##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the transition period from  to 000-31635
(Commission file number)   ENDWAVE CORPORATION    Delaware
    
    95-4333817(State of incorporation)
    
    (I.R.S. Employer Identification No.)776 Palomar Avenue,Sunnyvale, CA
    
    94085(Address of principal executive offices)
    
    (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 [x] No[  ]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [x]. The number of shares of the registrants Common Stock outstanding as of
October 29, 2004 was 10,074,495 shares.




---



ENDWAVE CORPORATION INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September
30, 2004 (unaudited) and December 31, 2003
    
    
    3Unaudited Condensed Consolidated Statements of
Operations for the three and nine months ended September
30, 2004 and 2003
    
    
    4Unaudited Condensed Consolidated Statements of Cash
Flows for the nine months ended September 30, 2004 and
2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Qualitative and Quantitative Disclosure about Market Risk
    
    
    34Item 4.
    
    Controls and Procedures
    
    
    34PART II.
    
    OTHER INFORMATIONItem 5.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 6.
    
    Exhibits
    
    
    36SIGNATURES
    
    
    38EXHIBITS
    
    
    39EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements ENDWAVE CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 September 30,
    
    December 31,2004
    
    2003(unaudited)
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    15,629
    
    
    $
    13,408Restricted cash
    
    
    
    
    
    
    778Short-term investments
    
    
    10,984
    
    
    
    15,890Accounts receivable, net
    
    
    5,438
    
    
    
    6,476Accounts receivable from affiliates, net
    
    
    20
    
    
    
    105Inventories
    
    
    7,625
    
    
    
    8,119Equipment held-for-sale
    
    
    
    
    
    
    306Other current assets
    
    
    292
    
    
    
    592Total current assets
    
    
    39,988
    
    
    
    45,674Property, plant and equipment, net
    
    
    2,661
    
    
    
    7,260Other assets, net
    
    
    125
    
    
    
    140Goodwill and intangible assets
    
    
    5,843
    
    
    
    $
    48,617
    
    
    $
    53,074LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,993
    
    
    $
    1,733Accounts payable to affiliates
    
    
    139
    
    
    
    1,355Accrued warranty
    
    
    5,031
    
    
    
    5,835Accrued compensation
    
    
    1,733
    
    
    
    1,139Notes payable
    
    
    
    
    
    
    516Restructuring liabilities, current
    
    
    396
    
    
    
    98Other current liabilities
    
    
    879
    
    
    
    992Total current liabilities
    
    
    10,171
    
    
    
    11,668Notes payable, less current portion
    
    
    
    
    
    
    262Other long-term liabilities
    
    
    618
    
    
    
    101Total liabilities
    
    
    10,789
    
    
    
    12,031Commitments and contingenciesStockholders equity:Common stock, $0.001 par value per
share; 100,000,000 authorized,
10,070,452 and 9,347,585 issued and
outstanding on September 30, 2004 and
December 31, 2003, respectively
    
    
    10
    
    
    
    9Additional paid-in capital
    
    
    303,664
    
    
    
    302,427Treasury stock, at cost, 39,150 shares
    
    
    (79
    )
    
    
    (79
    )Deferred stock compensation
    
    
    
    
    
    
    (221
    )Accumulated other comprehensive loss
    
    
    (34
    )
    
    
    (2
    )Accumulated deficit
    
    
    (265,733
    )
    
    
    (261,091
    )Total stockholders equity
    
    
    37,828
    
    
    
    41,043$
    48,617
    
    
    $
    53,074
 (1) Derived from the Companys audited financial statements as of December
31, 2003 See accompanying notes.   3




---



##### Table of Contents



ENDWAVE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
 (unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Product revenues
    
    $
    7,377
    
    
    $
    7,869
    
    
    $
    21,118
    
    
    $
    23,301Product revenues from affiliates
    
    
    63
    
    
    
    84
    
    
    
    105
    
    
    
    223Development fees
    
    
    154
    
    
    
    251
    
    
    
    564
    
    
    
    807Total revenues
    
    
    7,594
    
    
    
    8,204
    
    
    
    21,787
    
    
    
    24,331Costs and expenses:Cost of product revenues
    
    
    5,395
    
    
    
    5,857
    
    
    
    14,607
    
    
    
    19,009Cost of product revenues from affiliates
    
    
    12
    
    
    
    41
    
    
    
    28
    
    
    
    81Cost of product revenues, amortization of
intangible assets
    
    
    75
    
    
    
    
    
    
    
    75
    
    
    
    Research and development
    
    
    1,395
    
    
    
    1,097
    
    
    
    3,452
    
    
    
    3,643Selling, general and administrative
    
    
    2,204
    
    
    
    1,556
    
    
    
    5,738
    
    
    
    6,788In-process research and development
    
    
    320
    
    
    
    
    
    
    
    320
    
    
    
    Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    73Restructuring charges, net
    
    
    (4
    )
    
    
    490
    
    
    
    2,895
    
    
    
    490Amortization of deferred stock compensation*
    
    
    
    
    
    
    21
    
    
    
    204
    
    
    
    617Loss (recovery) on building sublease
    
    
    
    
    
    
    
    
    
    
    (359
    )
    
    
    662Impairment of long-lived assets and other
    
    
    389
    
    
    
    139
    
    
    
    389
    
    
    
    2,548Total costs and expenses
    
    
    9,859
    
    
    
    9,201
    
    
    
    27,422
    
    
    
    33,838Loss from operations
    
    
    (2,265
    )
    
    
    (997
    )
    
    
    (5,635
    )
    
    
    (9,507
    )Interest and other income, net
    
    
    231
    
    
    
    262
    
    
    
    993
    
    
    
    404Net loss
    
    $
    (2,034
    )
    
    $
    (735
    )
    
    $
    (4,642
    )
    
    $
    (9,103
    )Basic and diluted net loss per share
    
    $
    (0.21
    )
    
    $
    (0.08
    )
    
    $
    (0.48
    )
    
    $
    (1.00
    )Shares used in computing basic and diluted net
loss per share
    
    
    9,897,077
    
    
    
    9,179,749
    
    
    
    9,674,842
    
    
    
    9,084,222* Amortization of deferred stock compensation:Cost of product revenues
    
    $
    
    
    
    $
    (79
    )
    
    $
    109
    
    
    $
    84Research and development
    
    
    
    
    
    
    15
    
    
    
    44
    
    
    
    195Selling, general and administrative
    
    
    
    
    
    
    85
    
    
    
    51
    
    
    
    338$
    
    
    
    $
    21
    
    
    $
    204
    
    
    $
    617
 See accompanying notes. 4




---



##### Table of Contents



ENDWAVE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine months endedSeptember 30,2004
    
    2003Operating activities:Net loss
    
    $
    (4,642
    )
    
    $
    (9,103
    )Adjustments to reconcile net loss to net cash used in
operating activities:In-process research and development
    
    
    320
    
    
    
    Depreciation and amortization
    
    
    1,380
    
    
    
    2,003Impairment of long-lived assets and other
    
    
    389
    
    
    
    2,548Amortization of deferred stock compensation
    
    
    204
    
    
    
    617Restructuring charges, net
    
    
    (4
    )
    
    
    74Gain on the sale of land and equipment
    
    
    (469
    )
    
    
    Loss (recovery) on building sublease
    
    
    (359
    )
    
    
    662Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,737
    
    
    
    (1,871
    )Inventories
    
    
    851
    
    
    
    3,547Other assets
    
    
    345
    
    
    
    545Accounts payable
    
    
    (1,055
    )
    
    
    320Accrued warranty
    
    
    (1,128
    )
    
    
    378Accrued compensation and other current and long-term liabilities
    
    
    (126
    )
    
    
    (261
    )Net cash used in operating activities
    
    
    (2,557
    )
    
    
    (541
    )Investing activities:Cash paid in business combinations
    
    
    (6,067
    )
    
    
    Decrease in restricted cash
    
    
    778
    
    
    
    Purchases of equipment
    
    
    (340
    )
    
    
    (53
    )Proceeds on sales of property and equipment
    
    
    5,056
    
    
    
    113Purchases of Verticom assets
    
    
    
    
    
    
    (250
    )Purchases of short term investments
    
    
    (13,037
    )
    
    
    (21,265
    )Proceeds on maturities of short term investments
    
    
    17,911
    
    
    
    27,365Net cash provided by investing activities
    
    
    4,301
    
    
    
    5,910Financing activities:Payments on capital lease obligations
    
    
    
    
    
    
    (1,259
    )Payments on notes payable
    
    
    (778
    )
    
    
    (370
    )Proceeds from stock issuance
    
    
    92
    
    
    
    47Proceeds from exercises of stock options
    
    
    1,163
    
    
    
    396Net cash provided by (used in) financing activities
    
    
    477
    
    
    
    (1,186
    )Net change in cash and cash equivalents
    
    
    2,221
    
    
    
    4,183Cash and cash equivalents at beginning of period
    
    
    13,408
    
    
    
    9,224Cash and cash equivalents at end of period
    
    $
    15,629
    
    
    $
    13,407
 See accompanying notes. 5




---



##### Table of Contents



ENDWAVE CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Business and Basis of Presentation Endwave Corporation and its subsidiary, JCA Technology, Inc. (together
referred to below as Endwave or the Company) design, manufacture and market
RF (radio frequency) subsystems and components that enable the transmission,
reception and processing of high-speed electromagnetic signals in broadband
wireless telecommunications systems, cellular telephone infrastructure
networks, defense electronics systems, security systems, radar equipment,
homeland security and other similar systems requiring RF, microwave and
millimeter wave technology. The Company designs products to best satisfy its customers technical,
inventory, logistical, and cost requirements by using proprietary technologies,
RF design, and manufacturing expertise. Endwave offers a broad range of
products at multiple levels of integration that are optimized for a customers
specific product and performance needs. Products include RF modules such as
power amplifiers, low noise amplifiers, up and down converters, frequency
multipliers, oscillators, frequency synthesizers, integrated transceivers, and
power amplifier switch combiners used in cellular base stations. The Companys
proprietary circuit and manufacturing technologies enable it to design and
manufacture RF subsystems that minimize the use of expensive gallium arsenide
and reduce labor costs. The Company uses third-party fabrication facilities
both for the manufacture of gallium arsenide and other semiconductor devices,
which it designs, and for the assembly and test of its commercial production. The accompanying unaudited condensed consolidated financial statements of
Endwave include the financial results of JCA from the purchase date, July 21,
2004 and 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,
2004. These condensed consolidated financial statements should be read in
conjunction with the Companys audited financial statements for the year ended
December 31, 2003. Certain prior period amounts have been reclassified to
conform to the current period presentation. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates. Revenue Recognition The Companys primary customers are equipment manufacturers who integrate
the Companys products into their systems. The Company recognizes product
revenues at the time title passes, which is upon product shipment or when
withdrawn from a consignment location. Revenues related to product sales are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the sellers price to the buyer is
fixed or determinable, and collectibility is reasonably assured. Revenues under
development contracts are generally recorded on a percentage of completion
basis, using project hours as the basis to measure progress toward completing
the contract and recognizing revenue. Up-front fees, if any, associated with
development agreements are recognized over the estimated development and
production period. In no event are revenues recognized prior to becoming
payable by the customer. The costs incurred under these development agreements
are included in research and development expenses. 6




---



##### Table of Contents



Warranty The warranty periods for the Companys products are generally between one
and three years from date of shipment. The Company generally 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. During the second quarter of 2004, the Company determined that
approximately $1.3 million of warranty accrual related to a possible pattern
defect on a specific customer issue was no longer necessary. The amount is
included in warranties settled or reversed in the table below. This decrease
in the warranty accrual was partially offset by increases to the warranty
accrual of $996,000 during the nine months ended September 30, 2004. Changes in the Companys product warranty liability during the nine-month
periods ended September 30, 2004 and 2003 are as follows: 2004
    
    2003(in thousands)Balance at December 31
    
    $
    5,835
    
    
    $
    5,583Warranties accrued
    
    
    996
    
    
    
    354Warranties settled or reversed
    
    
    (1,800
    )
    
    
    24Balance at September 30
    
    $
    5,031
    
    
    $
    5,961
 Impairment of Long-Lived Assets For long-lived assets used in operations, the Company records impairment
losses when events and circumstances indicate that these assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. If less, the
impairment losses are based on the excess of the carrying amounts over their
respective fair values. Their fair values would then become the new cost
basis. Fair value is determined by discounted future cash flows, appraisals,
or other methods. For assets held for sale, impairment losses are measured at
the lower of the carrying amount of the assets or the fair value of the assets
less costs to sell. For assets to be disposed of other than by sale,
impairment losses are measured as their carrying amount less salvage value, if
any, at the time the assets cease to be used. During the first quarter of 2003, the Company recorded a charge of $2.4
million to reduce the carrying value of manufacturing equipment based on the
amounts by which the carrying value of the assets exceeded their salvage value.
The impairment took into consideration the move of production to the Companys
offshore supplier, which increased during 2003. During the third quarter of 2003, the Company recorded an additional
charge of $139,000 to reduce the carrying value of engineering equipment based
on the amounts by which the carrying value of these assets exceeded their fair
value. The impairment evaluation took in to consideration the reduction in
engineering headcount that occurred during the third quarter of 2003. The
Companys estimate of the fair value of the assets was based on selling prices
of similar equipment. During the third quarter of 2004, the Company recorded a charge of
$389,000 to write off the remaining carrying value of equipment held-for-sale
of $259,000 and to write off $130,000 associated with sales tax capitalized as
part of the Companys acquisition of Stellex Broadband Wireless in April 2001.
The equipment held-for-sale was determined to have no value based on a current
market review of similar assets and the Companys inability to sell the assets
despite its marketing efforts. The $130,000 of capitalized sales tax was
related to equipment that had been fully depreciated or fully impaired
previously, and as such was also fully written off. Restructuring Charges Restructuring charges include estimates pertaining to employee severance
and fringe benefit costs and facility exit costs. In accordance with Statement
of Financial Accounting Standards No. 146, Accounting for Costs 7




---



##### Table of Contents



Associated with Exit or Disposal Activities (SFAS 146), costs
associated with restructuring activities initiated after December 31, 2002 have
been recognized when they are incurred rather than at the date of a commitment
to an exit or disposal plan. The Company reviews remaining restructuring
accruals on a quarterly basis and adjusts these accruals when changes in facts
and circumstances suggest actual amounts will differ from managements
estimates. Changes in estimates occur when it is apparent that exit and other
costs accrued will be more or less than originally estimated. 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, 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 (SFAS 148) 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. 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 ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net loss, as reported
    
    $
    (2,034
    )
    
    $
    (735
    )
    
    $
    (4,642
    )
    
    $
    (9,103
    )Add: Stock-based employee compensation expense
included in reported net loss
    
    
    
    
    
    
    146
    
    
    
    204
    
    
    
    742Deduct: Stock-based employee compensation
expense determined under the fair value method for all awards
    
    
    (693
    )
    
    
    (933
    )
    
    
    (2,427
    )
    
    
    (3,836
    )Net loss, pro forma
    
    $
    (2,727
    )
    
    $
    (1,522
    )
    
    $
    (6,865
    )
    
    $
    (12,197
    )Basic and diluted net loss per share, as reported
    
    $
    (0.21
    )
    
    $
    (0.08
    )
    
    $
    (0.48
    )
    
    $
    (1.00
    )Basic and diluted net loss per share, pro forma
    
    $
    (0.28
    )
    
    $
    (0.17
    )
    
    $
    (0.71
    )
    
    $
    (1.34
    )
 3. Business Combinations On July 21, 2004, the Company acquired all of the outstanding capital
stock of JCA Technology, Inc. (JCA), a wholly owned subsidiary of Bookham
Technology plc. JCA is a provider of RF amplifiers and modules and its
products are broadly used in applications including electronic warfare, radar
and secure communications. This acquisition is complementary to the Companys
existing portfolio of RF module products and allows it to strengthen its
presence in the defense, commercial radar and homeland security markets. The transaction was accounted for under the purchase method of accounting
and, accordingly, the results of operations are included in the accompanying
unaudited condensed consolidated statements of operations for all periods or
partial periods subsequent to the acquisition date. The net tangible assets acquired and liabilities assumed in the
acquisition were recorded at fair value, which approximates the carrying amount
as of the acquisition date. The Company determined the valuation of the
identifiable intangible assets using future revenue assumptions and a valuation
analysis from an independent appraiser. The amounts allocated to the
identifiable intangible assets were determined through established valuation
techniques accepted in the technology industry. 8




---



##### Table of Contents



In calculating the value of the acquired in-process research and
development (IPR&D), the independent appraiser gave consideration to the
relevant market size and growth factors, expected industry trends, the
anticipated nature and timing of new product introductions by the Company and
our competitors, individual product sales cycles, and the estimated lives of
each of the products derived from the underlying technology. The value of the
acquired IPR&D reflects the relative value and contribution of the acquired
research and development. Consideration was given to the stage of completion,
the complexity of the work completed to date, the difficulty of completing the
remaining development, costs already incurred, and the expected cost to
complete the project in determining the value assigned to the acquired IPR&D.
The amounts allocated to the acquired IPR&D were immediately expensed in the
period the acquisition was completed because the projects associated with the
IPR&D had not yet reached technological feasibility and no future alternative
uses existed for the technology. The income approach, which includes an analysis of the cash flows and
risks associated with achieving such cash flows, was used to value all of the
identifiable intangible assets. Key assumptions used in analyzing the expected
cash flows from the other identifiable intangible assets included our estimates
of revenue growth, cost of sales, operating expenses and taxes. The purchase
price in excess of the identified tangible and intangible assets was allocated
to goodwill. The total purchase price of $6.1 million consisted of $5.9 million in cash
and $158,000 in direct transaction costs. In connection with the acquisition
of JCA, the Company implemented a restructuring plan to consolidate JCAs
manufacturing process to our Diamond Springs location. The restructuring plan
terminated or will terminate 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 estimated cost for the related severance, benefits,
payroll taxes and other associated costs totaled $431,000 and was accrued for
at the time of the acquisition and has been recognized as a liability assumed
in the business combination in accordance with EITF 95-3. The remaining
obligations as of September 30, 2004 were $316,000. Severance payments will be
substantially complete by the end of the fourth quarter of fiscal 2004. The aggregate purchase price for the JCA acquisition has been allocated to
the tangible and identifiable intangible assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition as
follows (in thousands): Tangible assets acquired:Accounts receivable
    
    $
    614Inventory
    
    
    357Property, plant and equipment, net
    
    
    56Other current assets
    
    
    30Liabilities assumed:Accounts payable
    
    
    (99
    )Accrued compensation
    
    
    (401
    )Accrued warranty
    
    
    (324
    )Other current liabilities
    
    
    (46
    )Restructuring activity associated with purchase:Restructuring charge
    
    
    (431
    )Identifiable intangible assets acquired:In-process research and development
    
    
    320Core/developed technology
    
    
    2,250Tradename
    
    
    1,060Customer relationships
    
    
    780Customer backlog
    
    
    140Goodwill acquired:Goodwill
    
    
    1,761Total purchase price
    
    $
    6,067
 9




---



##### Table of Contents



Pro forma financial information The following table presents the unaudited pro forma financial information
for the combined entity of Endwave and JCA for the three and nine month periods
ended September 30, 2004 and 2003, as if the acquisition had occurred at the
beginning of the periods presented after giving effect to certain purchase
accounting adjustments (in thousands, except per share amounts): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net revenue
    
    $
    7,670
    
    
    $
    9,793
    
    
    $
    25,047
    
    
    $
    29,170Net loss
    
    $
    (2,338
    )
    
    $
    (2,042
    )
    
    $
    (6,802
    )
    
    $
    (13,061
    )Net loss per share  basic and diluted
    
    $
    (0.24
    )
    
    $
    (0.22
    )
    
    $
    (0.70
    )
    
    $
    (1.44
    )
 These results are presented for illustrative purposes only and are not
necessarily indicative of the actual operating results or financial position
that would have occurred if the Company and JCA had been a consolidated entity
during the periods presented. 4. Goodwill and Intangible Assets Goodwill During the three months ended September 30, 2004, the Company recorded
$1.8 million of goodwill associated with the purchase of JCA. See Note 3.
Business Combinations for additional information. At the time of the
acquisition the Company had no other goodwill on its balance sheet. Under SFAS
No. 142, Goodwill and Other Intangible Assets, goodwill is no longer subject
to amortization. Rather, the Company evaluates goodwill for impairment at
least annually or more frequently if events and changes in circumstances
suggest that the carrying amount may not be recoverable. Intangible Assets The components of acquired identifiable intangible assets as of September
30, 2004 are as follows (in thousands): September 30, 2004Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    AmountCore/developed technology
    
    $
    2,250
    
    
    $
    (75
    )
    
    $
    2,175Tradename
    
    
    1,060
    
    
    
    
    
    
    
    1,060Customer relationships
    
    
    780
    
    
    
    (26
    )
    
    
    754Customer backlog
    
    
    140
    
    
    
    (47
    )
    
    $
    93Intangible assets
    
    $
    4,230
    
    
    $
    (148
    )
    
    $
    4,082
 The identifiable intangible assets are subject to amortization and have
approximate original estimated weighted-average useful lives as follows:
core/developed technology  5 years, customer backlog  6 months and customer
relationships  5 years. 10




---



##### Table of Contents



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. 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): September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    6,404
    
    
    $
    7,298Work in process
    
    
    614
    
    
    
    153Finished goods.
    
    
    607
    
    
    
    668$
    7,625
    
    
    $
    8,119
 6. Notes Payable On May 29, 2002, the Company obtained a loan, secured by fixed assets, in
the amount of $1.5 million from U.S. Bancorp Finance, Inc. This loan had a term
of three years and had a variable interest rate. The rate was 25 basis points
above LIBOR and reviewed quarterly. During the second quarter of 2004, the
Company paid off the remaining loan balance of $477,000 and, as such, there are
no future payments to be made on the note. 7. Property, Plant and Equipment During the second quarter of 2004, the Company finalized the sale of its
land and two buildings located in Diamond Springs, California. The Company
received $4.3 million for the land and buildings net of related closing costs
and legal fees. The net book value of the property on the date of sale was
$3.5 million. At the time of the closing, the Company entered into a five-year
operating lease with the new owner for one of the two buildings. As a result
of the sale-leaseback transaction, the Company will recognize an overall gain
of $777,000, which will be recognized on a straight-line basis over the term of
the lease. The Company recognized $38,000 of gain during the third quarter of
2004. At September 30, 2004 and December 31, 2003, the Company had $0 and
$306,000 of equipment classified as held for sale. See Note 2. Summary of
Significant Accounting Policies for additional information on the write-off of
equipment held-for-sale. 8. Restructuring Charges, Net Effective January 2004, the Company executed several agreements related to
the lease of 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 was
effective as of January 2004 and will expire in August 2006. During the third quarter of 2004, in connection with the acquisition of
JCA, the Company recorded a charge for restructuring of $431,000. The charge
was included as part of the purchase price allocation in accordance with EITF
95-3. As discussed in Note 3. Business Combinations, the Company has or is
planning to terminate 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 September
30, 2004 were $316,000. Severance payments will be substantially complete by
the end of the fourth quarter of fiscal 2004. 11




---



##### Table of Contents



Severance BenefitsThird Quarter 2004 PlanThird quarter 2004 restructuring charge
    
    $
    431Cash payments
    
    
    (115
    )Accrual at September 30, 2004
    
    $
    316
 During the third quarter of 2003, the Company recorded a restructuring
charge of $490,000 (the Third Quarter 2003 Plan), all of which was for
severance payments. Through the end of the third quarter of 2004, the Company
eliminated 18 positions and made cash payments of $486,000 under the Third
Quarter 2003 Plan. Severance BenefitsThird Quarter 2003 PlanThird quarter 2003 restructuring charge
    
    $
    490Cash payments
    
    
    (470
    )Accrual at December 31, 2003
    
    
    20Cash payments
    
    
    (16
    )Restructuring charge adjustment
    
    
    (4
    )Accrual at September 30, 2004
    
    $
    0
 During the first quarter of 2002, the Company announced and began to
implement a restructuring program (the First Quarter 2002 Plan) to reduce
operating expenses and align resources with long-term growth opportunities.
The Company recorded a restructuring charge of $3.5 million, the components of
which were $1.1 million for severance and fringe benefit costs related to the
elimination of 107 positions across all functions, $310,000 for lease
termination payments, and $2.1 million for excess equipment. In the fourth
quarter of 2002, the Company lowered its estimate of the total costs associated
with the First Quarter 2002 Plan and recorded an adjustment of $142,000, which
reflected lower than estimated severance and related costs. With the exception
of $120,000 of remaining net lease payments on abandoned facilities through
2006, the Company has substantially completed the activities associated with
the First Quarter 2002 Plan. Total payments made on the lease during the third
quarter and first nine months of 2004 were $20,000 and $59,000, respectively. Our restructuring estimates will be reviewed and revised quarterly and may
result in an increase to restructuring and other charges. 9. Loss (Recovery) on Sublease During the first quarter of 2003, the Company subleased 12,700 square feet
of its Sunnyvale, California headquarter 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. There have been no other losses on subleases recorded in the
periods presented herein. During the first quarter of 2004, $359,000 of this
loss was reversed as the sublease was terminated prior to its expiration date,
as part of the overall lease termination described above in Note 8. 10. Net Loss Per Share Basic and diluted net loss per share is computed by dividing the net loss
for the three and nine months ended September 30, 2004 and 2003, by the
weighted average number of shares of common stock outstanding during the
period. Options to purchase 1,893,060 and 2,013,060 shares of common stock were
outstanding at September 30, 2004 and 2003, respectively, but were not included
in the computation of diluted net loss per share as the effect would be
anti-dilutive. 11. Comprehensive Income (Loss) The Company had $34,000 of other comprehensive loss at September 30, 2004
and $2,000 of other comprehensive loss at December 31, 2003 resulting from
unrealized losses on its available-for-sale investments. 12




---



##### Table of Contents



12. Segment Disclosures The Company operates in a single segment. Although we sell to customers
in various geographic regions throughout the world, the end customers may be
located elsewhere. The Companys product sales by geographic location for the
three and nine months ended September 30, 2004 and 2003 were as follows (in
thousands and as a percentage of total revenues): Three months ended September 30,2004
    
    2003United States
    
    $
    1,813
    
    
    
    23.8
    %
    
    $
    2,128
    
    
    
    25.9
    %Finland
    
    
    4,152
    
    
    
    54.7
    %
    
    
    4,450
    
    
    
    54.2
    %Singapore
    
    
    561
    
    
    
    7.4
    %
    
    
    
    
    
    
    0.0
    %Sweden
    
    
    766
    
    
    
    10.1
    %
    
    
    414
    
    
    
    5.0
    %Other
    
    
    302
    
    
    
    4.0
    %
    
    
    1,212
    
    
    
    14.9
    %Total
    
    $
    7,594
    
    
    
    100.0
    %
    
    $
    8,204
    
    
    
    100.0
    %
 Nine months ended September 30,2004
    
    2003United States
    
    $
    4,475
    
    
    
    20.5
    %
    
    $
    6,527
    
    
    
    26.8
    %Finland
    
    
    11,693
    
    
    
    53.7
    %
    
    
    13,988
    
    
    
    57.5
    %Singapore
    
    
    2,028
    
    
    
    9.3
    %
    
    
    
    
    
    
    0.0
    %Sweden
    
    
    1,872
    
    
    
    8.6
    %
    
    
    1,082
    
    
    
    4.4
    %Other
    
    
    1,719
    
    
    
    7.9
    %
    
    
    2,734
    
    
    
    11.3
    %Total
    
    $
    21,787
    
    
    
    100.0
    %
    
    $
    24,331
    
    
    
    100.0
    %
 For the three months ended September 30, 2004, Nokia and PowerWave
accounted for 55% and 10% of total revenues listed above, respectively. For the
three months ended September 30, 2003, Nokia and Stratex Networks accounted for
54% and 14% of total revenues listed above, respectively. For the periods
presented, no other customer accounted for more than 10% of the Companys total
revenues. For the nine months ended September 30, 2004, Nokia accounted for 54% of
total revenues listed above. For the nine months ended September 30, 2003,
Nokia and Stratex Networks accounted for 58% and 13% of total revenues listed
above, respectively. For the periods presented, no other customer accounted for
more than 10% of the Companys total revenues. 13. 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. 14. Related Party Transactions The Company maintains a supply agreement and a technology services
agreement with Northrop Grumman, 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 $488,000 and $968,000 for the third quarter of
2004 and 2003, respectively, and $1.8 million and $2.0 million for the first
nine months of 2004 and 2003, respectively. The $1.8 million of purchases made
during the first nine months of 2004 is net of the reversal of a $793,000
liability pertaining to this agreement that was settled during the first
quarter of fiscal 2004. 13




---



##### Table of Contents



The Company also sells various products and services under purchase orders
and agreements to Northrop Grumman, and recognized revenues of $63,000 and
$84,000 for the third quarter of 2004 and 2003, respectively, and $105,000 and
$223,000 for the first nine months of 2004 and 2003 respectively. The Company
incurred costs related to this revenue of approximately $12,000 and $41,000
during the third quarter of 2004 and 2003, respectively, and $28,000 and
$81,000 during the first nine months of 2004 and 2003, respectively. At September 30, 2004, the Company had accounts receivable of $20,000 and
accounts payable of $139,000, related to its customer and supplier
relationships with Northrop Grumman. 14




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in this report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties, including
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. The following discussion should be read together with our
financial statements, notes to those financial statements and Risk Factors
included elsewhere in this 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 financial statements and the notes thereto in
our Annual Report on Form 10-K for the year ended December 31, 2003. 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 described in our forward-looking statements. Readers 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 third quarter of 2004 of $7.6 million were down $610,000,
or 7%, from the third quarter of 2003. Revenues for the first nine months of
2004 of $21.8 million were down $2.5 million or 10%, from the first nine months
of 2003. The decrease in revenue is primarily due to pricing decreases of 10
to 15% amongst our larger customers based on contractual volume commitments and
competitive market demands, as well as a decrease in development fees
recognized. This was partially offset by revenues from our wholly owned
subsidiary, JCA Technology, Inc. (JCA) of $1.0 million during the third
quarter of 2004. Revenues of $7.6 million during the third quarter of 2004 were consistent
with revenues of $7.6 million from the second quarter of 2004. We experienced
decreased revenues to several customers due to a seasonal slowness with
European summer holidays, offset by revenues from JCA during the third quarter
of 2004 of $1.0 million. We anticipate fourth quarter 2004 revenues to increase from our third
quarter 2004 revenues as we ramp up sales to our European customers after a
seasonal lull in the third quarter, add new designs for new customers and as we
continue to integrate our acquisition of JCA into our operations. However, the
telecommunications market has been difficult to forecast as the economic
recovery has remained slow and inconsistent and the integration of our
acquisition is also susceptible to uncertainty. See Risk Factors below. During 2004, we have undertaken a number of steps to increase revenues
while working to reduce costs and better address our customers needs. We took the following steps during 2004:  
    
    On July 21, 2004, we acquired JCA, a provider of RF
amplifiers and modules to the defense, commercial radar, and
homeland security market for approximately $6.1 million in cash.
During the third quarter of 2004, JCA had revenues of $1.0
million. We anticipate future revenues from the acquisition will
be $1.0 million to $2.0 million per quarter after full
integration of the operation.
    
    During the second quarter of 2004, we finalized the
sale of our land and two buildings located in Diamond Springs,
California. We received $4.3 million for the land and buildings
net of related closing costs and legal fees. The net book value
of the property on the date of sale was $3.5 million. At the
time of the closing, we entered into a five-year operating lease
with the new owner for one of the two buildings. As a result of
the sale-leaseback transaction, we will recognize an overall gain
of $777,000, which will be recognized on a straight-line basis
over the term of the lease.
    
    Effective January 2004, we executed several agreements
related to the lease of our 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 has been cancelled,
effective January 2004. In consideration for the cancellation,
we paid our landlord 15




---



##### Table of Contents



a settlement fee of $3.0 million, resulting in a net termination
expense of $2.9 million. We also entered into a new lease for
16,000 square feet in Sunnyvale, California at a lower, at-market
rate. The new lease is effective January 2004 and will expire
August 2006. Through this settlement and new lease agreement, we
will realize significant reductions in the facility costs for our
Sunnyvale headquarters through the new lease period.
    
    In March 2004, we executed a renewal to our master
supply agreement with Northrop Grumman through December 31, 2005.
This renewal expands our access to Northrop Grummans custom
wafer processing services, includes guaranteed pricing, and
stipulates that Northrop Grumman hold specified amounts of
consigned inventory on our behalf. We have continued to focus on consolidating our manufacturing at the
location of our partner in Southeast Asia. During the first nine months of
2004, over 70% of our shipped products were manufactured and shipped by our
offshore partner. By shifting our production overseas, we have realized cost
reductions in the manufacturing of our products and have increased flexibility
to scale our business. During the fourth quarter of 2004, we will begin to manufacture high
volume products based on our customers designs at the location of our partner
in Southeast Asia. Accordingly, we expect these products will have a slightly
lower gross margin than our internal designs. As a result, our gross margin
may be negatively impacted in the near term while increasing after we have had
the opportunity to secure material cost savings and redesign products for lower
costs and more efficient processes. We believe, however, that this model will
allow us to increase market share, establish relationships with new customers,
and further 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 and nine months ended September 30, 2004 and 2003 The following table sets forth certain statement of operations data as a
percentage of total revenues for the periods indicated: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of product revenues
    
    
    71.2
    
    
    
    71.9
    
    
    
    67.2
    
    
    
    78.5Cost of product revenues, amortization of
intangible assets
    
    
    1.0
    
    
    
    
    
    
    
    0.3
    
    
    
    Research and development
    
    
    18.4
    
    
    
    13.4
    
    
    
    15.8
    
    
    
    15.0Selling, general and administrative
    
    
    29.0
    
    
    
    19.0
    
    
    
    26.3
    
    
    
    27.9In-process research and development
    
    
    4.2
    
    
    
    
    
    
    
    1.5
    
    
    
    Amortization of intangible assets
    
    
    1.0
    
    
    
    
    
    
    
    0.4
    
    
    
    Restructuring charges, net
    
    
    (0.1
    )
    
    
    6.0
    
    
    
    13.3
    
    
    
    2.0Amortization of deferred stock compensation
    
    
    
    
    
    
    0.2
    
    
    
    0.9
    
    
    
    2.5Loss (recovery) on building sublease
    
    
    
    
    
    
    
    
    
    
    (1.6
    )
    
    
    2.7Impairment of long-lived assets and other
    
    
    5.1
    
    
    
    1.7
    
    
    
    1.8
    
    
    
    10.5Total costs and expenses
    
    
    129.8
    
    
    
    112.2
    
    
    
    125.9
    
    
    
    139.1Loss from operations
    
    
    (29.8
    )
    
    
    (12.2
    )
    
    
    (25.9
    )
    
    
    (39.1
    )Interest and other income, net
    
    
    3.0
    
    
    
    3.2
    
    
    
    4.6
    
    
    
    1.7Net loss
    
    
    (26.8
    )%
    
    
    (9.0
    )%
    
    
    (21.3
    )%
    
    
    (37.4
    )%
 Revenues Total revenues in the third quarter of 2004 were $7.6 million, a 7%
decrease from $8.2 million for the same period in 2003 and were comprised of
product revenues and development fees. Total revenues for the nine months of
2004 were $21.8 million, a 10% decrease from $24.3 million for the same period
in 2003. The decrease in revenues is primarily due to pricing decreases of 10
to 15% amongst our larger customers based on contractual volume commitments and
competitive market demands, as well as a decrease in development fees
recognized. This 16




---



##### Table of Contents



was partially offset by revenues from our wholly owned subsidiary, JCA, of
$1.0 million during the third quarter of 2004. Product revenues were $7.4 million in the third quarter of 2004, a 6%
decrease from $8.0 million for the same period in 2003. Product revenues were
$21.2 million in the first nine months of 2004, a 10% decrease from $23.5
million for the same period in 2003. The decrease in revenue is primarily due
to pricing decreases of 10 to 15% amongst our larger customers based on
contractual volume commitments and competitive market demands. This was
partially offset by revenue from our wholly owned subsidiary, JCA, of $1.0
million during the third quarter of 2004. 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 $154,000 and $564,000 for the three and nine months ended September 30,
2004, respectively, as compared to $251,000 and $807,000 for the three and nine
months ended September 30, 2003. The decrease in development fees is
attributable to decreased funding for the 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. Cost 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 offset by the benefit of
usage of materials that were previously written off. Cost of product revenues was $5.4 million for the three months ended
September 30, 2004, an 8% decrease from $5.9 million for the same period in
2003. As a percentage of revenues, cost of product revenues decreased to 71.2%
in the quarter ended September 30, 2004, from 71.9% for the same period in
2003. The percentage improvement is attributable to cost reductions within the
manufacturing process, reduced materials costs and a shift toward variable
costs of manufacturing from fixed costs. The cost of product revenues was
favorably impacted by the utilization of inventory that was previously written
off amounting to approximately $114,000 during the third quarter of 2004 as
compared to $580,000 during the third quarter of 2003. Cost of product revenues was $14.6 million for the nine months ended
September 30, 2004, a 23% decrease from $19.1 million for the same period in
2003. As a percentage of revenues, cost of product revenues decreased to 67.2%
in the nine months ended September 30, 2004, from 78.5% for the same period in
2003. The percentage improvement is attributable to cost reductions within the
manufacturing process, reduced materials costs, a shift toward variable costs
of manufacturing from fixed costs and the reversal of a $793,000 charge to cost
of product revenues for a liability that was settled during the first quarter
of 2004. The cost of product revenues was favorably impacted by the
utilization of previously reserved inventory amounting to approximately
$361,000 during the first nine months of 2004 as compared to $996,000 during
the first nine months of 2003. Research and development expenses.Research and development expenses
were $1.4 million for the three months ended September 30, 2004, a 27% increase
from $1.1 million for the same period in 2003. As a percentage of revenues,
research and development expenses increased to 18.4% in the quarter ended
September 30, 2004, from 13.4% for the same period in 2003. The increase was
primarily attributable to research and development expenses incurred by JCA
during the quarter of $264,000. We also experienced increased project costs
incurred to support our current development efforts. Research and development expenses were $3.5 million for the nine months
ended September 30, 2004, a 5% decrease from $3.6 million for the same period
in 2003. As a percentage of revenues, research and development expenses
increased to 15.8% in the nine months ended September 30, 2004, from 15.0% for
the same period in 2003. The decrease in absolute dollars was primarily
attributable to the restructuring of our engineering team 17




---



##### Table of Contents



partially offset by the increase due to research and development expenses
incurred by JCA during the quarter and increased project costs as noted above. During the fourth quarter of 2004, we expect a moderate increase to
research and development expenses as we complete certain development programs
and incur costs associated with advanced development programs. Additionally,
there may be unexpected increases to research and development expenses due to
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 $2.2 million for
the three months ended September 30, 2004, a 42% increase from $1.6 million for
the same period in 2003. As a percentage of revenues, selling, general and
administrative expenses increased to 29.0% in the quarter ended September 30,
2004, from 19.0% for the same period in 2003. The increase was primarily
attributable to selling, general and administrative expenses incurred by JCA
during the quarter of $405,000 as well as increased consulting and service
fees. Selling, general and administrative expenses were $5.7 million for the
nine months ended September 30, 2004, a 15% decrease from $6.8 million for the
same period in 2003. As a percentage of revenues, selling, general and
administrative expenses decreased to 26.3% in the nine months ended September
30, 2004, from 27.9% for the same period in 2003. The decrease was primarily
attributable to our restructuring actions in the third quarter of 2003 and
expense control measures. The latter were aimed at bringing operating expenses
more in line with revenues and included a significant decrease in facility
expenses, partially offset by the expenses incurred by JCA during the third
quarter of 2004 and increased consulting and service fees. During the fourth quarter of 2004, we expect a decrease in selling,
general and administrative expenses. In-process research and development.As part of the acquisition of JCA
on July 21, 2004 we acquired $320,000 of in-process research and development
(IPR&D). The value of the IPR&D was determined based on a valuation analysis
from an independent appraiser. The amount of the purchase price for JCA
allocated to IPR&D was determined through established valuation techniques
accepted in the technology industry. The $320,000 allocated to the acquired
IPR&D was immediately expensed in the period the acquisition was completed
because the projects associated with the IPR&D had not yet reached
technological feasibility and no future alternative uses existed for the
technology. There was no such charge in the first six months of 2004 or during
the first nine months of 2003. Amortization of intangible assets.As part of the acquisition of JCA on
July 21, 2004 we acquired $4.2 million of identifiable intangible assets,
including $2.3 million of core/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: core/developed
technology  5 years, customer backlog  6 months, customer relationships  5
years. The tradename intangible asset is 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 core/developed technology is a charge
to cost of product revenues. During the third quarter of 2004, $75,000 of
amortization of core/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 third quarter
of 2004, $73,000 of amortization of customer relationships and customer backlog
was charged to operating expenses. There were no such charges in the first six
months of 2004 or during the first nine months of 2003. Restructuring charges, net.During the third quarter of 2004, we
reversed $4,000 associated with the third quarter of 2003 restructuring plan,
as we had overestimated the related charges at that time. As of September 30,
2004 there is no remaining accrual for the third quarter 2003 restructuring
plan. 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 first quarter 18




---



##### Table of Contents



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 deferred rent liability related to the previous lease
agreement. During the third quarter of 2003, we recorded a restructuring charge of
$490,000, all of which was for severance payments. The Company eliminated 18
positions and made cash payments of $486,000 under the plan. The remaining
$4,000 was reversed during the third quarter of 2004 as noted above. 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 attributable to the acceleration
of options. During the third quarter of 2004, there was no amortization of
deferred stock compensation as the remaining balance was fully amortized during
the second quarter of 2004. During the third quarter of 2003, amortization of
deferred stock compensation was $21,000. During the first nine months of 2004, amortization of deferred stock
compensation was $204,000, a decrease from $617,000 in the same period in 2003.
The decrease was related to the timing of the termination of employees with
deferred compensation associated with their stock options and the effects of
the graded vested method of amortization, which accelerates the amortization of
deferred compensation. As of September 30, 2004, there is no remaining deferred stock
compensation; therefore, no additional amortization will be recognized during
the fourth quarter of 2004. Loss (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. There was no
such charge or recovery during the third quarter of 2004. Impairment of long-lived assets.During the third quarter of 2004, we
recorded a charge of $389,000 to write off the remaining carrying value of
equipment held-for-sale of $259,000 and to write off $130,000 associated with
sales tax capitalized as part of our acquisition of Stellex Broadband Wireless
in April 2001. The equipment held-for-sale was determined to have no value
based on a current market review of similar assets and our inability to sell
the assets despite our marketing efforts. The $130,000 of capitalized sales
tax was related to equipment that had been fully depreciated or fully impaired
previously, and as such was also fully written off. During the first quarter of 2003, we evaluated the carrying value of the
long-lived assets utilized in our manufacturing process. As we moved more of
our production to our offshore partner, we did not need as much manufacturing
equipment, and took an impairment charge of $2.4 million for excess
manufacturing equipment. The impairment charge was calculated as the difference
between the carrying value and the estimated salvage value of the equipment. During the third quarter of 2003, we recorded an additional charge of
$139,000 to reduce the carrying value of engineering equipment based on the
amounts by which the carrying value of these assets exceeded their fair value.
The impairment evaluation took in to consideration the reduction in engineering
headcount that occurred during the third quarter of 2003. Our estimate of the
fair value of the assets was based on sales prices of similar equipment. Interest and other income, net.Interest and other income, net consists
primarily of interest income earned on our cash, cash equivalents and
short-term investments and gains and losses on the sale of fixed assets, offset
by interest expense on notes payable and capital equipment leases. Interest and
other income, net was $231,000 for the three months ended September 30, 2004, a
decrease from $262,000 for the same period in 2003. As a percentage of
revenues, interest and other income, net decreased to 3.0% in the quarter ended
September 30, 2004, from 3.2% for the same period in 2003. The decrease is
primarily due to lower cash balances as we paid out $6.1 million during the
quarter related to the acquisition of JCA. 19




---



##### Table of Contents



Interest and other income, net was $993,000 for the nine months ended
September 30, 2004, an increase from $404,000 for the same period in 2003. As
a percentage of revenues, interest income, expense and other, net increased to
4.6% in the nine months ended September 30, 2004, from 1.7% for the same period
in 2003. The increase was due primarily to the sale of land, fixed assets and
assets held-for-sale during the first quarter of 2004, which resulted in a net
gain of $473,000 during the period. Additionally, we experienced lower
interest expense during the first nine months of 2004 as all of our capital
leases were paid off prior to the start of the current fiscal year. Liquidity and Capital Resources Selected Financial Liquidity Data We had cash, cash equivalents, restricted cash, and short-term investments
at September 30, 2004 and December 31, 2003 of $26.6 million and $30.1 million,
respectively. During the first nine months of 2004, we used $2.6 million of cash in
operating activities, as compared to $541,000 in the same period of 2003. The
use of $2.6 million of cash in the first nine months of 2004 was due to the net
loss adjusted for non-cash items of $3.2 million, a $2.3 million decrease in
accounts payable, accrued warranty, and accrued compensation and other current
and long-term liabilities, partially offset by a decrease in accounts
receivable of $1.7 million, a decrease in inventory of $851,000 and a decrease
in other assets of $345,000. The use of $541,000 in the first nine months of
2003 was due to net loss adjusted for non-cash items of $3.2 million, a $1.9
million increase to accounts receivable, partially offset by a $3.5 million
decrease to inventory, a $545,000 decrease to other assets and an increase of
$437,000 million in accounts payable, accrued warranty and other current and
long-term liabilities. Investing activities provided cash of $4.3 million in the first nine
months of 2004 as compared to $5.9 million in the same period for 2003. The
decrease in the cash provided by investing activities during the current year
was due to the use of $6.1 million for the purchase of JCA and fewer maturities
of short-term investments than in the corresponding period in the previous
year. This was partially offset by the proceeds from the decrease in
restricted cash of $778,000, and by the proceeds on sales of property and
equipment during the nine months ended September 30, 2004 of $5.1 million,
primarily due to the $4.3 million generated by the sale of our Diamond Springs,
California location. Financing activities provided cash of $477,000 in the first nine months of
2004 as compared to a use of $1.2 million in the first nine months of 2003. The
$477,000 provided by financing activities in the first nine months of 2004 was
due to the $1.3 million of proceeds from the exercise of employee stock options
and stock issuances offset by the $778,000 payment made on the notes payable.
Financing activities in the same period for 2003 included payments on capital
lease obligations of $1.3 million, which were paid off during 2003 and $370,000
on notes payable. We believe that our existing cash and investment balances will be
sufficient to meet our operating and capital requirements for at least the next
12 months. However, revenues could decline below our expectations resulting in
insufficient cash flow from operations or we may require additional financing
to fund strategic acquisitions. As a result, we could be required, or could
elect, to raise additional funds during that period and we may need to raise
additional capital in the future. 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. 20




---



##### Table of Contents



The following table summarizes our future payment obligations for
operating leases (excluding interest): OperatingYears Ending December 31,
    
    Leases(in thousands)2004
    
    $
    842005
    
    
    3092006
    
    
    131Total minimum payments required
    
    $
    524
 Risk Factors Stockholders or potential investors considering the purchase of shares of
our common stock should carefully consider the following risk factors, in
addition to other information contained in this Quarterly Report on Form 10-Q
and our most recent Annual Report on Form 10-K. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
could also impair our business operations. We expect to operate near our break even point and may not be profitable in the
future. We have had a history of losses. We had a net loss of $2.0 million and
$4.6 million for the three and nine months ended September 30, 2004,
respectively. Additionally, we had net losses of $7.9 million, $31.0 million
and $156.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively. While we have taken ongoing restructuring actions, there is no
guarantee that these restructuring actions will enable the Company to achieve
profitability in the future. Our failure to attain profitability may cause the
market price of our common stock to decline in the future. We are subject to risks associated with acquisitions. Acquiring other businesses is an important focus of our strategy for
growth. Most recently, on July 21, 2004, we announced the acquisition of JCA
Technology, Inc., JCA, a wholly owned subsidiary of Bookham plc., a provider of
RF amplifiers and modules to the defense, commercial radar, and homeland
security markets. The process of integrating JCA or any other acquired
business into our business and operations is risky and may create unforeseen
operating difficulties and expenditures. We are currently working toward
integrating JCA into our operations and face the possibility of the following
difficulties:  
    
    assimilating the acquired operations and personnel;
    
    integrating information technology and reporting systems;
    
    retention of key personnel;
    
    retention of acquired customers;
    
    disruption of the acquired business;
    
    disruption of our ongoing business; and
    
    implementation of controls, procedures and policies. Moreover, we may not be able to successfully overcome potential problems
encountered with these acquisitions or other potential acquisitions. In
addition, future acquisitions could materially adversely affect our operating
results by diluting our stockholders equity, causing us to incur additional
debt, incurring significant immediate expenses related to write-offs, or
incurring amortization of acquisition expenses and acquired assets. We are required in many cases to obtain government approvals and licenses prior
to shipping product and rejections or delays in getting approvals could delay
or reduce revenues. Many of the products we produce and supply to our foreign customers are
controlled by U.S. government export regulations promulgated by the Departments
of State, Commerce and Defense. Prior to shipment of these products, we must
apply for various approvals and licenses. This application process is lengthy
and granting of the 21




---



##### Table of Contents



licenses and approvals is not certain. Delays or rejections in approving
our applications would subsequently delay or reduce out shipments for these
products. Our ability to grow our business in the U.S. government end-use market could be
limited by Congress or Executive Branch agency decisions regarding future
government program appropriations and authorizations. Our growth strategy is partially dependent on growth in sales to Defense
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 sales
over past periods or alters future forecasts. At the first-tier subcontractor
level, the impacts of reduced (or increased) federal funding are often not
known until the winter following the start of the governments fiscal year. We depend upon a small number of key customers for a large part of our
revenues, and the loss of any of them, or their failure to sell their systems,
would limit our ability to generate revenues. We depend, and expect to remain dependent, on a relatively small number of
key customers for a large portion of the sales of our products. If our
customers reduce orders for our products, we could lose revenues and suffer
damage to our reputation in the industry. For the quarter ended September 30,
2004, sales to Nokia and PowerWave accounted for 55% and 10% of total revenues,
respectively. The loss of any one of our major customers, particularly Nokia, would have
a material adverse effect on our business, financial condition and results of
operations. Most of our customers are not under any commitment to purchase
products from us, except on a purchase order basis. Under our contract with
Nokia, Nokia is required to provide us with a weekly rolling forecast for the
upcoming 52-week period and we are obligated to provide products to them in a
consignment stock location. The amount and type of product shipped to the
consignment location is based upon Nokias estimate of need and RF frequency.
Revenues are recognized at the time product is withdrawn by Nokia from the
consignment location, or at the latest, after four months have passed since the
date of receipt, assuming all other criteria for revenue recognition have been
met. As a result, there could be up to a four-month period whereby we would
not recognize revenues for product previously shipped. Deliveries are based on
forecast but there is no guarantee that the forecast will be fulfilled.
Forecasts may vary greatly and can be changed without notice. Our customers may not have or use the financial, marketing, technological
and other resources necessary to ensure that their solutions will succeed in a
marketplace characterized by rapid technological changes and intense
competition. For example, communications service providers may insist that
wireless systems integrators provide extensive financing for the deployment of
large broadband wireless access networks, and our customers may be unwilling or
unable to provide the necessary financial resources. If the wireless systems
integrators that we supply were not successful in selling their broadband
wireless access systems for any reason, our operating results would be harmed. Until late 2002, our cost of product revenues has exceeded our product
revenues, and because we expect competitive conditions will force us to reduce
prices in the future, we must achieve further cost reductions in order to
maintain sufficient positive gross margins to remain profitable. We reported negative gross margins from inception until the fourth quarter
of 2002. If we are not able to continue to reduce our per-unit cost of product
revenues to a sufficient degree, we may not be able to maintain positive gross
margins. We expect market conditions, particularly declining prices for
competing broadband access solutions, will force us to reduce our prices in the
future. In order to reduce these costs, we must continue to migrate our
products to designs that require lower cost materials, improve our
manufacturing efficiencies and successfully move production to low cost,
offshore locations. The combined effects of these actions may not be sufficient
to achieve the cost reductions needed to maintain positive gross margins and to
sustain profitability. 22




---



##### Table of Contents



Our operating results have historically fluctuated significantly and are likely
to continue to do so in future periods. These results may fail to meet the
expectations of securities analysts or investors, causing our stock price to
fall. Our quarterly and annual operating results are difficult to predict and
are likely to continue to fluctuate significantly from period to period. It is
likely that our operating results in one or more future quarters may be below
the expectation of security analysts and investors. In that event, the trading
price of our common stock almost certainly would decline. Our operating results
may fluctuate for many reasons, including but may not limited to:  
    
    variations in the timing and size of, or cancellations or
reductions of, customer orders and shipments;
    
    variations in the availability, cost and quality of components from
our suppliers, particularly from our single source suppliers and
suppliers of scarce components;
    
    competitive factors, including pricing, availability and demand for competing products;
    
    constraints on our manufacturing capacity;
    
    variability of the product development and sales cycle with our customers;
    
    variations in our manufacturing yields and other factors affecting our manufacturing costs;
    
    changes in our sales prices;
    
    changes in the mix of products with different gross margins;
    
    failure to meet milestones under any significant development contracts;
    
    obsolescence of our component inventories;
    
    hiring and loss of personnel, particularly in manufacturing,
research and development and sales and marketing; and
    
    product defect claims and associated warranty expenses. We have a lengthy product development and sales cycle. As a result, we must
invest substantial financial and technical resources in a potential sale before
we know whether the sale will occur. If the sale does not occur, we may not
have the opportunity to sell products to that customer until another generation
of its system is developed. Our products are highly technical and accordingly our sales efforts
involve a collaborative and iterative process with our customers to determine
their specific requirements and design an appropriate solution. Depending on
the product, the typical product development and sales cycle can take anywhere
from three to twelve months, and we incur significant expenses as part of this
process without any assurance of resulting revenues. During the product
development phase, our engineers typically work with the customer to define the
product and design a prototype product for the customer to evaluate. 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 customers 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. 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. 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 23




---



##### Table of Contents



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 products is designed for a specific range of frequencies.
Because different national governments license different portions of the
frequency spectrum for the broadband wireless access market, and because
communications service providers that use broadband wireless access systems
license specific frequencies as they become available, we must adapt our
products rapidly to use a wide range of different frequencies in order to
remain competitive. 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 affect the
timing of our revenues. 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. At times in the past, we have not produced 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. 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. Manufacturing delays and interruptions can occur for many reasons
including but not limited to:  
    
    lack of sufficient capacity;
    
    the failure of a supplier to deliver needed components on a timely basis, or with acceptable quality;
    
    poor manufacturing yields;
    
    labor disputes;
    
    manufacturing personnel shortages;
    
    equipment failures;
    
    natural disasters;
    
    transportation disruptions;
    
    acts of terrorism;
    
    changes in import/export regulations
    
    infrastructure failures; and
    
    political instability. The manufacturing of 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. We rely heavily on our Southeast Asia manufacturing partners to produce product
for us. If our partners are unable to produce product in sufficient quantities
or with adequate quality or they choose to terminate our partnership
arrangements, we may not be able to fulfill our production commitments to our
customers, which could cause us to lose sales and would harm our reputation. As part of our operating strategy, we partially or wholly outsource the
assembly and test of some of our subassemblies and finished products to
partners located in Southeast Asia. We plan to continue this arrangement as a
key element of our operating strategy. If these vendors do not provide us with
high quality products and services in a timely manner, or if one or more of
these vendors terminates its relationship with us, we may be unable to obtain 24




---



##### Table of Contents



satisfactory replacements to fulfill customer orders on a timely basis.
Factors that could result in an interruption of supply from our offshore
partners include, but may not be limited to:  
    
    changes in local regulations and government policy;
    
    currency fluctuations;
    
    lack of sufficient capacity;
    
    the failure of a supplier to deliver needed components on a timely basis, or with acceptable quality;
    
    poor manufacturing yields;
    
    labor disputes;
    
    manufacturing personnel shortages;
    
    equipment failures;
    
    natural disasters;
    
    transportation disruptions;
    
    acts of terrorism;
    
    changes in import/export regulations
    
    infrastructure failures; and
    
    political instability. In the event of an interruption of supply from our offshore partners, our
reputation may be harmed and we may lose potential future sales. Our reliance on Northrop Grumman and other third-party semiconductor providers
to manufacture our gallium arsenide devices may cause a significant delay in
our ability to fill orders and limit our ability to assure product quality and
control costs. We do not own or operate a semiconductor fabrication facility. We
currently rely on the semiconductor fabrication facilities of Northrop Grumman,
and other third parties to manufacture substantially all of the gallium
arsenide and other semiconductor devices incorporated in our products. The loss
of our relationship with any of these third parties or our use of their
semiconductor fabrication facilities, and any resulting delay or reduction in
the supply of gallium arsenide devices to us, will impact our ability to
fulfill customer orders and could damage our relationships with our customers.
Our current supply agreement with Northrop Grumman expires in December of 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 are limited numbers of third-party
semiconductor fabrication facilities that use the particular process
technologies we select for our products and have sufficient capacity to meet
our needs, using alternative or additional third-party semiconductor
fabrication facilities would require an extensive qualification process that
could prevent or delay product shipments. Since we do not own or control any of these third party semiconductor
suppliers, any change in the corporate structure or ownership of the
corporations that own these foundries, could have a negative effect on or
future relations and ability to negotiate favorable supply agreements. Our reliance on these third-party suppliers involves several additional
risks, including reduced control over manufacturing costs, delivery times,
reliability and quality of the products incorporating these devices. The
fabrication of semiconductor devices is a complex and precise process. There
are many factors that can cause a 25




---



##### Table of Contents



substantial percentage of wafers to be rejected or numerous devices on a
wafer to be nonfunctional including, but not limited to:  
    
    minute impurities;
    
    difficulties or inconsistencies in the fabrication process;
    
    defects in the masks used to print circuits on a semiconductor wafer; and
    
    wafer breakage. We expect that our customers will continue to establish demanding
specifications for quality, performance and reliability that must be met by our
products. Our third-party semiconductor fabrication facilities may not be able
to achieve and maintain acceptable production yields in the future. In the
past, we have experienced delays in product shipments from our third-party
semiconductor fabrication facilities, which in turn delayed product shipments
to our customers. To the extent these suppliers suffer failures or defects, or
delay deliveries to us, we could experience lost revenues, increased costs and
delays in, cancellations or rescheduling of orders or shipments, any of which
would harm our business. Because of the scarcity of some components and our dependence on single
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:  
    
    electronic filters;
    
    circuit carrier assemblies;
    
    voltage controlled oscillators;
    
    semiconductor devices;
    
    yttrium iron garnet components;
    
    magnetic components; and
    
    frequency references. 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. 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 is
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. Additionally, consolidations among our
suppliers could result in other sole source suppliers for us in the future. Because we do not have long-term commitments from many of our customers, we
must estimate customer demand, and errors in our estimates would have negative
effects on our inventory levels and revenues. Our primary market, the telecommunications industry, has been
characterized in recent years by severe demand fluctuations and down turns.
Further, the overall economic slow down in the U.S. and other economies has
exacerbated these difficulties. This has led to fluctuating order forecasts
from some of our customers. There can be no certainty as to the degree of the
severity or duration of these fluctuations in demand. We also cannot predict
the extent and timing, of the impact of the economic downturn in the United
States and the worldwide downturn for the telecommunications industry on
economies in Canada, Europe and other countries and geographic regions. 26




---



##### Table of Contents



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 nine 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 accrue 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, lose 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. Because we may expand our manufacturing capacity in advance of demand, our
manufacturing facilities may continue to be underutilized, which may harm our
operating results. As part of our strategy, we may expand our manufacturing capacity beyond
the level required for our current sales. As a result, our manufacturing
facilities in the future may continue to be underutilized from time to time.
We expand our manufacturing capacity based on industry projections for future
growth. Even if the broadband wireless industry experiences significant
growth, we could still be unsuccessful in selling our products and growing
along with the industry. If demand for our products does not increase
significantly, underutilization of our manufacturing facilities will likely
continue and could harm our profitability and other operating results.
Conversely, if we do not maintain adequate manufacturing capacity to meet
demand for our products, we will lose opportunities for additional sales. Any
failure to have sufficient manufacturing capacity to meet demand would harm our
market share and operating results. Our products may contain component, manufacturing or design defects or may not
meet our customers performance criteria, which could harm our customer
relationships, industry reputation, 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 three 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. Further, our customers may discover
latent defects in our products that were not apparent when the warranty period
expired. These defects may cause repair or replacement expenses beyond the
normal warranty, the loss of customers or damage to our reputation. We have
experienced this type of failure in the past and have had to provide
liabilities for repairing the affected units. We cannot guarantee that similar
failures will not occur in the future resulting in significant liabilities and
charges in future periods. Some of the contracts that we have entered into or assumed during acquisitions
may contain clauses making Endwave liable for consequential damages or other
indirect costs that customers may incur. These indirect costs may be
significantly higher than the cost of repair or replacement of the Endwave
product. We typically warrant our products for a period of one to three years,
during which time we have the option to repair or replace any faulty products
that are returned to us during the warranty period. In addition, some
contracts require that if there are hidden or latent defects, or defects that
appear after the warranty period which could not be detected during normal
inspection, we shall undertake any and all necessary corrective actions,
including but not limited to redesigning the parts and replacing defective
parts in the field. If mutually agreed, repair or replacement of defective
units can be undertaken by the customer, who we shall compensate for actual
costs. Some radios incorporating our transceivers and manufactured and shipped by
one of our customers are experiencing degraded performance after installation
in the field. The cause of the degradation has been identified to be a faulty
electronic component supplied by one of our vendors. We believe the cause of
the components out of specification performance has been identified and
corrected. Although the transceiver products were delivered under a contract
between Endwave and the customer, the component supplier has agreed to
compensate our 27




---



##### Table of Contents



customer for the indirect costs associated with the repair and
replacement of the degraded radios and modules. 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 the radio.
Subsequently we have reached an agreement with the component supplier to share
a portion of these repair and replacement costs. Any failure to appropriately protect our intellectual property could reduce or
eliminate any competitive advantage we have. Our success will depend, 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. Nevertheless, these measures may not be adequate
to safeguard the proprietary technology underlying our products. With regard
to our pending patent applications, no patents may be issued as a result of
these or any future applications. If they are issued, any patent claims allowed
may not be sufficiently broad to protect our technology. In addition, any
existing or future patents may be challenged, invalidated or circumvented, and
any right granted hereunder may not provide meaningful protection to us. 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. We generally enter into confidentiality and assignment of rights to
inventions agreements with our employees, and confidentiality and
non-disclosure agreements with our strategic partners, and generally control
access to and distribution of our documentation and other proprietary
information. Despite these precautions, 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, limited, or unenforceable 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 or to
discontinue support of existing patents, copyrights or trademarks within the
United States or foreign countries. We occasionally agree to incorporate a
customers or suppliers intellectual property into our designs, in which cases
we have obligations with respect to the non-use and non-disclosure of that
intellectual property. We also license technology from Velocium, an operating unit of Northrop
Grumman. There are no limitations on our rights to make, use or sell products
we may develop in the future utilizing the technology licensed to us by
Velocium, 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 that 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 depend on our key personnel. Skilled personnel in our industry can be in
short supply. If we are unable to retain our current personnel and hire
additional qualified personnel, our ability to develop and successfully market
our products would be harmed. We believe that our future success will depend upon our ability to
attract, integrate and retain highly skilled managerial, sales and marketing,
research and development and manufacturing personnel. Skilled personnel in our
industry can be in short supply. To attract and retain qualified personnel, we
may be required to grant large option or other stock-based incentive awards,
which may be highly dilutive to other stockholders. We may also be required to
pay significant base salaries and cash bonuses, which could harm our operating
results. In addition, prospective employees, given the current volatility of
the stock prices of technology focused companies, could perceive the stock
option component of our compensation package overly risky and require more
significant salary or cash bonus incentives for that reason. 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 28




---



##### Table of Contents



to continue in their present positions, these persons would be very
difficult to replace, and our business could be seriously harmed. We do not
maintain key person life insurance policies. Our ability to increase our sales in international markets may be limited by
risks related to international trade and marketing. For the quarter ended September 30, 2004, 76% of our revenues were derived from
sales invoiced and shipped to customers outside the United States. In
addition, some of our United States based customers may sell products, which
incorporate our products, into international markets. Adverse international
economic conditions or developments could in the future negatively affect our
revenues and sales by our customers into these regions, which would impact our
revenues. In addition to the uncertainty as to our ability to maintain and
expand our international presence, there are certain risks inherent in foreign
operations, including, but not limited to:  
    
    changing regulations of various countries or regulating agencies
effecting radio deployments and spectrum use;
    
    difficulties in complying with foreign laws and regulations and
obtaining foreign governmental approvals and permits;
    
    delays in or prohibitions on exporting products resulting from
export restrictions for our products and technologies;
    
    international trade disagreements or embargos;
    
    fluctuations in foreign currencies and the United States dollar, especially the Euro;
    
    political and economic instability;
    
    unforeseen effects of terrorism and terrorist activities;
    
    adverse tax consequences; and
    
    seasonal reductions in business activity. In addition, foreign laws treat the protection of proprietary rights and
intellectual property differently from laws in the United States and may not
protect our proprietary rights and intellectual property to the same extent as
United States laws. We currently transact business only in U.S. dollars. In the future, economic or
competitive situations may require us to conduct business in other currencies.
If this were to happen, we could become subject to currency exchange rate
volatility, which could have an adverse impact on our operating results and
financial condition. We conduct all of our current business in U.S. dollars. In the future,
economic conditions or competitive pressures may require us to sell product in
other currencies, especially the Euro because of the high concentration of
current and potential customers in countries that have adopted the Euro. If
this was to occur and our contracts did not provide currency protection, we
could experience significant currency exchange rate volatility. That volatility
could have serious impacts on dollar value of our sales and subsequently on our
operating results and financial condition. Many of our customers operate in Euro-based economies. The current rise in the
value of the Euro could make their products noncompetitive in world markets
thereby reducing their revenues and causing Endwave to also lose revenues. Many of our customers operate in countries that have adopted the Euro as
their standard currency. The recent rise in the Euro could make products built
in those countries noncompetitive in world markets due to the relative strength
of the Euro. If this were to happen, it is likely that our customers would lose
sales and Endwave would subsequently see reduced demand. Further, similar
currency effects may require our customers to reduce their 29




---



##### Table of Contents



prices, bringing further pressure on Endwave to reduce its prices. Such
price reductions offered to our customers could harm our margins, operating
results and financial condition. Compliance with current or future environmental laws and regulations could
impose significant burdens on us, which could have an adverse impact on our
operating results and financial condition. We use a small number of hazardous substances to produce our products. If
we fail to comply with present or future governmental regulations related to
the use, storage, handling, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals used in our manufacturing processes, we may have
our manufacturing operations suspended and we may be assessed fines. We may
also be required to alter our manufacturing processes or even cease operations
in locations where we cannot become compliant with applicable government
regulation, which would result in significant costs. In particular, we face
the costs and risks associated with a transition to lead free solders in our
products. Governmental regulations could also require that we incur expensive
remediation costs or other expenses to comply with environmental regulations.
We could also face future liabilities in civil actions for violations of
environmental laws and regulations. Liability for cleanup under the
Comprehensive Environmental Response, Compensation and Liability Act is joint
and several. Consequently, if other parties that share responsibility with us
for contamination at any site are unable to pay for their share of any damages
or remediation, we may be held liable to pay for some or all of their share. The broadband wireless access industry is relatively new and its future is
uncertain. If significant demand for this technology does not develop, it will
limit our ability to grow our revenues. Broadband wireless access technology is one of several possible ways to
provide high-speed infrastructure for transmission of voice, video and data.
However, the level of demand for high speed access will be at least partially
dependent upon the development of end user applications that will require
higher data rates, and their acceptance and use by the market. If this demand
will be significant and at what rate it will be created is not known at this
time. Broadband wireless access technology is relatively new and unproven in the
marketplace. This technology may prove unsuitable for widespread commercial
deployment, in which case it is unlikely we could generate enough revenues to
obtain and sustain profitability. Many factors will influence the success or
failure of broadband wireless access technology, including, but not limited to:  
    
    its capacity to handle growing demands for faster transmission of
increasing amounts of video, voice and data;
    
    its cost effectiveness and performance compared to other forms of
broadband access, the prices and performance of which continue to
improve;
    
    its reliability and security;
    
    whether the products can be manufactured in sufficient volume;
    
    its suitability for a sufficient number of geographic regions;
    
    the availability of sufficient frequencies for wireless
communications service providers to deploy products at commercially
reasonable rates;
    
    the availability of sufficient site locations for wireless
communications service providers to install products at commercially
reasonable rates;
    
    the development of user applications that will create the demand
for higher capacity infrastructure for voice, video and data traffic;
    
    safety and environmental concerns regarding broadband wireless
transmissions; and
    
    permission by domestic and international regulatory authorities to
allow construction of new wireless systems. 30




---



##### Table of Contents



Many competing technologies serve our broadband access market, and if the
broadband wireless access technologies upon which our products are based do not
succeed as a solution for broadband access, we may not be able to sustain or
grow our business. Providers of broadband wireless access solutions compete with providers of
other high speed solutions, including digital subscriber lines, cable, fiber
and other high-speed wire, satellite and wireless technologies. Many of these
alternative technologies use existing installed infrastructure and have
achieved significantly greater market acceptance and penetration than broadband
wireless access technologies. Moreover, current broadband wireless access
technology has inherent technical limitations that may inhibit its widespread
adoption in many areas, including the need for line-of-sight installation and
reduced communication distance in bad weather. Broadband wireless access
technology continues to evolve which could cause some service providers to
delay product purchases or could result in significant shifts in the products
the market favors. In addition, the need for communications service providers
to obtain the rights to install broadband wireless access equipment on rooftops
and in other locations may inhibit its widespread adoption. We expect
broadband access technologies to face increasing competitive pressures from
both current and future alternative technologies. In light of these factors,
many communications service providers may be reluctant to invest heavily in
broadband wireless access solutions and, accordingly, the market for these
solutions may fail to develop or may develop more slowly than we expect.
Either outcome would limit our sales opportunities. The broadband wireless access infrastructure equipment industry is intensely
competitive, and our failure to compete effectively could reduce our revenues
and margins. Competition in the market for RF subsystems for broadband wireless access
systems is intense. In addition, new entrants to the market can emerge and
become significant competitors. Some new competitors have been formed by
acquiring assets of failed or disbanded companies. Generally, these assets have
been acquired at prices much lower than normally expected and this may give
these new entrants a cost advantage. We believe that the principal competitive factors in our industry are:  
    
    technical leadership and product performance;
    
    time-to-market in the design and manufacturing of products;
    
    manufacturing capability and scalable capacity;
    
    financial stability;
    
    favorable access to semiconductor materials;
    
    price;
    
    the ability to migrate to low cost solutions;
    
    product breadth;
    
    logistical flexibility; and
    
    carrier class quality. There are also wireless systems integrators, for example, Ericsson, that
design and manufacture their own RF subsystems for internal use. To the extent
wireless systems integrators presently, or may in the future, produce their own
RF subsystems, we lose the opportunity to gain a customer and the related sales
opportunities. Conversely, if they should decide to outsource their
requirements, we may have new opportunities. Many of our current and potential competitors are substantially larger
than us and have greater financial, technical, manufacturing and marketing
resources. If we were unable to compete successfully, our future operations
and financial results would be harmed. 31




---



##### Table of Contents



We must adapt to the rapid technological changes inherent in the broadband
wireless access industry in order to succeed. In order to succeed, we must improve current products and develop and
introduce new products that are competitive in terms of price, performance and
quality and that adequately address the changing requirements of wireless
systems integrators, their customers and subscribers and emerging industry
standards. To accomplish this, we make substantial investments in the research
and development of new products for and improvements to existing products. If
these investments do not result in competitive products that generate large
volume orders, we may be unable to generate sufficient revenues to achieve
profitability. We intend to continue to incur substantial research and
development and product development expenses. It is possible that these
investments will not generate product revenues sufficient to offset the
original investment expense. 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. The FCC
and foreign regulatory agencies have adopted regulations that impose stringent
RF emissions standards on the communications industry. Changes to these
regulations may require that we alter the performance of our products. The enactment by governments of new laws or regulations or a change in the
interpretation of existing regulations could adversely affect the market for
our products. Although there is a present trend toward deregulation and
current regulatory developments are favorable to the promotion of new and
expanded wireless services, this could change at any time, and future
regulatory changes could have a negative impact on us. Further, the increasing
demand for wireless communications has exerted pressure on regulatory bodies
worldwide to adopt new standards for broadband wireless access products,
generally following extensive investigation and deliberation over competing
technologies. In the past, the delays inherent in this governmental approval
process have caused, and in the future may cause, the cancellation,
postponement or rescheduling of the installation of communications systems by
our customers. These delays could affect our ability to allocate our research
and development resources effectively, cause our existing and potential
customers to delay orders and otherwise harm our ability to generate revenues. Our industry is characterized by vigorous protection and pursuit of
intellectual property rights. This could cause us to become involved in costly
and lengthy litigation, which could subject us to liability, prevent us from
selling our products or force us to redesign our products. The wireless access industry is characterized by vigorous protection and
pursuit of intellectual property rights. We have received and 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 the
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 strategic partners 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 strategic partner of a
product which was later discovered to infringe upon another partys proprietary
rights. Irrespective of the validity or successful assertion of intellectual
property claims, we would likely incur significant costs and diversion of our
resources with respect to the defense of any 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. Endwave has broad and comprehensive legal, ethical, and regulatory compliance
responsibilities, which could cause legal liability and reputational harm if
not managed carefully. As a public company engaged in commercial and government end-use commerce
on both a national and international basis from substantially a California base
of operations, we are charged with strict compliance under 32




---



##### Table of Contents



multi-jurisdictional law or regulation in all we do. The relative small
size of the company, coupled with our aggressive growth plan against an
industry backdrop of zero tolerance for breach of legal and ethical
obligations, creates a risk that we may unintentionally not fully comply with
all requirements. If this risk is realized, the result could be public or
private litigation, administrative penalties including higher compliance costs,
or in an extreme case, criminal sanctions The market price of our common stock is likely to fluctuate. The price of our common stock has fluctuated widely since our initial
public offering in October 2000. 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 broadband wireless access industry;
    
    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
    
    because a small percentage of our stock is owned by public
stockholders, it trades in low volumes which could cause volatility in
our share price. In addition, the stock market has experienced extreme price and volume
fluctuations, including significant volatility in the market price of our
common stock in particular. 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. Our ability to achieve our business goals is substantially dependent on our
access to sufficient capital. If we do not have sufficient capital to fund our operations, we may be
forced to discontinue product development, reduce our sales and marketing
efforts and forego attractive business opportunities, and we may lose the
ability to respond to competitive pressures. It is possible we may need to
raise additional funds in the future, and this additional financing may not be
available to us in favorable terms, if at all. We may also require additional
capital to acquire or invest in complementary businesses or products or obtain
the right to use complementary technologies. If we issue additional equity
securities to raise funds, the ownership percentage of our existing
stockholders would be reduced. New investors may demand rights, preferences or
privileges senior to those of existing holders of our common stock. If we
issue debt securities to raise funds, we may incur significant interest
expense, which would harm our profitability. The issuance of debt securities
may also require us to agree to various restrictions typical of debt
securities, including limitations on further borrowing and our right to pay
dividends. Northrop Grumman and our officers and directors control a large percentage of
our common stock and together are able to control the outcome of matters
requiring stockholder approval. As of September 1, 2004, directors and holders of five percent or more of
our outstanding common stock beneficially owned approximately 47% of our common
stock. Of this percentage, Northrop Grumman alone 33




---



##### Table of Contents



beneficially owns approximately 35% of our common stock. As a result, our
executive officers, directors and five percent stockholders as a group are able
to effectively control all matters requiring approval of our stockholders,
including the election of directors and approval of significant corporate
transactions. Northrop Grumman alone is able to significantly influence
matters on which the stockholders vote. 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. In
addition, because of their ownership of our common stock, these stockholders
are in a position to significantly affect our corporate actions in a manner
that could conflict with the interests of our public 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 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. In addition,
we have an Officer Retention Plan that provides for the acceleration of vesting
of a percentage of the stock options granted to our officers under certain
conditions. Under this plan, an unvested portion of each officers stock
options will become vested and, in addition, severance benefits will be paid to
the officer, if we undergo a change in control transaction or the officer is
terminated without cause. This plan 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, 2003 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 to ensure that information that we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. 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 34




---



##### Table of Contents



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. In connection with various restructuring plans during 2003, there were
significant changes to our internal controls over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act). We believe that these changes,
although significant, did not materially affect and are not reasonably likely
to materially affect our internal controls over financial reporting. During the first nine months ending September 30, 2004, we have
implemented additional controls and procedures to ensure that reconciliations,
analyses and supporting documentation are prepared on a timely basis. We have
also increased our accounting staff resources. We will continue to refine our
internal controls and procedures over time, to continue to facilitate the
accurate presentation of our financial condition, results of operations and
cash flows. 35




---



##### Table of Contents



PART II. OTHER INFORMATION 
 Item 5. Submission of Matters to a Vote of Security Holders We held our Annual Meeting of Stockholders on July 21, 2004. The results
of the voting were as follows: 1.
    
    To elect one director, Carol Herod Sharer, to hold office
until 2007 Annual Meeting of Stockholders.FOR: 9,114,657
    
    WITHHOLD: 17,976To the elect one director, Joseph J. Lazzara, to hold office until
2007 Annual Meeting of Stockholders.FOR: 9,111,758
    
    WITHHOLD: 20,8752.
    
    To approve the Companys 2000 Non-Employee Director Plan, as
amended, to increase the automatic option grants pursuant thereto
such that directors shall receive upon becoming a director an
initial option grant to purchase 20,000 shares of common stock and
each year thereafter an annual option grant to purchase 5,000 shares
of common stock.FOR: 4,991,469
    
    WITHHOLD: 530,934
    
    ABSTAIN: 9,3203.
    
    To ratify the selection by the Audit Committee of the Board
of Directors of Ernst & Young LLP as independent auditors of Endwave
for its fiscal year ending December 31, 2004.FOR: 9,113,890
    
    WITHHOLD: 16,278
    
    ABSTAIN: 2,465
 
 Item 6. Exhibits ExhibitsNumber
    
    Description2.1(iii)
    
    Asset Purchase Agreement by and among M/A-COM Tech, Inc., Tyco
Electronics Logistics AG and the Registrant dated as of April 24, 2001.2.2(v)
    
    Asset Purchase Agreement by and among Signal Technology Corporation and
the Registrant dated as of September 24, 2002.3.1(i)
    
    Amended and Restated Certificate of Incorporation effective October 20,
2000.3.2(i)
    
    Amended and Restated Bylaws effective October 20, 2000.3.3(xi)
    
    Certificate of Amendment of Amended and Restated Certificate of
Incorporation effective June 28, 2002.4.1(i)
    
    Form of specimen Common Stock Certificate.4.2(i)
    
    Investors Rights Agreement dated March 31, 2000 by and among the
Registrant and certain investors named therein.4.3(i)
    
    Warrant to Purchase Stock dated March 16, 1998, issued by the Registrant
to Silicon Valley Bank for the purchase of shares of the Registrants
Series E Preferred Stock.4.4(iii)
    
    Rights Agreement by and between M/A-COM Tech, Inc. and the Registrant
dated as of April 24, 2001.10.1(i)
    
    Form of Indemnity Agreement entered into by the Registrant with each of its directors and officers.10.2(i)
    
    1992 Stock Option Plan.10.3(i)
    
    Form of Incentive Stock Option under 1992 Stock Option Plan.10.4(i)
    
    Form of Nonstatutory Stock Option under 1992 Stock Option Plan.10.5(i)
    
    Amended and Restated 2000 Equity Incentive Plan.10.6(i)
    
    Form of Stock Option Agreement under 2000 Equity Incentive Plan.10.7(i)
    
    2000 Employee Stock Purchase Plan.
 36




---



##### Table of Contents



ExhibitsNumber
    
    Description10.8(i)
    
    Form of 2000 Employee Stock Purchase Plan Offering.10.9(i)
    
    2000 Non-Employee Director Plan.10.10(i)
    
    Form of Nonstatutory Stock Option Agreement under the 2000 Non-Employee Director Plan.10.11 (ix)
    
    Executive Officer Severance and Retention Plan.10.12(iv)
    
    Industrial Lease by and between The Irvine Company and the Registrant dated July 2, 2001.10.18(i)
    
    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, 1999.10.20(i)
    
    Services Agreement by and between TRW Inc. and the Registrant dated March 31, 2000.10.21(i)
    
    Supply Agreement by and between TRW Inc. and the Registrant dated March 31, 2000.10.23(i)
    
    License Agreement by and between TRW Inc. and TRW Milliwave Inc. dated February 28, 2000.10.24(ii)
    
    Purchase Agreement No. 1201000 made and entered into by and between
Nokia Networks By and Endwave Corporation on November 7, 2000.10.25(vi)
    
    Contract Change Notice/Amendment No. 1 to the Supply Agreement by and
between TRW Inc. and the Registrant dated March 15, 2002.10.26(vii)+
    
    Purchase Order 88M31651 by and between Lockheed Martin Corporation
and the Registrant, dated May 21, 2002.10.27(viii)
    
    Extension of Validity of Purchase Agreement by and between Nokia
and the Registrant dated September 9, 2002.10.28(ix)+
    
    Development Agreement by and between Nokia and the Registrant dated August 14, 2003.10.29(ix)
    
    Transaction Incentive Plan10.30(x)+
    
    Purchase Agreement by and between Nokia Corporation and the
Registrant dated December 31, 2003.10.31(xi)
    
    Amended and Restated Supply Agreement by and between Northrup Grumman
Space and Mission Systems Corp. and Registrant dated March 26, 200410.32(xi)
    
    Industrial Lease by and between The Irvine Company and the Registrant
dated January 28, 200410.33(xi)
    
    Lease Surrender and Termination Agreement by and between The Irvine
Company and the Registrant dated January 28, 2004.31.1
    
    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.
   (i)
    
    Previously filed with the Registrants Registration Statement on Form S-1
(Registration No. 333-41302).(ii)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.(iii)
    
    Previously filed as an exhibit to the Registrant s Current Report on Form 8-K, filed on May 8, 2001.(iv)
    
    Previously filed with the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2001.(v)
    
    Previously filed as an exhibit to the Registrant s Current Report on Form
8-K dated September 24, 2002.(vi)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.(vii)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.(viii)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.(ix)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.(x)
    
    Previously filed with the Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.(xi)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2004.+
    
    Confidential treatment has been requested for a portion of this exhibit. 37




---



##### Table of Contents



SIGNATURE 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 CORPORATION Date: November 8, 2004 By:
    
    /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 PrincipalFinancial and
Accounting Officer)
 38




---



##### Table of Contents



Index to Exhibits Number
    
    Description31.1
    
    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.
 39