    
    
    274Other current liabilities
    
    
    786
    
    
    
    752Total current liabilities
    
    
    12,143
    
    
    
    10,471Other long-term liabilities
    
    
    500
    
    
    
    559Total liabilities
    
    
    12,643
    
    
    
    11,030Commitments and contingencies (Note 11)Stockholders equity:Common stock, $0.001 par value per
share; 100,000,000 shares authorized,
10,540,982 and 10,499,944 shares issued
and outstanding on March 31, 2005 and
December 31, 2004, respectively
    
    
    10
    
    
    
    10Additional paid-in capital
    
    
    304,885
    
    
    
    304,658Treasury stock, at cost, 39,150 shares
    
    
    (79
    )
    
    
    (79
    )Accumulated other comprehensive loss
    
    
    (12
    )
    
    
    (30
    )Accumulated deficit
    
    
    (266,342
    )
    
    
    (265,495
    )Total stockholders equity
    
    
    38,462
    
    
    
    39,064$
    51,105
    
    
    $
    50,094
   (1)
    
    Derived from the Companys audited financial statements as of December 31, 2004 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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ENDWAVE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
 (unaudited)
 Three months endedMarch 31,2005
    
    
    2004Revenues:Product revenues ($10 and $0 from affiliate, respectively)
    
    $
    8,972
    
    
    $
    6,495Development fees
    
    
    128
    
    
    
    122Total revenues
    
    
    9,100
    
    
    
    6,617Costs and expenses:Cost of product revenues ($1and $0 related to revenues from
affiliate, respectively)
    
    
    6,175
    
    
    
    3,971Cost of product revenues, amortization of intangible assets
    
    
    113
    
    
    
    Research and development
    
    
    1,492
    
    
    
    974Selling, general and administrative
    
    
    2,274
    
    
    
    1,829Amortization of intangible assets
    
    
    62
    
    
    
    Restructuring charges, net
    
    
    
    
    
    
    2,899Recovery on building sublease
    
    
    
    
    
    
    (359
    )Amortization of deferred stock compensation*
    
    
    
    
    
    
    119Total costs and expenses
    
    
    10,116
    
    
    
    9,433Loss from operations
    
    
    (1,016
    )
    
    
    (2,816
    )Interest and other income, net
    
    
    169
    
    
    
    637Net loss
    
    $
    (847
    )
    
    $
    (2,179
    )Basic and diluted net loss per share
    
    $
    (0.08
    )
    
    $
    (0.23
    )Shares used in computing basic and diluted net loss per share
    
    
    10,518,656
    
    
    
    9,472,107* Amortization of deferred stock compensation:Cost of product revenues
    
    $
    
    
    
    $
    64Research and development
    
    
    
    
    
    
    25Selling, general and administrative
    
    
    
    
    
    
    30$
    
    
    
    $
    119
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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ENDWAVE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three months endedMarch 31,2005
    
    
    2004Operating activities:Net loss
    
    $
    (847
    )
    
    $
    (2,179
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    391
    
    
    
    419Amortization of intangible assets
    
    
    175
    
    
    
    Amortization of deferred stock compensation
    
    
    
    
    
    
    119Gain on the sale of land and equipment
    
    
    (38
    )
    
    
    (474
    )Recovery on building sublease
    
    
    
    
    
    
    (359
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,140
    
    
    
    301Inventories
    
    
    (2,835
    )
    
    
    (1,004
    )Other assets
    
    
    (192
    )
    
    
    175Accounts payable, net
    
    
    1,470
    
    
    
    (845
    )Accrued warranty
    
    
    15
    
    
    
    (109
    )Accrued compensation and other current and long-term liabilities
    
    
    166
    
    
    
    (289
    )Net cash used in operating activities
    
    
    (555
    )
    
    
    (4,245
    )Investing activities:Cash paid in business combination
    
    
    (20
    )
    
    
    Purchases of property and equipment
    
    
    (47
    )
    
    
    (6
    )Proceeds on sales of property and equipment
    
    
    
    
    
    
    721Purchases of short term investments
    
    
    (10,412
    )
    
    
    (8,508
    )Proceeds on maturities of short term investments
    
    
    5,518
    
    
    
    9,366Net cash provided by (used in) investing activities
    
    
    (4,961
    )
    
    
    1,573Financing activities:Payments on notes payable
    
    
    
    
    
    
    (127
    )Decrease in restricted cash
    
    
    
    
    
    
    127Proceeds from exercises of stock options
    
    
    227
    
    
    
    445Net cash provided by financing activities
    
    
    227
    
    
    
    445Net change in cash and cash equivalents
    
    
    (5,289
    )
    
    
    (2,227
    )Cash and cash equivalents at beginning of period
    
    
    14,158
    
    
    
    13,408Cash and cash equivalents at end of period
    
    $
    8,869
    
    
    $
    11,181Supplemental cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    9
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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ENDWAVE CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Business and Basis of Presentation Endwave Corporation and its wholly-owned subsidiary, Endwave Defense Systems Incorporated
(EDSI), formerly JCA Technology, (together referred to as Endwave or the Company), design,
manufacture and market radio frequency (RF) modules that enable the transmission, reception and
processing of high frequency signals in telecommunication networks, defense electronics and
homeland security systems. The Companys RF modules are typically used in high-frequency
applications and include integrated transceivers, amplifiers, synthesizers, oscillators, up and
down converters, frequency multipliers and microwave switch arrays. The accompanying unaudited condensed consolidated financial statements of Endwave have been
prepared in conformity with accounting principles generally accepted in the United States of
America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not contain all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In the opinion of
management, the information contained herein reflects all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of the results of the interim
periods presented. Operating results for the periods presented are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005. These condensed
consolidated financial statements should be read in conjunction with the Companys audited
consolidated financial statements for the year ended December 31, 2004. Certain prior period
financial statement amounts have been reclassified to conform to the current periods presentation.
These reclassifications had no impact on previously reported total assets, stockholders equity or
net losses. 2. Warranty The warranty periods for the Companys products are between one and two years from date of
shipment. The Company provides for estimated warranty expense at the time of shipment. While the
Company engages in extensive product quality programs and processes, including actively monitoring
and evaluating the quality of component suppliers, its warranty obligation is affected by product
failure rates, material usage, and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage, or service delivery costs differ from the
estimates, revisions to the estimated warranty accrual and related costs may be required. In March 2005, the Company entered into a settlement and release agreement with Northrop
Grumman Space & Mission Systems Corp. to settle all matters related to direct and indirect costs
associated with a degraded semiconductor component originally provided by their foundry. Northrop
Grumman Space & Missions Systems Corp. reimbursed the Companys customer for indirect costs
associated with a recall of the product incorporating the degraded semiconductor component. Under
the settlement and release agreement, the Company obtained the right to make a final purchase of
additional wafers at preferable pricing, agreed to pay $300,000 for final reimbursement of such
indirect costs, and assumed sole responsibility for any future product failures attributable to the
semiconductor component. As of March 31, 2005 the $300,000 settlement fee had not been paid and
the related warranty accrual had not been relieved. Changes in the Companys product warranty liability during the period ended March 31, 2005 and
2004 are as follows: 2005
    
    
    2004(in thousands)Balance at January 1
    
    $
    4,488
    
    
    $
    5,835Warranties accrued
    
    
    49
    
    
    
    Warranties settled or reversed
    
    
    (34
    )
    
    
    (109
    )Balance at March 31
    
    $
    4,503
    
    
    $
    5,726
 6




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3. Stock-Based Compensation The Company has elected to use the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employee (APB 25), as permitted by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123),
subsequently amended by Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure to account for stock-based awards issued to
its employees under its stock option plans and stock purchase plans. Deferred stock compensation
is amortized using the graded vesting method over the vesting period of the related options,
generally four years. The Company accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS 123, Emerging Issues Task Force Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, and Financial Accounting Standards Board Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans. For purposes of pro forma disclosures, the Company estimates the fair value of its stock-based
awards to employees using a Black-Scholes option-pricing model. Following is the pro forma effect on net loss and net loss per share for all periods presented
had the Company applied SFAS 123s fair value method of accounting for stock-based awards issued to
its employees. Three months endedMarch 31,2005
    
    
    2004(in thousands)Net loss, as reported
    
    $
    (847
    )
    
    $
    (2,179
    )Add: Stock-based employee compensation expense included in reported net loss
    
    
    
    
    
    
    119Deduct: Stock-based employee compensation expense determined under the fair
value based method for all awards
    
    
    (979
    )
    
    
    (677
    )Net loss, pro forma
    
    $
    (1,826
    )
    
    $
    (2,737
    )Basic and diluted net loss per share, as reported
    
    $
    (0.08
    )
    
    $
    (0.23
    )Basic and diluted net loss per share, pro forma
    
    $
    (0.17
    )
    
    $
    (0.29
    )
 4. Goodwill and Other Intangible Assets Goodwill At December 31, 2004, the Company had goodwill of $1,546,000 associated with the purchase of
EDSI. During the first quarter of 2005, the Company incurred an additional liability associated
with the purchase of EDSI and increased the goodwill balance by $20,000. Intangible Assets The components of intangible assets as of March 31, 2005 are as follows (in thousands): Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountDeveloped technology
    
    $
    2,250
    
    
    $
    (300
    )
    
    $
    1,950Tradename
    
    
    1,060
    
    
    
    
    
    
    
    1,060Customer relationships
    
    
    780
    
    
    
    (104
    )
    
    
    676Customer backlog
    
    
    140
    
    
    
    (140
    )
    
    
    Intangible assets
    
    $
    4,230
    
    
    $
    (544
    )
    
    $
    3,686
 7




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The identifiable intangible assets are subject to amortization and have approximate original
estimated weighted-average useful lives as follows: developed technology  five years, customer
backlog  six months and customer relationships  five years. The tradename has a gross carrying value of $1.1 million and is not subject to amortization
and will be evaluated for impairment at least annually or more frequently if events and changes in
circumstances suggest that the carrying amount may not be recoverable. The customer backlog was
fully amortized at March 31, 2005. The amortization of the identifiable intangible assets was
$175,000 during the first quarter of 2005. The future amortization of the identifiable intangible
assets is as follows (in thousands): Years Ending December 312005
    
    $
    4542006
    
    
    6062007
    
    
    6062008
    
    
    6062009
    
    
    354$
    2,626
 5. Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or
market and are comprised of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    9,832
    
    
    $
    7,139Work in process
    
    
    300
    
    
    
    432Finished goods
    
    
    569
    
    
    
    295$
    10,701
    
    
    $
    7,866
 6. Restructuring Charges, Net During the third quarter of 2004, in connection with the acquisition of EDSI, the Company
recorded a charge for restructuring of $431,000 (the Third Quarter 2004 Plan). The charge was
included as part of the purchase price allocation in accordance with EITF 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination. The Company has terminated a total
of 39 employees, in order to eliminate duplicative activities and to reduce the cost structure of
the combined company. These terminations primarily affected the manufacturing and operations group.
The charge was for the related severance, benefits, payroll taxes and other associated costs. The
remaining obligations as of March 31, 2005 were $92,000. Third Quarter 2004 Plan
    
    Severance Benefits(In thousands)Accrual at December 31, 2004
    
    $
    193Cash payments
    
    
    (101
    )Accrual at March 31, 2005
    
    $
    92
 Effective January 2004, the Company executed several agreements related to the leasing
arrangements for its Sunnyvale headquarters. Due to declining commercial real estate lease rates,
the original lease executed in August 2001 was at an above market rate, and would have expired in
July 2006. This lease was cancelled, effective January 2004 and the Company exited the property.
In consideration for the cancellation, the Company paid the landlord a settlement fee of
approximately $3.0 million resulting in a net lease termination expense of $2.9 million. The
Company also entered into a new lease for 16,000 square feet in Sunnyvale, California at a lower,
at-market rate. The new lease will expire in August 2006. 8




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7. Recovery on Building Sublease During the first quarter of 2003, the Company subleased 12,700 square feet of its Sunnyvale,
California headquarters building to an unrelated third party. The rental income for the lease
period was less than the rental expense that would be incurred, and therefore a loss at sublease
inception of $662,000 was incurred. During the first quarter of 2004, $359,000 of this loss was
reversed as the sublease was terminated prior to its expiration date. 8. Net Loss Per Share Basic net loss per share is computed by dividing the net loss for the three months ended March
31, 2005 and 2004, by the weighted average number of shares of common stock outstanding during the
period. Options to purchase 1,808,420 and 1,588,360 shares of common stock were outstanding at
March 31, 2005 and December 31, 2004, respectively, but were not included in the computation of
diluted net loss per share as the effect would be anti-dilutive. 9. Comprehensive Income (Loss) Comprehensive income (loss) generally represents all changes in stockholders equity except
those resulting from investments or contributions by stockholders. The Companys unrealized gains
on available-for-sale securities represent the component of comprehensive income (loss) that were
excluded from the net loss and were $18,000 and $3,000 for the three months ended March 31, 2005
and 2004. Total comprehensive loss for the three months ended March 31, 2005 and 2004 was $829,000
and $2,176,000, respectively. 10. Segment Disclosures The Company operates in a single segment. The Companys product sales by geographic location
for the three months ended March 31, 2005 and 2004 were as follows (in thousands and as a
percentage of total revenues): Three months ended March 31,2005
    
    
    2004United States
    
    $
    1,607
    
    
    
    17.7
    %
    
    $
    1,451
    
    
    
    21.9
    %Finland
    
    
    5,455
    
    
    
    59.9
    %
    
    
    3,164
    
    
    
    47.8
    %Italy
    
    
    1,010
    
    
    
    11.1
    %
    
    
    728
    
    
    
    11.0
    %Other
    
    
    1,028
    
    
    
    11.3
    %
    
    
    1,274
    
    
    
    19.3
    %Total
    
    $
    9,100
    
    
    
    100.0
    %
    
    $
    6,617
    
    
    
    100.0
    %
 For the three months ended March 31, 2005, Nokia and Siemens accounted for 59% and 11% of
total revenues listed above, respectively. For the three months ended March 31, 2004, Nokia,
Stratex Networks and Siemens accounted for 48%, 13% and 11% of total revenues listed above,
respectively. No other customer accounted for more than 10% of the Companys total revenues. 11. Commitments and Contingencies From time to time, the Company may be subject to legal proceedings and claims in the ordinary
course of business. These claims, even if not meritorious, could result in the expenditure of
significant financial and other resources. The Company is not currently aware of any legal
proceedings or claims, and management does not believe that the Company is subject to other claims
that would constitute material contingencies. 12. Related Party Transactions The Company maintains a supply agreement and a technology services agreement with Northrop
Grumman Space & Mission Systems Corp., which is a principal stockholder of Endwave. The supply
agreement specifies volume and price commitments, as well as a description of a consigned inventory
arrangement. Under this agreement, the Company purchased inventory of $1.4 million and $685,000
during the first quarter of 2005 and 9




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2004. The $685,000 of charges to costs of product revenues during the first quarter of 2004
included the reversal of a $793,000 liability that was settled during the quarter. The Company also sells various products and services under purchase orders and agreements to
Northrop Grumman Space & Mission Systems Corp., and recognized revenues of $10,000 and $0 for the
first quarter of 2005 and 2004, respectively. In the quarter ended March 31, 2005, the Company
incurred costs related to this revenue of approximately $1,000. At December 31, 2004, the Company had accounts receivable of $15,000 and accounts payable of
$1.3 million, related to its supplier and customer relationships with Northrop Grumman Space &
Mission Systems Corp., respectively. At March 31, 2005, the Company had accounts receivable of $15,000 and accounts payable of
$885,000, related to its supplier and customer relationships with Northrop Grumman Space & Mission
Systems Corp. 13. Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 151, Inventory Costs  An Amendment of ARB No. 43, Chapter 4
(SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Among other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight and re-handling costs must be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal as stated in
ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is
effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the
Company in the first quarter of 2006, beginning on January 1, 2006. The Company is currently
evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of
operations and financial condition but does not expect SFAS 151 to have a material financial
statement impact. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets  An
Amendment of APB Opinion No. 29, (SFAS 153). SFAS 153 eliminates the exception from fair value
measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Non-monetary Transactions, and replaces it with the exception for
exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange
has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning
after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal
2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the
adoption of SFAS 153 will have on its consolidated results of operations and financial condition
but does not expect it to have a material financial statement impact. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123R), which requires the measurement of all share-based
payments to employees, including grants of stock options, using a fair-value-based method and the
recording of such expense in the consolidated statements of operations. The accounting provisions
of SFAS 123R were originally effective for all reporting periods beginning after June 15, 2005. The
pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. See Stock-Based Compensation above for the pro forma net loss
and net loss per share amounts, for fiscal 2002 through fiscal 2004, as if the Company had used a
fair-value-based method similar to the methods required under SFAS 123R to measure compensation
expense for employee stock incentive awards. Although the Company has not yet determined whether
the adoption of SFAS 123R will result in amounts that are similar to the current pro forma
disclosures under SFAS 123, it is evaluating the requirements under SFAS 123R and expects the
adoption to have a significant adverse impact on the Companys consolidated statements of
operations and net loss per share. In April 2005, the Securities and Exchange Commission approved a new rule that delays the
effective date of SFAS 123R to the first annual reporting period beginning after June 15, 2005.
SFAS123R will be effective for the Company beginning with the first quarter of 2006. 10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the condensed
consolidated financial statements, related notes and Risk Factors section included elsewhere in
this report on Form 10-Q, as well as the information contained under Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of Operations and our consolidated
financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended
December 31, 2004. In addition to historical consolidated financial information, this discussion
contains forward-looking statements that involve known and unknown risks and uncertainties,
including statements regarding our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this report are based on information available
to us on the date hereof, and we assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from those discussed in the forward-looking
statements. You are cautioned not to place undue reliance on these forward-looking statements. In
the past, our operating results have fluctuated and are likely to continue to fluctuate in the
future. Overview Revenues for the first quarter of 2005 of $9.1 million were up $2.5 million, or 38%, from the
first quarter of 2004, and were down $2.3 million, or 20%, from the fourth quarter of 2004.
Revenues for the first quarter of 2005 were higher than the first quarter of 2004 due to the full
integration of the Endwave Defense Systems Incorporated (EDSI) acquisition and increased demand
for our products in both the telecommunications networks and defense electronics business.
Revenues for the first quarter of 2005 were lower than revenues for the fourth quarter of 2004
primarily due to the seasonality in the telecommunications networks market. The fourth quarter has
historically been our strongest quarter as our customers expend their remaining capital budgets for
the year, a trend that continued in the fourth quarter of 2004. We
continue to seek growth through furthering our position as the leading supplier of high-frequency
RF modules, continued diversification into the defense electronics and homeland security markets,
and strategic acquisitions. During the first quarter of 2005 we took a number of steps in line with our growth strategy:  o
    In March 2005, we filed a registration statement on Form S-3 with the
Securities and Exchange Commission to register for sale 5,000,000 shares of common
stock, plus up to 750,000 shares pursuant to an overallotment option granted to the
underwriters. Of these shares, we are offering 2,000,000. We intend to use the
proceeds from the offering of these 2,000,000 shares primarily for working capital
and general corporate purposes and to acquire complementary products, technologies
or businesses. Northrop Grumman Space & Mission Systems Corp. is offering the
remaining 3,000,000 registered shares.o

    In January 2005, we announced the formation of EDSI to provide focus on
the defense electronics and homeland security markets. The division consists of
JCA Technology, which we purchased in July 2004, and our legacy defense products
business. We plan to continue to use the JCA brand name and apply our expertise to
surrounding components as a means to provide more highly integrated, value-added
subsystem solutions for the defense and homeland security markets.o
    During 2005, we will continue to manufacture products based on our customers
designs at the location of our offshore partner in Southeast Asia. Accordingly,
these products have a slightly lower gross margin than our internal designs, which
utilize our proprietary technology. We believe our product mix will shift further
toward these products during the remainder of 2005 and as a result, our gross
margin may be negatively impacted. We believe, however, that this will allow us to
increase market share, establish relationships with new customers, increase
revenues, 11




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and absorb some of our fixed costs. We would not expect to incur other significant
operating costs associated with this model unless we elect to redesign the product. Results of Operations Three months ended March 31, 2005 and 2004 The following table sets forth certain statement of operations data as a percentage of total
revenues for the periods indicated: Three Months EndedMarch 31,2005
    
    
    2004Total revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of product revenues
    
    
    67.9
    
    
    
    60.0Cost of product revenues, amortization of intangible assets
    
    
    1.2
    
    
    
    Research and development
    
    
    16.4
    
    
    
    14.7Selling, general and administrative
    
    
    25.0
    
    
    
    27.6Amortization of intangible assets
    
    
    0.7
    
    
    
    Restructuring charges, net
    
    
    
    
    
    
    43.8Amortization of deferred stock compensation
    
    
    
    
    
    
    1.8Recovery on building sublease
    
    
    
    
    
    
    (5.4
    )Total costs and expenses
    
    
    111.2
    
    
    
    142.5Loss from operations
    
    
    (11.2
    )
    
    
    (42.5
    )Interest and other income, net
    
    
    1.9
    
    
    
    9.6Net loss
    
    
    (9.3
    )%
    
    
    (32.9
    )%
 Revenues Total revenues in the first quarter of 2005 were $9.1 million, a 38% increase from $6.6
million for the same period in 2004 and were comprised of product revenues and development fees.
The first quarter of 2005 revenues were slightly higher than anticipated due to increased sales to
our larger customers and the integration of EDSI. Product revenues were $9.0 million in the first quarter of 2005, a 38% increase from $6.5
million for the same period in 2005. The increase reflects stronger overall sales from our larger
customers as noted above. We generate development fees by developing product prototypes and custom products pursuant to
development agreements that provide for payment of a portion of our research and development or
other expenses. Development fees were $128,000 for the three months ended March 31, 2005, as
compared to $122,000 in the same period of 2004. The increase in development fees is attributable
to increased development of custom designed products for new and existing customers. We expect to
generate future product revenues as a result of these development agreements. We do not foresee
development fees to be a significant component of our overall revenues in the near term. Costs and Expenses Cost of product revenues.Cost of product revenues consists primarily of: costs of
direct materials and labor utilized to assemble and test our products; equipment depreciation;
costs associated with procurement, production control, quality assurance, and manufacturing
engineering; costs associated with maintaining our manufacturing facilities; fees paid to our
offshore manufacturing partner; and costs associated with warranty returns partially offset by the
benefit of usage of materials that were previously written off. Cost of product revenues was $6.2 million for the three months ended March 31, 2005, a 56%
increase from $4.0 million for the same period in 2004. As a percentage of revenues, cost of
product revenues increased to 67.9% in the quarter ended March 31, 2005, from 60.0% for the same
period in 2004. The increase in cost of product revenues as a percentage of revenues is partially
attributable to the first quarter of 2004 reversal of a $793,000 charge to cost of product revenues
for a liability that was settled. There were no similar reversals during the first quarter of
2005. This was partially offset by a product mix favoring our higher margin products during the
first quarter of 2005 and the benefit of increased absorption of our overhead costs due to
increased overall revenue 12




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during the quarter. The cost of product revenues was also favorably impacted by the
utilization of previously reserved inventory amounting to approximately $195,000 during the first
quarter of 2005 as compared to $176,000 during the first quarter of 2004. We expect further
incremental improvements in cost of product revenues as a result of our continued efforts at cost
reduction, introduction of new designs and technology, the benefit of increasing revenues to our
overhead absorption and further strengthening of our offshore manufacturing model. These
incremental improvements will be offset in some part by increased production of products based on
our customers designs and continued pricing pressure. Research and development expenses.Research and development expenses were $1.5
million for the three months ended March 31, 2005, a 53% increase from $1.0 million for the same
period in 2004. As a percentage of revenues, research and development expenses increased to 16.4%
in the quarter ended March 31, 2005, from 14.7% for the same period in 2004. The increase in
dollars was primarily attributable to $367,000 incurred by added personnel from EDSI, which we
acquired in the third quarter of 2004, and increased project and consulting expenses for
development programs of $89,000. During the remainder of 2005, we expect a moderate increase to research and development
expenses as we accelerate certain development programs and begin new ones. This increase could be
more significant if we have an unexpected increase in new customer-specific development projects
for which we could receive some development fees. Selling, general and administrative expenses.Selling, general and
administrative expenses consist primarily of salaries and related expenses for executive, sales,
marketing, finance, accounting, information technology, and human resources personnel, professional
fees, facilities costs and promotional activities. Selling, general and administrative expenses
were $2.3 million for the three months ended March 31, 2005, a 24% increase from $1.8 million for
the same period in 2004. As a percentage of revenues, selling, general and administrative expenses
decreased to 25.0% in the quarter ended March 31, 2005, from 27.6% for the same period in 2004.
The increase in dollars was primarily attributable to increased personnel related expenses of
$404,000 incurred by added personnel from EDSI, which we acquired in the third quarter of 2004 and
added administrative personnel. During the remainder of 2005, we anticipate a moderate increase in selling, general and
administrative expenses due to the implementation of the Sarbanes-Oxley requirements. Amortization of intangible assets.As part of the acquisition of EDSI on July
21, 2004 we acquired $4.2 million of identifiable intangible assets, including $2.3 million of
developed technology, $1.1 million for the tradename, $780,000 for customer relationships and
$140,000 for customer backlog. These assets are subject to amortization and have approximate
original estimated weighted-average useful lives as follows: developed technology  5 years,
customer backlog  6 months, customer relationships  5 years. The tradename intangible asset was
determined to have an indefinite useful life and is therefore not subject to amortization and will
be evaluated for impairment at least annually or more frequently if events and change in
circumstances suggest that the carrying amount may not be recoverable. The amortization associated with the developed technology is a charge to cost of product
revenues. During the first quarter of 2005, $113,000 of amortization of developed technology was
charged to cost of product revenues. The amortization associated with the customer relationships
and customer backlog is a charge to operating expenses. During the first quarter of 2005, $62,000
of amortization of customer relationships and customer backlog was charged to operating expenses.
There were no such charges in the first quarter of 2004. Restructuring charges, net.During the first quarter of 2004, we incurred a net
lease termination fee of $2.9 million related to the termination of the lease agreement for our
corporate headquarters in Sunnyvale, California. During the quarter we finalized the renegotiation
of the lease, which resulted in a $3.0 million cash payment to our landlord in exchange for
substantially reduced rent in a new location. This settlement was partially offset by a $101,000
benefit due to the reversal of the deferred rent liability related to the previous lease agreement.
There were no such charges during the first quarter of 2005. Amortization of deferred stock compensation. Deferred stock compensation charges
consist primarily of charges related to the difference between deemed fair market values for
financial reporting purposes on the date of employee option grants and the option price for option
awards prior to our initial public offering, as well as expenses 13




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attributable to the acceleration of options. During the first quarter of 2004, amortization of
deferred stock compensation and other option-related expenses were $119,000. There were no such
charges during the first quarter of 2005. Recovery on building sublease.During the first quarter of 2003, we recorded a
charge of $662,000 associated with the sublease of our Sunnyvale, California headquarter building
for the excess of the remaining lease obligations over the anticipated sublease income. During the
first quarter of 2004, $359,000 of this loss was reversed as the sublease was terminated prior to
expiration date, as a part of lease termination noted above. Interest and other income, net.Interest and other income, net consists primarily of
interest income earned on our cash and cash equivalents and short-term investments and gains and
losses on the sale of fixed assets, partially offset by interest expense on notes payable and
capital equipment leases. Interest and other income, net was $169,000 for the three months ended
March 31, 2005, a decrease from $637,000 for the same period in 2004. As a percentage of revenues,
interest and other income, net decreased to 1.9% in the quarter ended March 31, 2005, from 9.6% for
the same period in 2004. The decrease was due primarily to the first quarter of 2004 sale of fixed
assets and assets held-for-sale, which resulted in a net gain of $473,000. During the first
quarter of 2005, the $169,000 was primarily due to interest income earned on investments held
during the quarter. Liquidity and Capital Resources We had cash, cash equivalents and short-term investments at March 31, 2005 and December 31,
2004 of $24.8 million and $25.1 million, respectively. Our principal source of liquidity as of March 31, 2005, consisted of approximately $24.8
million in cash, cash equivalents and short-term investments. During the first quarter of 2005, we
consumed $555,000 of cash in operating activities, as compared to $4.2 million in the same period
of 2004. The use of $555,000 of cash in the first quarter of 2005 was primarily due to the net loss
adjusted for non-cash items of $319,000 and an increase in inventory of $2.8 million partially
offset by a $1.1 million decrease in accounts receivable and a $1.5 million increase to accounts
payable. The use of $4.2 million in the first quarter of 2004 was due to a $3.0 million lease
termination fee paid out during the quarter that was included in the $2.5 million net loss adjusted
for non-cash items. Additionally, cash decreased due to a $1.0 million increase to inventory and a
$1.2 million decrease to accounts payable, accrued warranty and other current and long-term
liabilities. These decreases to cash were partially offset by a $300,000 decrease to accounts
receivable and a $175,000 decrease to other assets. Investing activities consumed cash of $5.0 million in the first quarter of 2005 as compared to
providing cash of $1.6 million in the first quarter of 2004. The decrease in the cash provided by
investing activities was primarily due to a net increase of short-term investments of $4.9 million
during the first quarter of 2005. Financing activities provided cash of $227,000 in the first quarter of 2005 as compared to
$445,000 in the first quarter of 2004. The $227,000 provided by financing activities in the first
quarter of 2005 was due to proceeds from the exercise of employee stock options. The $445,000
provided by financing activities in the first quarter of 2004 was due to proceeds from the exercise
of employee stock options. We believe that our existing cash and investment balances and cash provided by operating
activities will be sufficient to meet our working capital and capital expenditure requirements for
the next 12 months and the foreseeable future thereafter. During the next 14 months, we expect to
incur approximately $2.0 million in capital expenditures for manufacturing and development
equipment in order to support our projected growing business. Our cash needs are dependent upon
our rate of revenue growth, the level of our marketing and sales activities and expansion of our
customer base, the timing and extent of spending to support research and development efforts,
expansion into new markets and the timing of introductions of new products. Our primary use of
additional cash, beyond that needed for our operations and capital needs, is to support our
required strategy. We intend to make acquisitions of companies and product lines that we believe
will further strengthen our competitive position and revenue growth. We have no planned
acquisitions at this time, but continue to evaluate potentially attractive acquisition candidates
as they become known to us. Future acquisitions may require us to use cash to pay for the
businesses or product lines we acquire, the costs associated with integrating such business or
businesses with our own, or for additional working capital expenditure needs are greater than we
estimate, our revenues are lower than 14




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we estimate, or we engage in future acquisitions requiring additional cash, we may be required to
raise additional capital. Additional capital may not be available at all, or may only be available
on terms unfavorable to us. With the exception of operating leases, we have not entered into any
off-balance sheet financing arrangements, we have not established or invested in any variable
interest entities, we do not have any unconditional purchase obligations, nor do we have
non-cancelable commitments for capital expenditures. We have not guaranteed the debt or obligations
of other entities or entered into options on non-financial assets. The following table summarizes our future payment obligations for operating leases (excluding
interest): Years Ending December 31,
    
    Operating Leases(In thousands)2005
    
    $
    5292006
    
    
    3452007
    
    
    2002008
    
    
    2062009
    
    
    105Total minimum payments required
    
    $
    1,385
 Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 151, Inventory Costs  An Amendment of ARB No. 43, Chapter 4
(SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Among other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight and re-handling costs must be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal as stated in
ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to
the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is
effective for fiscal years beginning after June 15, 2005 and is required to be adopted by us
in the first quarter of 2006, beginning on January 1, 2006. We are currently
evaluating the effect that the adoption of SFAS 151 will have on our consolidated results of
operations and financial condition but do not expect SFAS 151 to have a material financial
statement impact. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets  An
Amendment of APB Opinion No. 29, (SFAS 153). SFAS 153 eliminates the exception from fair value
measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Non-monetary Transactions, and replaces it with the exception for
exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange
has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning
after June 15, 2005 and is required to be adopted by us in the first quarter of fiscal
2006, beginning on January 1, 2006. We are currently evaluating the effect that the
adoption of SFAS 153 will have on our consolidated results of operations and financial condition
but do not expect it to have a material financial statement impact. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment (SFAS 123R), which requires the measurement of all share-based
payments to employees, including grants of stock options, using a fair-value-based method and the
recording of such expense in the consolidated statements of operations. The accounting provisions
of SFAS 123R were originally effective for all reporting periods beginning after June 15, 2005. The
pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. See Stock-Based Compensation above for the pro forma net loss
and net loss per share amounts, for fiscal 2002 through fiscal 2004, as if we had used a
fair-value-based method similar to the methods required under SFAS 123R to measure compensation
expense for employee stock incentive awards. Although we have not yet determined whether
the adoption of SFAS 123R will result in amounts that are similar to the current pro forma
disclosures under SFAS 123, we are 15




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evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse
impact on our consolidated statements of operations and net loss per share. In April 2005, the Securities and Exchange Commission approved a new rule that delays the
effective date of SFAS 123R to the first annual reporting period beginning after June 15, 2005.
SFAS 123R will be effective for us beginning with the first quarter of 2006. RISK FACTORS You should consider carefully the following risk factors as well as other information in this
report and the documents incorporated by reference herein or therein, before investing any of our
securities. If any of the following risks actually occur, our business, operating results and
financial condition could be adversely affected. This could cause the market price of our common
stock to decline, and you may lose all or part of your investment. Risks Relating to Our Business We have had a history of losses and may not be profitable in the future. We have had a history of losses. We had a net loss of $847,000 in the first quarter of 2005.
We also had net losses of $31.0 million, $7.9 million and $4.4 million for the years ended December
31, 2002, 2003 and 2004 respectively. There is no guarantee that we will achieve or maintain
profitability in the future. We depend on a small number of key customers in the telecommunications industry for a large portion
of our revenues. If we lose any of our major customers, particularly Nokia, or there is any
material reduction in orders for our products from any of these customers, our business, financial
condition and results of operations would be adversely affected. We depend, and expect to continue to depend, on a relatively small number of
telecommunications network original equipment manufacturers and systems integrators, collectively
referred to in this report as telecom OEMs, for a large portion of our revenues. The loss of any of
our major customers, particularly Nokia, or any material reduction in orders from any of such
customers would have a material adverse effect on our business, financial condition and results of
operations. In 2002, 2003, 2004, and the first quarter of 2005 revenues from Nokia accounted for
71%, 59%, 55% and 59% of our total revenues, respectively. Revenues from Siemens accounted for 11%
of our total revenues for the first quarter of 2005. Revenues from Nera ASA accounted for 10% of
our total revenues for 2004. Revenues from Stratex Networks, Inc. accounted for 13% of our total
revenues for 2003. We had no other customers individually representing more than 10% of our total
revenues for 2002, 2003, 2004 or the first quarter of 2005. Most of our customer agreements are in
the form of purchase orders and are not pursuant to a formal agreement. As a result, none of our
major customers is under any long-term commitment to purchase products from us, and there is no
guarantee that any of them will continue to do business with us. We depend on the telecommunications industry for most of our revenues. If this industry suffers
another downturn or fails to grow as anticipated, our revenues could decrease and our profitability
could suffer. In addition, consolidation in this industry could result in delays or cancellations
of orders for our products, adversely impacting our results of operations. We depend, and expect to remain dependent, on the telecommunications industry for most of our
revenues. Revenues from all of our telecom OEM customers comprised 86% of our total revenues in
2004 and 80% of our total revenues in the first quarter of 2005. The telecommunications industry suffered a significant worldwide downturn beginning in 2000,
and has only recently begun to grow again. In connection with this downturn, there were worldwide
reductions in telecommunications network projects that resulted in the loss of some of our key
customers and reduced revenues from our remaining customers. We also were forced to undertake
significant cost reduction measures as a result. If 16




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similar downturns reoccur, or if the telecommunications industry fails to grow as we
anticipate, our revenues may remain flat or decrease. Significantly lower revenues would likely
force us to make provisions for excess inventory and abandoned or obsolete equipment and reduce our
operating expenses. To reduce our operating expenses, we could be required to reduce the size of
our workforce and consolidate facilities. We cannot guarantee that we would be able to reduce
operating expenses to a level commensurate with the lower revenues resulting from such an industry
downturn. The telecommunications industry has undergone significant consolidation in the past few years
and we expect that consolidation to continue. The acquisition of one of our major customers in this
market, or one of the communications service providers supplied by one of our major customers,
could result in delays or cancellations of orders of our products and, accordingly, delays or
reductions in our anticipated revenues and reduced profitability or increased net losses. Our future success depends in part on our ability to further penetrate into new markets, such as
defense electronics and homeland security, and we may be unable to do so. Historically, all or a large majority of our revenues have been attributable to sales of our
RF modules to telecom OEMs such as Nokia. Part of our growth strategy is to design and sell
high-frequency RF modules for and to OEMs and systems integrators in new markets, particularly
defense electronics and homeland security. To date, only a small percentage of our revenues has
been attributable to sales of RF modules to defense systems integrators. We have only recently
begun to design and sell products for the recently emerging homeland security market. The potential
size of this market is unclear and we cannot predict how the market will evolve. If increased
demand for high-frequency RF modules in the defense electronics and homeland security markets does
not materialize, we fail to secure new design wins in these markets or we are unable to design
readily manufacturable products for these new markets, our growth and revenues could be adversely
impacted, thereby decreasing our profitability or increasing our net losses. Our operating results fluctuate significantly based on seasonal factors in the telecommunications
network market. We typically recognize lower revenues in the first and third calendar quarters due to
seasonality in the telecommunications network market. Revenues attributable to telecom OEMs
typically contract in the first quarter due to delays in purchasing resulting from wireless
carriers budgeting processes. The third quarter is generally slow in our telecommunications
network market as many of our European telecom OEM customers shut down their factories for a
portion of the summer months. The fourth quarter historically has been our strongest quarter as the
wireless carriers expend their remaining capital budgets for the year. We expect these seasonal
fluctuations to continue as they pertain to our telecommunications network business. Because of the scarcity of some components and our dependence on single source suppliers for some
other components, we may be unable to obtain an adequate supply of components, or we may be
required to pay higher prices or to purchase components of lesser quality. We currently purchase a number of components, some from single source suppliers for which
alternative sources may not be readily available, including, but not limited to:  
    semiconductor devices;
    application-specific monolithic microwave integrated circuits;
    voltage-controlled oscillators;
    voltage regulators;
    lead-free surface mount components;
    high-frequency circuit boards;
    custom connectors;
    electromagnetic housings;
    yttrium iron garnet components; and
    magnetic components. 17




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Any delay or interruption in the supply of these or other components could impair our ability
to manufacture and deliver our products, harm our reputation and cause a reduction in our revenues.
In addition, any increase in the cost of the components that we use in our products could make our
products less competitive and lower our margins. Recently, we suffered from a shortage of various
components, including voltage-controlled oscillators and voltage regulators, which we estimate
reduced our revenues by approximately $1.0 million in each of the fourth quarter of 2004 and the
first quarter of 2005. We believe this shortage may further reduce or delay product revenues in
subsequent quarters of 2005. Our single source suppliers could enter into exclusive agreements with
or be acquired by one of our competitors, increase their prices, refuse to sell their products to
us, discontinue products or go out of business. Even to the extent alternative suppliers are
available to us, identifying them and entering into arrangements with them may be difficult and
time consuming, and they may not meet our quality standards. We may not be able to obtain
sufficient quantities of required components on the same or substantially the same terms. We rely heavily on a Thailand facility of HANA Microelectronics Co., Ltd., a contract manufacturer,
to produce our RF modules. If HANA is unable to produce these modules in sufficient quantities or
with adequate quality, or it chooses to terminate our manufacturing arrangement, we will be forced
to find an alternative manufacturer and may not be able to fulfill our production commitments to
our customers, which could cause sales to be delayed or lost and could harm our reputation. We outsource the assembly and testing of most of our products to a Thailand facility of HANA
Microelectronics Co., Ltd., or HANA, a contract manufacturer. We plan to continue this arrangement

as a key element of our operating strategy. If HANA does not provide us with high quality products
and services in a timely manner, or terminates its relationship with us, we may be unable to obtain
a satisfactory replacement to fulfill customer orders on a timely basis. In the event of an
interruption of supply from HANA, sales of our products could be delayed or lost and our reputation
could be harmed. Our manufacturing agreement with HANA currently expires in July 2005 but will
renew automatically for a one-year period unless either party notifies the other of its desire to
terminate the agreement at least 90 days prior to the expiration of the term. In addition, either
party may terminate the agreement without cause upon 120 days prior written notice to the other
party, and either party may terminate the agreement if the non-terminating party is in breach and
does not cure the breach within 30 days after notice of the breach is given by the terminating
party. There can be no guarantee that HANA will not seek to terminate its agreement with us. We rely on Velocium and other third-party semiconductor foundries to manufacture the semiconductors
contained in our products. The loss of our relationship with any of these foundries, particularly
Velocium, without adequate notice would adversely impact our ability to fill customer orders and
could damage our customer relationships. We design semiconductor devices. However, we do not own or operate a semiconductor fabrication
facility, or foundry, and rely on a limited number of third parties to produce these components.
Our primary semiconductor foundry is Velocium, a division of Northrop Grumman Space & Mission
Systems Corp., which is the holder of approximately 33.0% of our common stock, and a wholly-owned
subsidiary of Northrop Grumman Corporation. In this report, we refer to the Northrop Grumman Space
& Mission Systems Corp. foundry by its tradename, Velocium. Velocium produced over 85% of our
semiconductors in 2004. We also use other suppliers for some of our products. The loss of our
relationship with or our access to any of the semiconductor foundries we currently use,
particularly Velocium, and any resulting delay or reduction in the supply of semiconductor devices
to us, would severely impact our ability to fulfill customer orders and could damage our
relationships with our customers. Our current supply agreement with Velocium expires in December 2005. We may not be able to
negotiate an extension to this agreement on favorable terms, if at all. We also may not be
successful in forming alternative supply arrangements that provide us with a sufficient supply of
gallium arsenide devices. Because there is a limited number of semiconductor foundries that use the
particular process technologies we select for our products and have sufficient capacity to meet our
needs, using alternative or additional semiconductor foundries would require an extensive
qualification process that could prevent or delay product shipments and revenues. We estimate that
it may take up to six months to shift production of a given semiconductor circuit design to a new
foundry. 18




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Implementing our acquisition strategy could result in dilution to our stockholders and operating
difficulties leading to a decline in revenues and operating profit. One of our strategies is to grow through acquisitions. To that end, we have completed five
acquisitions since our initial public offering and intend to pursue attractive acquisitions in our
market as appropriate. The process of investigating, acquiring and integrating any business into
our business and operations is risky and may create unforeseen operating difficulties and
expenditures. The areas in which we may face difficulties include:  
    diversion of our management from the operation of our core business;
    assimilating the acquired operations and personnel;
    integrating information technology and reporting systems;
    retention of key personnel;
    retention of acquired customers; and
    implementation of controls, procedures and policies in the acquired business. For example, it took us longer to integrate JCA Technology into our operations at our Diamond
Springs facilities than we originally anticipated. Additionally, the JCA acquisition required us to
devote efforts to standardize the product design and manufacturing process to reduce dependence on
specific personnel. As a result of these difficulties, our ability to timely deliver our defense
electronics products to our customers was temporarily adversely affected. In addition to the factors set forth above, we may encounter other unforeseen problems with
acquisitions that we may not be able to overcome. Future acquisitions may require us to issue
shares of our stock or other securities that dilute our other stockholders, expend cash, incur
debt, assume liabilities, including contingent or unknown liabilities, or create additional
expenses related to write-offs or amortization of intangible assets with estimated useful lives,
any of which could materially adversely affect our revenues and our operating profits. Our products may contain component, manufacturing or design defects or may not meet our customers
performance criteria, which could cause us to incur significant repair expenses, harm our customer
relationships and industry reputation, and reduce our revenues and profitability. We have experienced manufacturing quality problems with our products in the past and may have
similar problems in the future. As a result of these problems, we have replaced components in some
products, or replaced the product, in accordance with our product warranties. Our product
warranties typically last one to two years. As a result of component, manufacturing or design
defects, we may be required to repair or replace a substantial number of products under our product
warranties, incurring significant expenses as a result. Further, our customers may discover latent
defects in our products that were not apparent when the warranty period expired. These defects may
cause us to incur significant repair or replacement expenses beyond the normal warranty period. In
addition, any component, manufacturing or design defect could cause us to lose customers or
revenues or damage our customer relationships and industry reputation. For example, some radios incorporating our transceivers that are manufactured and shipped by
one of our customers have experienced degraded performance after installation in the field. The
cause of the degradation was identified to be a faulty semiconductor component originally developed
and supplied by TRW Inc. that was incorporated in the transceiver. TRW was later acquired by
Northrop Grumman Corporation and renamed Northrop Grumman Space & Mission Systems Corp., and its
foundry is referred to by its tradename, Velocium. Pursuant to a settlement agreement between TRW
and us, we are responsible for the direct costs associated with the repair and replacement of the
degraded transceivers produced under our supply agreement with the customer. Northrop Grumman Space
& Mission Systems Corp., as successor to TRW, compensated our customer for the indirect costs
associated with the repair and replacement of the degraded radios and transceivers. These indirect
costs include the costs associated with removing and replacing the radios in the field as well as
removing and replacing the transceiver module in each returned radio. During 2001, we reserved $4.6
million for warranty charges to cover the actual repair of the transceivers containing these faulty
components, of which $1.2 million had been used through March 31, 2005. Under an agreement we entered into with Northrop Grumman Space & Mission Systems Corp. in
March 2005, we agreed to pay $300,000 to Northrop Grumman Space & Mission Systems Corp. as final
reimbursement for these indirect costs and to assume sole responsibility for any future product
failures attributable to the semiconductor component. We are in the process of designing a
replacement component, which will be fabricated by an alternate 19




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supplier that we believe will eliminate the degradation of performance in future production
units. We expect to complete the design and qualification of this replacement component by mid-2005
at a cost of approximately $120,000. We depend on our key personnel. Skilled personnel in our industry can be in short supply. If we are
unable to retain our current personnel or hire additional qualified personnel, our ability to
develop and successfully market our products would be harmed. We believe that our future success depends upon our ability to attract, integrate and retain
highly skilled managerial, research and development, manufacturing and sales and marketing
personnel. Skilled personnel in our industry can be in short supply. As a result, our employees are
highly sought after by competing companies and our ability to attract skilled personnel is limited.
To attract and retain qualified personnel, we may be required to grant large stock option or other
stock-based incentive awards, which may harm our operating results or be dilutive to our other
stockholders. We may also be required to pay significant base salaries and cash bonuses, which
could harm our operating results. Due to our relatively small number of employees and the limited number of individuals with the
skill set needed to work in our industry, we are particularly dependent on the continued employment
of our senior management team and other key personnel. If one or more members of our senior
management team or other key personnel were unable or unwilling to continue in their present
positions, these persons would be very difficult to replace, and our ability to conduct our
business successfully could be seriously harmed. We do not maintain key person life insurance
policies. Competitive conditions may require us to reduce prices in the future and, as a result, we may need
to reduce our costs in order to be profitable. Over the past year, we have reduced our prices by 10% to 15% in order to remain competitive
and we expect market conditions will cause us to reduce our prices in the future. In order to
reduce our per-unit cost of product revenues, we must continue to design and re-design products to
require lower cost materials, improve our manufacturing efficiencies and successfully move
production to low-cost, offshore locations. The combined effects of these actions may be
insufficient to achieve the cost reductions needed to be profitable. The length of our sales cycle requires us to invest substantial financial and technical resources
in a potential sale before we know whether the sale will occur. There is no guarantee that the sale
will ever occur and if we are unsuccessful in designing a high-frequency RF module for a particular
generation of a customers products, we may need to wait until the next generation of that product
to sell our products to that particular customer. Our products are highly technical and the sales cycle can be long. Our sales efforts involve a
collaborative and iterative process with our customers to determine their specific requirements
either in order to design an appropriate solution or to transfer efficiently the product to our
offshore contract manufacturer. Depending on the product, the sales cycle can take anywhere from 2
to 12 months, and we incur significant expenses as part of this process without any assurance of
resulting revenues. We generate revenues only if our product is selected for incorporation into a
customers system and that system is accepted in the marketplace. If our product is not selected,
or the customers development program is discontinued, we generally will not have an opportunity to
sell our product to that customer until that customer develops a new generation of its system.
There is no guarantee that our product will be selected for that new generation of its system. In
the past, we have had difficulty meeting some of our major customers stated volume and cost
requirements. The length of our product development and sales cycle makes us particularly
vulnerable to the loss of a significant customer or a significant reduction in orders by a customer
because we may be unable to quickly replace the lost or reduced sales. 20




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We may not be able to design our products as quickly as our customers require, which could cause us
to lose sales and may harm our reputation. Existing and potential customers typically demand that we design products for them under
difficult time constraints. In the current market environment, the need to respond quickly is
particularly important. If we are unable to commit the necessary resources to complete a project
for a potential customer within the requested timeframe, we may lose a potential sale. Our ability
to design products within the time constraints demanded by a customer will depend on the number of
product design professionals who are available to focus on that customers project and the
availability of professionals with the requisite level of expertise is limited. Each of our telecommunications network products is designed for a specific range of
frequencies. Because different national governments license different portions of the frequency
spectrum for the telecommunications network market, and because communications service providers
license specific frequencies as they become available, in order to remain competitive we must adapt
our products rapidly to use a wide range of different frequencies. This may require the design of
products at a number of different frequencies simultaneously. This design process can be difficult
and time consuming, could increase our costs and could cause delays in the delivery of products to
our customers, which may harm our reputation and delay or cause us to lose revenues. In our other markets, our customers have specific requirements that can be at the forefront of
technological development and therefore difficult and expensive to develop. If we are not able to
devote sufficient resources to these products, or we experience development difficulties or delays,
we could lose sales and damage our reputation with those customers. We may not be able to manufacture and deliver our products as quickly as our customers require,
which could cause us to lose sales and would harm our reputation. In each of the fourth quarter of 2004 and the first quarter of 2005, we have been unable to
manufacture products in the volume requested by our customers. In the future, we may not be able to
manufacture products and deliver them to our customers at the times and in the volumes they
require. Manufacturing delays and interruptions can occur for many reasons, including, but not
limited to:  
    the failure of a supplier to deliver needed components on a timely basis or with acceptable quality;
    lack of sufficient capacity;
    poor manufacturing yields;
    equipment failures;
    manufacturing personnel shortages;
    labor disputes;
    transportation disruptions;
    changes in import/export regulations;
    infrastructure failures at the facilities of our offshore contract manufacturer;
    natural disasters;
    acts of terrorism; and
    political instability. Manufacturing our products is complex. The yield, or percentage of products manufactured that
conform to required specifications, can decrease for many reasons, including materials containing
impurities, equipment not functioning in accordance with requirements or human error. If our yield
is lower than we expect, we may not be able to deliver products on time. For example, in the past,
we have experienced poor yields on the products produced by HANA that have prevented us from
delivering products on time and have resulted in lost sales. If we fail to manufacture and deliver
products in a timely fashion, our reputation may be harmed, we may jeopardize existing orders and
lose potential future sales, and we may be forced to pay penalties to our customers. As part of our strategy, we may expand our domestic manufacturing capacity beyond the level
required for our current sales in order to accommodate anticipated increases in our defense
electronics business. As a result, our domestic manufacturing facilities may be underutilized from
time to time. Conversely, if we do not maintain adequate manufacturing capacity to meet demand for
our defense electronic products, we may lose opportunities for additional sales. Any failure to
have sufficient manufacturing capacity to meet demand could cause us to lose revenues, thereby
reducing our profitability, or increasing our net losses, and could harm our reputation with
customers. 21




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Because we do not have long-term commitments from many of our customers, we must estimate customer
demand, and errors in our estimates could have negative effects on our inventory levels and
revenues. Our sales are generally made on the basis of formal agreements and purchase orders, which may
be later modified or canceled by the customer, rather than firm long-term purchase commitments. We
have historically been required to place firm orders for products and manufacturing equipment with
our suppliers up to six months prior to the anticipated delivery date and, on occasion, prior to
receiving an order for the product, based on our forecasts of customer demands. Our sales process
requires us to make multiple demand forecast assumptions, each of which may introduce error into
our estimates, causing excess inventory to accumulate or a lack of manufacturing capacity when
needed. If we overestimate customer demand, we may allocate resources to manufacturing products
that we may not be able to sell when we expect or at all. As a result, we would have excess
inventory, which would harm our financial results. Conversely, if we underestimate customer demand
or if insufficient manufacturing capacity were available, we would lose revenue opportunities,
market share and damage our customer relationships. On occasion, we have been unable to adequately
respond to unexpected increases in customer purchase orders and were unable to benefit from this
increased demand. There is no guarantee that we will be able to adequately respond to unexpected
increases in customer purchase orders in the future, in which case we may lose the revenues
associated with those additional purchase orders and our customer relationships and reputation may
suffer. Some of our customer contracts require us to manufacture products designed by our customers. While
we intend to convert these products to products of our own design, such transitions may be
difficult to implement and delays or difficulties in doing so could harm our operating results. Some of our customer contracts are based on the transfer of product manufacturing from our
customers factories to our own. Under these contracts, we may be required to manufacture the
products in a manner similar to the way our customers previously manufactured them until we are
able to convert these products to products of our own design. The objective of converting a product
to one of our own design is to improve manufacturability and lower costs. If we encounter
difficulties or delays in transitioning a customers product to our manufacturing facilities,
revenues attributable to that product could be delayed or lost. The cost of manufacturing a
customer-designed product is typically much higher than the cost of manufacturing a product of our
own design. In the short term, while we are manufacturing a customer-designed product, our profit
margins will be adversely impacted. Similarly, difficulties and delays in transitioning a product
to a product of our own design will result in reduced profitability over the long-term. Any failure to protect our intellectual property appropriately could reduce or eliminate any
competitive advantage we have. Our success depends, in part, on our ability to protect our intellectual property. We rely
primarily on a combination of patent, copyright, trademark and trade secret laws to protect our
proprietary technologies and processes. As of March 31, 2005, we had 38 United States patents
issued, many with associated foreign filings and patents. Our issued patents include those relating
to basic circuit and device designs, semiconductors, Multilithic Microsystem technology and system
designs. Our issued United States patents expire between 2007 and 2020. We maintain a vigorous
technology development program that routinely generates potentially patentable intellectual
property. Our decision as to whether to seek formal patent protection is done on a patent by patent
basis and is based on the economic value of the intellectual property, the anticipated strength of
the resulting patent, the cost of pursuing the patent and an assessment of using a patent as a
strategy to protect the intellectual property. To protect our intellectual property, we enter into confidentiality and assignment of rights
to inventions agreements with our employees, and confidentiality and non-disclosure agreements with
third parties, and generally control access to and distribution of our documentation and other
proprietary information. These measures may not be adequate in all cases to safeguard the
proprietary technology underlying our products. It may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization, develop similar
technology independently or design around our patents. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited outside of the United States,
Europe and Japan. We may not be able to obtain any meaningful intellectual property protection in
other countries and territories. Additionally, we may, for a variety of reasons, decide not to file
for patent, copyright, or trademark protection outside of the United States. We occasionally agree
to incorporate a customers or suppliers intellectual property into our designs, in which case we 22




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have obligations with respect to the non-use and non-disclosure of that intellectual property.
We also license technology from other companies, including Northrop Grumman Corporation. There are
no limitations on our rights to make, use or sell products we may develop in the future using the
technology licensed to us by Northrop Grumman Corporation, provided that the products are for
commercial customers and non-satellite applications. Steps taken by us to prevent misappropriation
or infringement of our intellectual property or the intellectual property of our customers may not
be successful. Moreover, litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and scope of proprietary
rights of others, including our customers. Litigation of this type could result in substantial
costs and diversion of our resources. We may receive in the future, notices of claims of infringement of other parties proprietary
rights. In addition, the invalidity of our patents may be asserted or prosecuted against us.
Furthermore, in a patent or trade secret action, we could be required to withdraw the product or
products as to which infringement was claimed from the market or redesign products offered for sale
or under development. We have also at times agreed to indemnification obligations in favor of our
customers and other third parties that could be triggered upon an allegation or finding of our
infringement of other parties proprietary rights. These indemnification obligations would be
triggered for reasons including our sale or supply to a customer or other third parties of a
product which was later discovered to infringe upon another partys proprietary rights.
Irrespective of the validity or successful assertion of such claims we would likely incur
significant costs and diversion of our resources with respect to the defense of such claims. To
address any potential claims or actions asserted against us, we may seek to obtain a license under
a third partys intellectual property rights. However, in such an instance, a license may not be
available on commercially reasonable terms, if at all. With regard to our pending patent applications, it is possible that no patents may be issued
as a result of these or any future applications or the allowed patent claims may be of reduced
value and importance. If they are issued, any patent claims allowed may not be sufficiently broad
to protect our technology. Further, any existing or future patents may be challenged, invalidated
or circumvented thus reducing or eliminating their commercial value. The failure of any patents to
provide protection to our technology might make it easier for our competitors to offer similar
products and use similar manufacturing techniques. Risks Relating to Our Industry Our acquisition of JCA Technology and our own marketing and sales efforts have increased the volume
of our products used by the United States government. Our revenues in this market largely depend
upon the funding and implementation decisions of Congress and United States government agencies.
These decisions could change abruptly and without notice, unexpectedly reducing our current or
future revenues in this market. Our growth is partially dependent on growth in sales to defense electronics and homeland
security prime contractors as a first-tier subcontractor. Government appropriations and prime
contractor reactions to changing levels of contract funding availability can cause re-programming
of first-tier subcontractor requirements by prime contractors in a way that reduces our current
revenues or future revenue forecasts. These funding and implementation decisions are difficult to
predict and may change abruptly. If they change in a manner unfavorable to us, we could find that
previously expected and forecasted revenues do not materialize. Our failure to compete effectively could reduce our revenues and margins. Among merchant suppliers in the telecommunications network market, we primarily compete with
Eyal Microwave Industry, Filtronics plc, the Forem division of Andrew Corporation, Linkra Srl,
Microelectronics Technology Inc., REMEC, Inc., Teledyne Technologies Incorporated, Thales Group SA,
and Xytrans Inc. In addition to these companies, there are telecom OEMs, such as Ericsson and NEC
Corporation, that use their own captive resources for the design and manufacture of their
high-frequency RF transceiver modules, rather than use merchant suppliers like us. We believe that
over one-half of the high-frequency RF transceiver modules manufactured today are being produced by
these captive resources. To the extent that telecom OEMs presently, or may in the future, produce
their own RF transceiver modules, we lose the opportunity to gain a customer and the potential
related sales. In the defense electronics and homeland security markets, we primarily compete with 23




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Aeroflex Incorporated, AML Communications Inc., Chelton, Ltd., CTT Inc., Herley Industries,
Inc., KMIC Technology, Inc. and Teledyne Technologies Incorporated. Many of our current and potential competitors are substantially larger than us and have
greater financial, technical, manufacturing and marketing resources. In addition, we have only
recently begun to design and sell products for homeland security applications as the market for
homeland security is only now emerging. If we were unable to compete successfully, our future
operations and financial results would be harmed. Government regulation of the communications industry could limit the growth of the markets that we
serve or could require costly alterations of our current or future products. The markets that we serve are highly regulated. Communications service providers must obtain
regulatory approvals to operate broadband wireless access networks within specified licensed bands
of the frequency spectrum. For example, the Indian governments unexpected decision to award a
license to a carrier in an alternative frequency for which we did not then supply RF modules
adversely impacted our revenues for the first quarter of 2004. Further, the Federal Communications
Commission and foreign regulatory agencies have adopted regulations that impose stringent RF
emissions standards on the communications industry. In response to the new environmental
regulations on health and safety in Europe and China, we are required to design and build a
lead-free product. Changes to these regulations may require that we alter the performance of our
products. Risks Relating to Ownership of Our Stock The market price of our common stock has historically fluctuated and is likely to fluctuate in the
future. The price of our common stock has fluctuated widely since our initial public offering in
October 2000. For example, in the first quarter of 2005, the lowest bid price for our common stock
was $16.63 and the highest bid price for our common stock was $25.83 and in 2004, the lowest bid
price for our common stock was $5.50 and the highest bid price for our common stock was $19.20.
The market price of our common stock can fluctuate significantly for many reasons, including, but
not limited to:  
    our financial performance or the performance of our competitors;
    technological innovations or other trends or changes in the telecommunications
network, defense electronics or homeland security markets;
    successes or failures at significant product evaluations or site demonstrations;
    the introduction of new products by us or our competitors;
    acquisitions, strategic alliances or joint ventures involving us or our competitors;
    decisions by major participants in the communications industry not to purchase
products from us or to pursue alternative technologies;
    decisions by investors to de-emphasize investment categories, groups or strategies
that include our company or industry;
    market conditions in the industry, the financial markets and the economy as a whole; and
    low trading volume of our common stock. It is likely that our operating results in one or more future quarters may be below the
expectations of security analysts and investors. In that event, the trading price of our common
stock would likely decline. In addition, the stock market has experienced extreme price and volume
fluctuations. These market fluctuations can be unrelated to the operating performance of particular
companies and the market prices for securities of technology companies have been especially
volatile. Future sales of substantial amounts of our common stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for our common stock.
Additionally, future stock price volatility for our common stock could provoke the initiation of
securities litigation, which may divert substantial management resources and have an adverse effect
on our business, operating results and financial condition. Our existing insurance coverage may not
sufficiently cover all costs and claims that could arise out of any such securities litigation. We
anticipate that prices for our common stock will continue to be volatile. 24




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Northrop Grumman Corporation controls a large percentage of our common stock and is able to
significantly affect the outcome of matters requiring stockholder approval. As of February 9, 2005, Northrop Grumman Corporation, through its wholly-owned subsidiary,
Northrop Grumman Space Mission & Systems Corp., beneficially owned approximately 33.0% of our
outstanding common stock and is our largest stockholder. Because most matters requiring approval of
our stockholders, require the approval of the holders of a majority of the shares of our
outstanding common stock, Northrop Grumman Corporations significant beneficial ownership interest
and position as our largest stockholder allows it to significantly affect the election of our
directors and the outcome of most corporate actions requiring stockholder approval. As of that
date, our directors and executive officers owned, or had the right to acquire within 60 days
thereafter, approximately 9.6% of our outstanding common stock. As a result, they also may have a
significant impact on matters requiring approval of our stockholders. This concentration of
ownership may also delay, deter or prevent a change in control and may make some transactions more
difficult or impossible to complete without the support of these stockholders, even if the
transaction is favorable to our stockholders. Our certificate of incorporation, bylaws and arrangements with executive officers contain
provisions that could delay or prevent a change in control. We are subject to certain Delaware anti-takeover laws by virtue of our status as a Delaware
corporation. These laws prevent us from engaging in a merger or sale of more than 10% of our assets
with any stockholder, including all affiliates and associates of any stockholder, who owns 15% or
more of our outstanding voting stock, for three years following the date that the stockholder
acquired 15% or more of our voting stock, unless the board of directors approved the business
combination or the transaction which resulted in the stockholder becoming an interested
stockholder, or upon consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of our voting stock of the
corporation, or the business combination is approved by our board of directors and authorized by at
least 66 2/3% of our outstanding voting stock not owned by the interested stockholder. A
corporation may opt out of the Delaware anti-takeover laws in its charter documents, however we
have not chosen to do so. Additionally, our certificate of incorporation and bylaws include a
number of provisions that may deter or impede hostile takeovers or changes of control of
management, including a staggered board of directors, the elimination of the ability of our
stockholders to act by written consent, discretionary authority given to our board of directors as
to the issuance of preferred stock, and indemnification rights for our directors and executive
officers. We have an Executive Officer Severance and Retention Plan and a Key Employee Severance
and Retention Plan that provide for severance payments and the acceleration of vesting of a
percentage of certain stock options granted to our executive officers and certain senior,
non-executive employees under specified conditions. We also have a Transaction Incentive Plan for
the benefit of our executive officers and certain senior, non-executive employees that provides for
bonus payments to be made to them upon a change in control transaction. These plans may make us a
less attractive acquisition target or may reduce the amount a potential acquirer may otherwise be
willing to pay for our company. 
 Item 3. Qualitative and Quantitative Disclosures about Market Risk We believe that there have been no material changes in our reported market risks since our
report on market risks in our Annual Report on Form 10-K for the year ended December 31, 2004 under
the heading corresponding to that set forth above. Our exposure to market risk is limited to
interest income sensitivity, which is affected by changes in the general level of U.S. interest
rates, as our investments in cash equivalents include investment grade commercial paper and
government securities. We place our investments with high-quality issuers and attempt to limit
when possible the amount of credit exposure to any one issuer. Due to the nature of our short-term
investments, we do not believe we are subject to any material market risk exposure. We do not have
any material equity investments or foreign currency or other derivative financial instruments. 
 Item 4. Controls and Procedures. (a) Evaluation of disclosure controls and procedures. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our chief executive officer and chief financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) were effective as of the end of the period covered by
this report. 25




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Our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives, and our chief executive officer and our chief financial officer have
concluded that these controls and procedures are effective at the reasonable assurance level. We
believe that a control system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the control system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within a company
have been detected. (b) Changes in internal controls over financial reporting. There were no changes in our internal controls over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting. 26




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PART II. OTHER INFORMATION 
 Item 6. Exhibits Number
    
    Description2.1(1)
    
    Asset Purchase Agreement by and among M/A-COM Tech, Inc., Tyco Electronics Logistics AG and
the Registrant dated April 24, 2001.2.2(2)
    
    Asset Purchase Agreement by and among Signal Technology Corporation and the Registrant dated
September 24, 2002.2.3(3)
    
    Purchase and Sale Agreement by and Among New Focus, Inc., Bookham Technology PLC and the
Registrant dated July 21, 2004.3.1(4)
    
    Amended and Restated Certificate of Incorporation effective October 20, 2000.3.2(5)
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation effective June
28, 2002.3.3(4)
    
    Amended and Restated Bylaws effective October 20, 2000.4.1(4)
    
    Form of specimen Common Stock Certificate.4.2(4)
    
    Investors Rights Agreement by and among the Registrant and certain investors named therein
dated March 31, 2000.4.3(6)
    
    Registration Rights Agreement by and between Northrop Grumman Space & Mission Systems Corp.
and the Registrant dated March 23, 2005.10.1(4)
    
    Form of Indemnity Agreement entered into by the Registrant with each of its directors and
officers.10.2(4)*
    
    1992 Stock Option Plan.10.3(4)*
    
    Form of Incentive Stock Option under 1992 Stock Option Plan.10.4(4)*
    
    Form of Nonstatutory Stock Option under 1992 Stock Option Plan.10.5(4)*
    
    2000 Equity Incentive Plan, as amended.10.6(4)*
    
    Form of Stock Option Agreement under 2000 Equity Incentive Plan.10.7(4)*
    
    2000 Employee Stock Purchase Plan.10.8(4)*
    
    Form of 2000 Employee Stock Purchase Plan Offering.10.9(11)*
    
    2000 Non-Employee Directors Stock Option Plan, as amended.10.10(4)*
    
    Form of Nonstatutory Stock Option Agreement under the 2000 Non-Employee Director Plan.10.11(7)*
    
    Description of Compensation Payable to Non-Employee Directors.10.12(7)*
    
    2005 Base Salaries for Named Executive Officers.10.13(7)*
    
    2005 Executive Incentive Compensation Plan.10.14(8)*
    
    Executive Officer Severance and Retention Plan.10.15(8)*
    
    Transaction Incentive Plan.
 27




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Number
    
    Description10.16(4)
    
    License Agreement by and between TRW Inc. and TRW Milliwave Inc. dated February 28, 2000.10.17(4)
    
    Production Agreement by and between TRW Inc. and the Registrant dated March 31, 2000 for the
performance of the Development Agreement by and between TRW Inc. and Nokia
Telecommunications OY dated January 28, 1999.10.18(4)
    
    Services Agreement by and between TRW Inc. and the Registrant dated March 31, 2000.10.19(9)
    
    Development Agreement by and between Nokia and the Registrant dated August 14, 2003.10.20(10)
    
    Purchase Agreement by and between Nokia Corporation and the Registrant dated December 31,
2003.10.21(5)
    
    Industrial Lease by and between The Irvine Company and the Registrant dated January 28, 2004.10.22(5)
    
    Amended and Restated Supply Agreement by and between Northrop Grumman Space and Mission
Systems Corp. and the Registrant dated March 26, 2004.10.23(6)
    
    Settlement and Release Agreement by and between Northrop Grumman Space & Mission Systems
Corp. and the Registrant dated March 23, 2005.10.24
    
    Manufacturing and Supply Agreement by and between HANA Microelectronics and the Registrant
dated September 18, 2002.31.1
    
    Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   (1)
    
    Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on May
8, 2001.(2)
    
    Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on
October 11, 2002.(3)
    
    Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on August
4, 2004.(4)
    
    Previously filed with the Registrants Registration Statement on Form S-1 (Registration No.
333-41302).(5)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004.(6)
    
    Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on March
25, 2005.(7)
    
    Previously filed as an exhibit to the Registrants Current Report on Form 8-K filed on
February 3, 2005.(8)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.(9)
    
    Previously filed with an amendment to the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 filed on August 4, 2004.(10)
    
    Previously filed with an amendment to the Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 filed on August 4, 2004.(11)
    
    Previously filed with the Registrants
Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.*
    
    Indicates a management contract or compensatory plan or arrangement.
    
    Confidential treatment has been requested for a portion of this exhibit. 28




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENDWAVE CORPORATIONDate: May 13, 2005By:
    
    /s/ Edward A. Keible, Jr.Edward A. Keible, Jr.President and Chief Executive OfficerBy:
    
    /s/ Julianne M. BiaginiJulianne M. BiaginiSenior Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
 29




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##### Table of Contents



Index to Exhibits Number
    
    Description10.24
    
    Manufacturing and Supply Agreement by and between HANA Microelectronics and the Registrant dated
September 18, 2002.31.1
    
    Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
    
    Confidential treatment has been requested for a portion of this exhibit. 30