##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 000-31635
(Commission file number)
 
 ENDWAVE CORPORATION
  Delaware
    
    95-4333817(State of incorporation)
    
    (I.R.S. Employer Identification No.)130 Baytech Drive 
San Jose, CA
    
    95134(Address of principal executive offices)
    
    (Zip code)
 (408) 522-3100
 þ o
  o þ o
 o þ




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##### Table of Contents



ENDWAVE CORPORATION
 INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2006
(unaudited) and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    18Item 3.
    
    Qualitative and Quantitative Disclosure about Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38Item 6.
    
    Exhibits
    
    
    39SIGNATURES
    
    
    41EXHIBITS
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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##### 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 31,2006
    
    
    2005(unaudited)
    
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,030
    
    
    $
    8,456Short-term investments
    
    
    35,658
    
    
    
    13,959Accounts receivable, net
    
    
    12,822
    
    
    
    10,487Inventories
    
    
    15,298
    
    
    
    13,448Other current assets
    
    
    530
    
    
    
    560Total current assets
    
    
    95,338
    
    
    
    46,910Property and equipment, net
    
    
    1,941
    
    
    
    1,321Other assets
    
    
    133
    
    
    
    97Restricted cash
    
    
    261
    
    
    
    25Goodwill and intangible assets, net
    
    
    4,342
    
    
    
    4,796$
    102,015
    
    
    $
    53,149LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,556
    
    
    $
    2,954Accrued warranty
    
    
    2,973
    
    
    
    3,257Accrued compensation
    
    
    3,120
    
    
    
    2,494Restructuring liabilities
    
    
    
    
    
    
    20Other current liabilities
    
    
    1,150
    
    
    
    956Total current liabilities
    
    
    12,799
    
    
    
    9,681Other long-term liabilities
    
    
    269
    
    
    
    385Total liabilities
    
    
    13,068
    
    
    
    10,066Commitments and contingencies (Note 8)Stockholders equity:Convertible preferred stock, $0.001
par value; 5,000,000 shares
authorized; 300,000 and zero shares
issued and outstanding at September
30, 2006 and December 31, 2005,
respectively
    
    
    
    
    
    
    Common stock, $0.001 par value;
100,000,000 shares authorized;
11,487,568 and 11,358,816 shares
issued and outstanding at September
30, 2006 and December 31, 2005,
respectively
    
    
    11
    
    
    
    11Additional paid-in capital
    
    
    355,897
    
    
    
    309,583Treasury stock, at cost, 39,150
shares at September 30, 2006 and
December 31, 2005
    
    
    (79
    )
    
    
    (79
    )Accumulated other comprehensive loss
    
    
    (39
    )
    
    
    (63
    )Accumulated deficit
    
    
    (266,843
    )
    
    
    (266,369
    )Total stockholders equity
    
    
    88,947
    
    
    
    43,083$
    102,015
    
    
    $
    53,149
 
 (1)
    
    Derived from the Companys audited consolidated financial statements as of December 31, 2005. The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENDWAVE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
 (unaudited)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Product revenues
    
    $
    18,452
    
    
    $
    13,523
    
    
    $
    47,931
    
    
    $
    34,367Product revenues from affiliate
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    26Development fees
    
    
    384
    
    
    
    785
    
    
    
    977
    
    
    
    1,269Total revenues
    
    
    18,836
    
    
    
    14,320
    
    
    
    48,908
    
    
    
    35,662Costs and expenses:Cost of product revenues*
    
    
    12,815
    
    
    
    9,668
    
    
    
    34,245
    
    
    
    23,800Cost of product revenues from affiliate
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    3Cost of product revenues, amortization of
intangible assets
    
    
    113
    
    
    
    113
    
    
    
    337
    
    
    
    339Research and development*
    
    
    2,389
    
    
    
    1,708
    
    
    
    6,579
    
    
    
    4,819Selling, general and administrative*
    
    
    3,353
    
    
    
    2,386
    
    
    
    9,845
    
    
    
    7,119Transaction costs
    
    
    
    
    
    
    773
    
    
    
    
    
    
    
    773Amortization of intangible assets
    
    
    39
    
    
    
    39
    
    
    
    117
    
    
    
    140Restructuring charges, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46
    )Total costs and expenses
    
    
    18,709
    
    
    
    14,688
    
    
    
    51,123
    
    
    
    36,947Income (loss) from operations
    
    
    127
    
    
    
    (368
    )
    
    
    (2,215
    )
    
    
    (1,285
    )Interest and other income, net
    
    
    784
    
    
    
    175
    
    
    
    1,741
    
    
    
    563Net income (loss)
    
    $
    911
    
    
    $
    (193
    )
    
    $
    (474
    )
    
    $
    (722
    )Basic net income (loss) per share
    
    $
    0.08
    
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.07
    )Diluted net income (loss) per share
    
    $
    0.06
    
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.07
    )Shares used in computing basic net income
(loss) per share
    
    
    11,436,417
    
    
    
    11,078,344
    
    
    
    11,403,728
    
    
    
    10,752,423Shares used in computing diluted net
income (loss) per share
    
    
    14,676,969
    
    
    
    11,078,344
    
    
    
    11,403,728
    
    
    
    10,752,423*   Includes the following amounts related to stock-based compensation:Cost of product revenues
    
    $
    120
    
    
    $
    
    
    
    $
    334
    
    
    $
    Research and development
    
    
    129
    
    
    
    
    
    
    
    409
    
    
    
    Selling, general and administrative
    
    
    629
    
    
    
    
    
    
    
    1,821
    
    
    
    $
    878
    
    
    $
    
    
    
    $
    2,564
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENDWAVE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Nine months endedSeptember 30,2006
    
    
    2005Operating activities:Net loss
    
    $
    (474
    )
    
    $
    (722
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    670
    
    
    
    1,145Amortization of intangible assets
    
    
    454
    
    
    
    479Stock compensation expense
    
    
    2,564
    
    
    
    Amortization of investments
    
    
    75
    
    
    
    91Restructuring charges, net
    
    
    
    
    
    
    (46
    )Loss (gain) on the sale of land and equipment
    
    
    84
    
    
    
    (121
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (2,335
    )
    
    
    (2,771
    )Inventories
    
    
    (1,843
    )
    
    
    (7,776
    )Other assets
    
    
    (6
    )
    
    
    154Accounts payable
    
    
    2,602
    
    
    
    1,550Accrued warranty
    
    
    (284
    )
    
    
    (545
    )Accrued compensation, restructuring
liabilities, other current and long-term
liabilities
    
    
    684
    
    
    
    1,263Net cash provided by (used in) operating activities
    
    
    2,191
    
    
    
    (7,299
    )Investing activities:Cash paid in business combinations
    
    
    
    
    
    
    (20
    )Purchases of property and equipment
    
    
    (1,379
    )
    
    
    (349
    )Purchases of short term investments
    
    
    (30,550
    )
    
    
    (12,424
    )Proceeds on sales of property and equipment
    
    
    5
    
    
    
    30Proceeds on maturities of short term investments
    
    
    8,800
    
    
    
    19,650Increase in restricted cash
    
    
    (236
    )
    
    
    (25
    )Net cash provided by (used in) investing activities
    
    
    (23,360
    )
    
    
    6,862Financing activities:Proceeds from the sale of Series B preferred stock
and warrants, net of issuance costs
    
    
    43,107
    
    
    
    Proceeds from common stock issuance
    
    
    379
    
    
    
    230Proceeds from exercises of stock options
    
    
    257
    
    
    
    4,264Net cash provided by financing activities
    
    
    43,743
    
    
    
    4,494Net increase in cash and cash equivalents
    
    
    22,574
    
    
    
    4,057Cash and cash equivalents at beginning of period
    
    
    8,456
    
    
    
    4,808Cash and cash equivalents at end of period
    
    $
    31,030
    
    
    $
    8,865
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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ENDWAVE CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Business and Basis of Presentation
  °
    
    integrated transceivers  assembly of electronic devices that combine
both the transmit and receive functions necessary for a bi-directional radio link;°
    
    amplifiers  electronic devices used to increase the amplitude and
power of an electronic signal;°
    
    synthesizers  electronic devices that can be used to generate several
different radio frequency signals from a single source;°
    
    oscillators  electronic devices that generate radio frequency signals
at a fixed frequency;°
    
    up and down converters  electronic devices that shift the center
frequency of a radio signal without altering the signals data modulation;°
    
    frequency multipliers  electronic devices that increase the frequency
of a radio signal in integer multiples; and°
    
    microwave switch arrays  electronic devices that can switch the
routing of a radio signal.
   2. Short-term Investments
  6




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##### Table of Contents



September 30, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)Short-term investments:United States government agencies
    
    $
    2,000
    
    
    $
    
    
    
    $
    (16
    )
    
    $
    1,984Corporate securities
    
    
    3,047
    
    
    
    
    
    
    
    (23
    )
    
    
    3,024Obligations of states and
political subdivisions
    
    
    30,650
    
    
    
    
    
    
    
    
    
    
    
    30,650Total
    
    $
    35,697
    
    
    $
    
    
    
    $
    (39
    )
    
    $
    35,658Cash equivalents:Commercial paper
    
    $
    26,850
    
    
    
    
    
    
    
    
    
    
    $
    26,850
 December 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)Short-term investments:United States government
agencies
    
    $
    2,000
    
    
    $
    
    
    
    $
    (19
    )
    
    $
    1,981Corporate securities
    
    
    3,122
    
    
    
    
    
    
    
    (44
    )
    
    
    3,078Obligations of states and
political subdivisions
    
    
    8,900
    
    
    
    
    
    
    
    
    
    
    
    8,900Total
    
    $
    14,022
    
    
    $
    
    
    
    $
    (63
    )
    
    $
    13,959Cash equivalents:Commercial paper
    
    $
    1,898
    
    
    
    
    
    
    
    
    
    
    $
    1,898
    3. Inventories
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    11,652
    
    
    $
    10,181Work in process
    
    
    2,156
    
    
    
    1,509Finished goods
    
    
    1,490
    
    
    
    1,758$
    15,298
    
    
    $
    13,448
 7




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4. Restricted Cash
   5. Goodwill and Intangible Assets
 Goodwill
  Intangible Assets
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountDeveloped technology
    
    $
    2,250
    
    
    $
    (975
    )
    
    $
    1,275Tradename
    
    
    1,060
    
    
    
    
    
    
    
    1,060Customer relationships
    
    
    780
    
    
    
    (339
    )
    
    
    441Customer backlog
    
    
    140
    
    
    
    (140
    )
    
    
    Intangible assets
    
    $
    4,230
    
    
    $
    (1,454
    )
    
    $
    2,776
  Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    AmountDeveloped technology
    
    $
    2,250
    
    
    $
    (639
    )
    
    $
    1,611Tradename
    
    
    1,060
    
    
    
    
    
    
    
    1,060Customer relationships
    
    
    780
    
    
    
    (221
    )
    
    
    559Customer backlog
    
    
    140
    
    
    
    (140
    )
    
    
    Intangible assets
    
    $
    4,230
    
    
    $
    (1,000
    )
    
    $
    3,230
    8




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##### Table of Contents



Years Ending December 312006 (October 1 through December 31)
    
    $
    1512007
    
    
    6062008
    
    
    6062009
    
    
    353$
    1,716
 6. Warranty
   2006
    
    
    2005Balance at January 1
    
    $
    3,257
    
    
    $
    4,488Warranties accrued
    
    
    654
    
    
    
    533Warranties settled or reversed
    
    
    (938
    )
    
    
    (1,078
    )Balance at September 30
    
    $
    2,973
    
    
    $
    3,943
 7. Restructuring Liabilities
   8. Commitments and Contingencies
  9




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9. Preferred Stock and Warrant Purchase Agreement
       10




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10. Stock-Based Compensation
  Prior to the Adoption of SFAS No. 123(R)
   Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Net loss, as reported
    
    $
    (193
    )
    
    $
    (722
    )Add: Stock-based employee compensation expense
included in reported net loss
    
    
    
    
    
    
    Deduct: Stock-based employee compensation
expense determined under the fair value based
method for all awards
    
    
    (1,265
    )
    
    
    (3,270
    )Net loss, pro forma
    
    $
    (1,458
    )
    
    $
    (3,992
    )Basic and diluted net loss per share, as reported
    
    $
    (0.02
    )
    
    $
    (0.07
    )Basic and diluted net loss per share, pro forma
    
    $
    (0.13
    )
    
    $
    (0.37
    )
 Impact of the Adoption of SFAS No. 123(R)
  11




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Three months ended
    
    
    Nine months endedSeptember 30, 2006
    
    
    September 30, 2006Stock-based compensation expense by type of award:Employee stock options
    
    $
    799
    
    
    $
    2,288Employee stock purchase plan
    
    
    86
    
    
    
    302Amounts capitalized as inventory
    
    
    (7
    )
    
    
    (26
    )Total stock-based compensation
    
    
    878
    
    
    
    2,564Tax effect on stock-based compensation
    
    
    
    
    
    
    Total stock-based compensation expense
    
    $
    878
    
    
    $
    2,564Impact on basic net income (loss) per share
    
    $
    (0.08
    )
    
    $
    (0.22
    )Impact on diluted net income (loss) per share
    
    $
    (0.06
    )
    
    $
    (0.22
    )
     Valuation Assumptions
  12




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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.45
    %
    
    
    4.05
    %
    
    
    4.69
    %
    
    
    3.94
    %Expected life of options
    
    4.6 years
    
    5.0 years
    
    4.6 years
    
    5.0 yearsExpected dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    70
    %
    
    
    82
    %
    
    
    79
    %
    
    
    77
    %
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Risk-free interest rate
    
    
    5.0
    %
    
    
    3.66
    %
    
    
    4.84
    %
    
    
    3.23
    %Expected life of options
    
    1.3 years
    
    0.5 year
    
    0.8 years
    
    0.5 yearExpected dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    51
    %
    
    
    100
    %
    
    
    61
    %
    
    
    55
    %
     Equity Incentive Program
  13




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WeightedWeighted
    
    Average
    
    AggregateAverage
    
    Remaining
    
    IntrinsicNumber of
    
    Exercise
    
    Contractual
    
    ValueShares
    
    Price
    
    Term (Years)
    
    (In thousands)Outstanding at December 31, 2005
    
    
    1,292,877
    
    
    
    14.19Options granted
    
    
    599,900
    
    
    
    10.21Options exercised
    
    
    (87,230
    )
    
    
    2.94Options cancelled
    
    
    (42,593
    )
    
    
    12.09Outstanding at September 30, 2006
    
    
    1,762,954
    
    
    
    13.44
    
    
    
    8.33
    
    
    $
    4,112Options vested and exercisable and
expected to be exercisable at
September 30, 2006
    
    
    1,580,872
    
    
    
    13.77
    
    
    
    8.26
    
    
    $
    3,764Options vested and exercisable at
September 30, 2006
    
    
    800,157
    
    
    
    17.21
    
    
    
    7.90
    
    
    $
    1,969
   Options Vested and ExercisableOptions Outstanding at September 30, 2006
    
    At September 30, 2006Weighted AverageWeighted Average
    
    Remaining
    
    
    
    
    
    Weighted AverageRange of Exercise Price
    
    Shares
    
    Exercise Price
    
    Contractual Life
    
    Shares
    
    Exercise Price$0.76 - $1.17
    
    
    43,120
    
    
    $
    1.01
    
    
    
    6.21
    
    
    
    31,105
    
    
    $
    1.00$1.18 - $1.21
    
    
    25,474
    
    
    $
    1.21
    
    
    
    5.83
    
    
    
    25,286
    
    
    $
    1.21$1.93 - $1.93
    
    
    121,446
    
    
    $
    1.93
    
    
    
    6.68
    
    
    
    78,138
    
    
    $
    1.93$2.68 - $4.80
    
    
    12,625
    
    
    $
    4.05
    
    
    
    5.46
    
    
    
    11,228
    
    
    $
    3.97$5.00 - $9.16
    
    
    15,888
    
    
    $
    7.03
    
    
    
    7.04
    
    
    
    5,387
    
    
    $
    7.03$9.32 - $9.32
    
    
    120,000
    
    
    $
    9.32
    
    
    
    9.42
    
    
    
    15,000
    
    
    $
    9.32$9.68 - $9.82
    
    
    389,508
    
    
    $
    9.77
    
    
    
    9.27
    
    
    
    54,089
    
    
    $
    9.76$10.20 - $10.20
    
    
    161,128
    
    
    $
    10.20
    
    
    
    7.84
    
    
    
    56,563
    
    
    $
    10.20$10.22 - $10.22
    
    
    190,063
    
    
    $
    10.22
    
    
    
    7.35
    
    
    
    80,188
    
    
    $
    10.22$10.50 - $20.32
    
    
    313,976
    
    
    $
    13.82
    
    
    
    8.80
    
    
    
    73,447
    
    
    $
    14.02$21.47 - $21.47
    
    
    196,376
    
    
    $
    21.47
    
    
    
    8.35
    
    
    
    196,376
    
    
    $
    21.47$24.00 - $56.00
    
    
    173,350
    
    
    $
    35.58
    
    
    
    8.53
    
    
    
    173,350
    
    
    $
    35.581,762,954
    
    
    $
    13.44
    
    
    
    8.33
    
    
    
    800,157
    
    
    $
    17.21
 Employee Stock Purchase Plan
  14




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##### Table of Contents



11. Net Income (Loss) Per Share
   Three months ended September 30,
    
    
    Nine months ended September 302006
    
    
    2005
    
    
    2006
    
    
    2005Weighted average common shares outstanding
    
    
    11,436,417
    
    
    
    11,078,344
    
    
    
    11,403,728
    
    
    
    10,752,423Dilutive effect of convertible preferred stock
    
    
    3,000,000
    
    
    
    
    
    
    
    
    
    
    
    Dilutive effect of employee stock options
    
    
    234,974
    
    
    
    
    
    
    
    
    
    
    
    Dilutive effect of the Companys stock
purchase plan
    
    
    5,578
    
    
    
    
    
    
    
    
    
    
    
    Weighted average diluted common shares
outstanding
    
    
    14,676,969
    
    
    
    11,078,344
    
    
    
    11,403,728
    
    
    
    10,752,423
     12. Comprehensive Income (Loss)
   15




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##### Table of Contents



13. Segment Disclosures
  Three months ended September 30,2006
    
    
    2005United States
    
    $
    2,162
    
    
    
    11.5
    %
    
    $
    2,043
    
    
    
    14.3
    %Finland
    
    
    11,475
    
    
    
    60.9
    %
    
    
    6,858
    
    
    
    47.9
    %Italy
    
    
    1,887
    
    
    
    10.0
    %
    
    
    2,021
    
    
    
    14.1
    %Norway
    
    
    2,429
    
    
    
    12.9
    %
    
    
    1,868
    
    
    
    13.0
    %Other
    
    
    883
    
    
    
    4.7
    %
    
    
    1,530
    
    
    
    10.7
    %Total
    
    $
    18,836
    
    
    
    100.0
    %
    
    $
    14,320
    
    
    
    100.0
    %
 Nine months ended September 30,2006
    
    
    2005United States
    
    $
    7,768
    
    
    
    15.9
    %
    
    $
    6,216
    
    
    
    17.4
    %Finland
    
    
    21,063
    
    
    
    43.1
    %
    
    
    18,583
    
    
    
    52.1
    %Italy
    
    
    11,117
    
    
    
    22.7
    %
    
    
    4,802
    
    
    
    13.5
    %Norway
    
    
    5,682
    
    
    
    11.6
    %
    
    
    2,647
    
    
    
    7.4
    %Other
    
    
    3,278
    
    
    
    6.7
    %
    
    
    3,414
    
    
    
    9.6
    %Total
    
    $
    48,908
    
    
    
    100.0
    %
    
    $
    35,662
    
    
    
    100.0
    %
   14. Related Party Transactions
  16




---



##### Table of Contents



15. Recent Accounting Pronouncements
     17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Overview
   18




---



##### Table of Contents



Results of Operations
 Three and nine months ended September 30, 2006 and 2005
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of product revenues
    
    
    68.0
    
    
    
    67.5
    
    
    
    70.0
    
    
    
    66.7Cost of product revenues,
amortization of intangible assets
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.9Research and development
    
    
    12.7
    
    
    
    11.9
    
    
    
    13.5
    
    
    
    13.5Selling, general and administrative
    
    
    17.8
    
    
    
    16.7
    
    
    
    20.1
    
    
    
    20.0Transactions costs
    
    
    0.0
    
    
    
    5.4
    
    
    
    0.0
    
    
    
    2.2Amortization of intangible assets
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.4Restructuring charges, net
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    (0.1
    )Total costs and expenses
    
    
    99.3
    
    
    
    102.6
    
    
    
    104.5
    
    
    
    103.6Income (loss) from operations
    
    
    0.7
    
    
    
    (2.6
    )
    
    
    (4.5
    )
    
    
    (3.6
    )Interest and other income, net
    
    
    4.1
    
    
    
    1.3
    
    
    
    3.5
    
    
    
    1.6Net income (loss)
    
    
    4.8
    %
    
    
    ( 1.3
    )%
    
    
    ( 1.0
    )%
    
    
    ( 2.0
    )%
 Total revenues
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Total revenues
    
    $
    18,836
    
    
    $
    14,320
    
    
    
    31.5
    %
    
    $
    48,908
    
    
    $
    35,662
    
    
    
    37.1
    %Product revenues
    
    $
    18,452
    
    
    $
    13,535
    
    
    
    36.3
    %
    
    $
    47,931
    
    
    $
    34,393
    
    
    
    39.4
    %Development fees
    
    $
    384
    
    
    $
    785
    
    
    
    (51.1
    %)
    
    $
    977
    
    
    $
    1,269
    
    
    
    (23.0
    %)
     19




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##### Table of Contents



Cost of product revenues
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Cost of product revenues
    
    $
    12,815
    
    
    $
    9,669
    
    
    
    32.5
    %
    
    $
    34,245
    
    
    $
    23,803
    
    
    
    43.9
    %Percentage of total revenues
    
    
    68.0
    %
    
    
    67.5
    %
    
    
    
    
    
    
    70.0
    %
    
    
    66.7
    %
     Research and development expenses
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Research and
development expenses
    
    $
    2,389
    
    
    $
    1,708
    
    
    
    39.9
    %
    
    $
    6,579
    
    
    $
    4,819
    
    
    
    36.5
    %Percentage of total revenues
    
    
    12.7
    %
    
    
    11.9
    %
    
    
    
    
    
    
    13.5
    %
    
    
    13.5
    %
    20




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##### Table of Contents



Selling, general and administrative expenses
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Selling, general and
administrative expenses
    
    $
    3,353
    
    
    $
    2,386
    
    
    
    40.5
    %
    
    $
    9,845
    
    
    $
    7,119
    
    
    
    38.3
    %Percentage of total revenues
    
    
    17.8
    %
    
    
    16.7
    %
    
    
    
    
    
    
    20.1
    %
    
    
    20.0
    %
     Transaction costs
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Transaction costs
    
    $
    
    
    
    $
    773
    
    
    
    (100
    )%
    
    $
    
    
    
    $
    773
    
    
    
    (100
    )%Percentage of total revenues
    
    
    
    
    
    
    5.4
    %
    
    
    
    
    
    
    
    
    
    
    2.2
    %
    
    
    
  21




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##### Table of Contents



Amortization of intangible assets
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Cost of
product revenues,
amortization of
intangible assets
    
    $
    113
    
    
    $
    113
    
    
    
    0
    %
    
    $
    337
    
    
    $
    339
    
    
    
    (1
    )%Amortization of
intangible assets
    
    $
    39
    
    
    $
    39
    
    
    
    0
    %
    
    $
    117
    
    
    $
    140
    
    
    
    (16
    )%
    Interest and other income, net
 Three months ended September 30,
    
    Nine months ended September 30,2006
    
    2005
    
    % Change
    
    2006
    
    2005
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Interest and other income, net
    
    $
    784
    
    
    $
    175
    
    
    
    348.0
    %
    
    $
    1,741
    
    
    $
    563
    
    
    
    209.2
    %Percentage of total revenues
    
    
    4.1
    %
    
    
    1.3
    %
    
    
    
    
    
    
    3.5
    %
    
    
    1.6
    %
  Liquidity and Capital Resources
  Nine months endedSeptember 30,2006
    
    2005(in thousands)Net cash provided by (used in) operating activities
    
    $
    2,191
    
    
    $
    (7,299
    )Net cash provided by (used in) investing activities
    
    
    (23,360
    )
    
    
    6,862Net cash provided by financing activities
    
    
    43,743
    
    
    
    4,494Cash, cash equivalents and short-
term investments at end of period
    
    $
    66,688
    
    
    $
    21,860
  22




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##### Table of Contents



Years Ending December 31,
    
    Operating Leases(in thousands)2006 (October 1  December 31)
    
    $
    1502007
    
    
    6142008
    
    
    6812009
    
    
    4942010
    
    
    397Thereafter
    
    
    268Total minimum payments required
    
    $
    2,604
 Recent Accounting Pronouncements
  23




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24




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##### Table of Contents



Item 3. Qualitative and Quantitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 (a) Evaluation of disclosure controls and procedures.
   (b) Changes in internal controls over financial reporting.
  25




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
 You should consider carefully the following risk factors as well as other information in this
report before investing in any of our securities. If any of the following risks actually occur, our
business, operating results and financial condition could be adversely affected. This could cause
the market price of our common stock to decline, and you may lose all or part of your investment.
 
 **
    
    Indicates risk factor has been updated since our Annual Report on Form 10-K for
the year ended December 31, 2005. Risks Relating to Our Business
 We have had a history of losses and may not be profitable in the future. **
  We depend on a small number of key customers in the telecommunications industry for a large portion
of our revenues. If we lose any of our major customers, particularly Nera, Nokia or Siemens or
there is any material reduction in orders for our products from any of these customers, our
business, financial condition and results of operations would be adversely affected. **
   26




---



##### Table of Contents



We depend on the telecommunications industry for most of our revenues. If this industry suffers
another downturn or fails to grow as anticipated, our revenues could decrease and our profitability
could suffer. In addition, consolidation in this industry could result in delays or cancellations
of orders for our products, adversely impacting our results of operations.**
    Our future success depends in part on our ability to further penetrate into new markets, such as
defense electronics and homeland security, and we may be unable to do so.
  Our operating results may be adversely affected by substantial quarterly and annual fluctuations
and market downturns.
  27




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##### Table of Contents



Because of the shortages of some components and our dependence on single source suppliers and
custom components, we may be unable to obtain an adequate supply of components of sufficient
quality in a timely fashion, or we may be required to pay higher prices or to purchase components
of lesser quality.**
   
    
    semiconductor devices;
    
    application-specific monolithic microwave integrated circuits;
    
    voltage-controlled oscillators;
    
    voltage regulators;
    
    RoHS (Restriction of Hazardous Substances Directive) surface mount components;
    
    high-frequency circuit boards;
    
    custom connectors;
    
    electromagnetic housings;
    
    yttrium iron garnet components; and
    
    magnetic components.
  Our cash requirements will be impacted by our need to increase inventories.
  28




---



##### Table of Contents



We rely heavily on a Thailand facility of HANA Microelectronics Co., Ltd., a contract manufacturer,
to produce our RF modules. If HANA is unable to produce these modules in sufficient quantities or
with adequate quality, or it chooses to terminate our manufacturing arrangement, we will be forced
to find an alternative manufacturer and may not be able to fulfill our production commitments to
our customers, which could cause sales to be delayed or lost and could harm our reputation.**
  We rely on Velocium and other third-party semiconductor foundries to manufacture the semiconductors
contained in our products. The loss of our relationship with any of these foundries, particularly
Velocium, without adequate notice would adversely impact our ability to fill customer orders and
could damage our customer relationships.**
   Implementing our acquisition strategy could result in dilution to our stockholders and operating
difficulties leading to a decline in revenues and operating profit.**
  
    
    diversion of our management from the operation of our core business;
 29




---



##### Table of Contents




    
    assimilating the acquired operations and personnel;
    
    integrating information technology and reporting systems;
    
    retention of key personnel;
    
    retention of acquired customers; and
    
    implementation of controls, procedures and policies in the acquired business.
   Our products may contain component, manufacturing or design defects or may not meet our customers
performance criteria, which could cause us to incur significant repair expenses, harm our customer
relationships and industry reputation, and reduce our revenues and profitability.**
   30




---



##### Table of Contents



We depend on our key personnel. Skilled personnel in our industry can be in short supply. If we are
unable to retain our current personnel or hire additional qualified personnel, our ability to
develop and successfully market our products would be harmed.
   Competitive conditions may require us to reduce prices in the future and, as a result, we may need
to reduce our costs in order to be profitable.**
  The length of our sales cycle requires us to invest substantial financial and technical resources
in a potential sale before we know whether the sale will occur. There is no guarantee that the sale
will ever occur and if we are unsuccessful in designing a high-frequency RF module for a particular
generation of a customers products, we may need to wait until the next generation of that product
to sell our products to that particular customer.
  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.
  31
    Table of Contents     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.
  
    
    the failure of a supplier to deliver needed components on a timely basis or with acceptable quality;
    
    lack of sufficient capacity;
    
    poor manufacturing yields;
    
    equipment failures;
    
    manufacturing personnel shortages;
    
    labor disputes;
    
    transportation disruptions;
    
    changes in import/export regulations;
    
    infrastructure failures at the facilities of our offshore contract manufacturer;
    
    natural disasters;
    
    acts of terrorism; and
    
    political instability.
   32




---



##### Table of Contents



Because we do not have long-term commitments from many of our customers, we must estimate customer
demand, and errors in our estimates could have negative effects on our inventory levels, revenues
and results of operations.**
  Some of our customer contracts require us to manufacture products designed by our customers. While
we intend to convert many of these products to products of our own design, such transitions may be
difficult and/or expensive to implement and delays or difficulties in doing so could harm our
operating results.
  Any failure to protect our intellectual property appropriately could reduce or eliminate any
competitive advantage we have.**
   33




---



##### Table of Contents



Risks Relating to Our Industry
 We have increased our focus on sales to the United States government and other governmental
agencies. Our revenues in this market largely depend upon the funding and implementation decisions
of Congress and government agencies. These decisions could change abruptly and without notice,
unexpectedly reducing our current or future revenues in this market. Development fees in this
market can fluctuate. **
   34




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##### Table of Contents



Our failure to compete effectively could reduce our revenues and margins.**
   Our failure to comply with any applicable environmental regulations could result in a range of
consequences, including fines, suspension of production, excess inventory, sales limitations and
criminal and civil liabilities.
  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.
  35




---



##### Table of Contents



Risks Relating to Ownership of Our Stock
 The assets of Wood River Capital Management, LLC and certain of its affiliates, the holders of
shares of common stock representing approximately 27% of our outstanding capital stock as of
September 30, 2006, have been placed into receivership by the Securities and Exchange Commission,
and the receiver may dispose of such shares of our common stock. Such disposition may adversely
affect the trading price of our common stock.**
  The market price of our common stock has historically fluctuated and is likely to fluctuate in the
future.**
  
    
    our financial performance or the performance of our competitors;
    
    the purchase or sale of common stock, or short-selling or other
transactions involving our securities, particularly by Wood River or other large
stockholders;
    
    technological innovations or other trends or changes in the
telecommunication network, defense electronics or homeland security markets;
    
    successes or failures at significant product evaluations or site demonstrations;
    
    the introduction of new products by us or our competitors;
    
    acquisitions, strategic alliances or joint ventures involving us or our competitors;
    
    decisions by major participants in the communications industry not to
purchase products from us or to pursue alternative technologies;
    
    decisions by investors to de-emphasize investment categories, groups or
strategies that include our company or industry;
    
    market conditions in the industry, the financial markets and the economy as a whole; and
    
    the low trading volume of our common stock.
  36




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##### Table of Contents



There are two shareholders who own a large percentage of our outstanding capital stock and are able
to affect significantly the outcome of matters requiring stockholder approval.**
   Our certificate of incorporation, bylaws and arrangements with executive officers contain
provisions that could delay or prevent a change in control.
  37




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    To elect one director, Edward C.V. Winn, to hold office until the 2009 Annual
Meeting of Stockholders.FOR: 9,668,864       WITHHOLD: 674,4532.
    
    To the elect one director, Edward A. Keible, to hold office until the 2009
Annual Meeting of Stockholders.FOR: 9,657,767       WITHHOLD: 685,5473.
    
    To ratify the selection by the Audit Committee of the Board of Directors of
Burr, Pilger & Mayer LLP as our independent registered public accounting firm for the
fiscal year ending December 31, 2006.FOR: 10,334,449       AGAINST: 6,159       ABSTAIN: 2,706
 38




---



##### Table of Contents



Item 6.
Exhibits.
 Number
    
    Description2.3(3)
    
    Purchase and Sale Agreement by and Among New Focus, Inc., Bookham Technology PLC and the Registrant
dated July 21, 2004.3.1(4)
    
    Amended and Restated Certificate of Incorporation effective October 20, 2000.3.2(5)
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation effective June 28, 2002.3.3(4)
    
    Amended and Restated Bylaws effective October 20, 2000.3.4(6)
    
    Certificate of Designation for Series A Junior Participating Preferred Stock.3.5(7)
    
    Certificate of Designation of Series B Preferred Stock.4.1(4)
    
    Form of specimen Common Stock Certificate.4.2(8)
    
    Amended and Restated Registration Rights Agreement by and between Northrop Grumman Space & Mission
Systems Corp. and the Registrant dated September 14, 2005.4.3(6)
    
    Rights Agreement dated as of December 1, 2005 between Endwave Corporation and Computershare Trust
Company, Inc.4.4(6)
    
    Form of Rights Certificate.4.5(7)
    
    Preferred Stock and Warrant Purchase Agreement by and between Oak Investment Partners XI, Limited
Partnership and the Registrant dated April 24, 2006.4.6(7)
    
    Warrant issued to Oak Investment Partners XI, Limited Partnership.10.1(4)
    
    Form of Indemnity Agreement entered into by the Registrant with each of its directors and officers.10.2(4)*
    
    1992 Stock Option Plan.10.3(4)*
    
    Form of Incentive Stock Option under 1992 Stock Option Plan.10.4(4)*
    
    Form of Nonstatutory Stock Option under 1992 Stock Option Plan.10.5(4)*
    
    2000 Equity Incentive Plan, as amended.10.6(4)*
    
    Form of Stock Option Agreement under 2000 Equity Incentive Plan.10.7(4)*
    
    2000 Employee Stock Purchase Plan.10.8(4)*
    
    Form of 2000 Employee Stock Purchase Plan Offering.10.9(9)*
    
    2000 Non-Employee Directors Stock Option Plan, as amended.10.10(4)*
    
    Form of Nonstatutory Stock Option Agreement under the 2000 Non-Employee Director Plan.10.11(10), (11)*
    
    Description of Compensation Payable to Non-Employee Directors.10.12(11)*
    
    2006 Base Salaries for Named Executive Officers.10.13(11)*
    
    2006 Executive Incentive Compensation Plan.10.14(12)*
    
    Executive Officer Severance and Retention Plan.10.15(12)*
    
    Transaction Incentive Plan.10.16(4)
    
    License Agreement by and between TRW Inc. and TRW Milliwave Inc. dated February 28, 2000.10.17(4)
    
    Production Agreement by and between TRW Inc. and the Registrant dated March 31, 2000 for the
performance of the Development Agreement by and between TRW Inc. and Nokia Telecommunications OY
dated January 28, 1999.10.18(4)
    
    Services Agreement by and between TRW Inc. and the Registrant dated March 31, 2000.10.19(13)
    
    Development Agreement by and between Nokia and the Registrant dated August 14, 2003.10.20(14)
    
    Purchase Agreement by and between Nokia Corporation and the Registrant dated December 31, 2003.10.21(5)
    
    Industrial Lease by and between The Irvine Company and the Registrant dated January 28, 2004.10.22(5)
    
    Amended and Restated Supply Agreement by and between Northrop Grumman Space and Mission Systems Corp.
and the Registrant dated March 26, 2004.10.23(15)
    
    Settlement and Release Agreement by and between Northrop Grumman Space & Mission Systems Corp. and
the Registrant dated March 23, 2005.10.24(9)
    
    Purchase Agreement between Nokia and Endwave Corporation dated January 1, 2006.10.25(9)
    
    Frame Purchase Agreement by and between Endwave Corporation and Siemens Mobile Communications Spa
dated January 16, 2006.10.26(16)
    
    Lease Agreement by and between Legacy Partners I San Jose, LLC and the Registrant dated May 24, 200610.27(16)
    
    Supply Agreement by and between Northrop Grumman Space and Mission Systems Corp. and the Registrant
dated July 25, 2006.31.1
    
    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.
 39




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##### Table of Contents



(1)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on May 8, 2001 and incorporated herein by reference.(2)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on October 11, 2002 and incorporated herein by
reference.(3)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on August 4, 2004 and incorporated herein by reference.(4)
    
    Previously filed with the Registrants Registration Statement on Form
S-1 (Registration No. 333-41302) and incorporated herein by reference.(5)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004 and incorporated herein by
reference.(6)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on December 5, 2005 and incorporated herein by
reference.(7)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on April 26, 2006 and incorporated herein by reference.(8)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on September 15, 2005 and incorporated herein by
reference.(9)
    
    Previously filed as an exhibit with the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 2005 and
incorporated herein by reference.(10)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on February 3, 2005 and incorporated herein by
reference.(11)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on February 8, 2006 and incorporated herein by
reference.(12)
    
    Previously filed with the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003 and incorporated herein by
reference.(13)
    
    Previously filed with an amendment to the Registrants Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003 filed on
August 4, 2004 and incorporated herein by reference.(14)
    
    Previously filed with an amendment to the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 filed on
August 4, 2004 and incorporated herein by reference..(15)
    
    Previously filed as an exhibit to the Registrants Current Report on
Form 8-K filed on March 25, 2005 and incorporated herein by
reference.(16)
    
    Previously filed with an amendment to the Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006 and
incorporated herein by reference.*
    
    Indicates a management contract or compensatory plan or arrangement.
    
    Confidential treatment has been requested for a portion of this exhibit. 40




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##### Table of Contents



SIGNATURES
  ENDWAVE CORPORATIONDate: November 7, 2006By:
    
    /s/ Edward A. Keible, Jr.Edward A. Keible, Jr.President and Chief Executive Officer(Duly Authorized Officer and PrincipalExecutive Officer)By:
    
    /s/ Brett W. WallaceBrett W. Wallace Executive Vice Presidentand Chief Financial Officer(Duly Authorized Officer and PrincipalFinancial and Accounting Officer)
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##### Table of Contents



Index to Exhibits
 Number            Description
 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.
 42