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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 SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to 000-31635
(Commission file number)   ENDWAVE CORPORATION    Delaware
(State of incorporation)
    
    95-4333817
(I.R.S. Employer Identification No.)776 Palomar Avenue,Sunnyvale, CA
(Address of principal executive offices)
    
    94085
(Zip code)
 (408) 522-3100
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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
April 28, 2004 was 9,585,277 shares.




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ENDWAVE CORPORATION INDEX PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003
    
    
    3Unaudited Condensed Statements of Operations for the three months ended March
31, 2004 and 2003
    
    
    4Unaudited Condensed Statements of Cash Flows for the three months ended March
31, 2004 and 2003
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Qualitative and Quantitative Disclosure about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-K
    
    
    29SIGNATURES
    
    
    31EXHIBITS
    
    
    32EXHIBIT 3.3EXHIBIT 10.31EXHIBIT 10.32EXHIBIT 10.33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements ENDWAVE CORPORATION 
 CONDENSED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 March 31,
    
    December 31,2004
    
    2003(unaudited)
    
    (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,181
    
    
    $
    13,408Restricted cash
    
    
    651
    
    
    
    778Short-term investments
    
    
    15,035
    
    
    
    15,890Accounts receivable, net
    
    
    6,213
    
    
    
    6,476Accounts receivable from affiliates, net
    
    
    67
    
    
    
    105Inventories
    
    
    9,123
    
    
    
    8,119Equipment held-for-sale
    
    
    266
    
    
    
    306Other current assets
    
    
    480
    
    
    
    592Total current assets
    
    
    43,016
    
    
    
    45,674Property, plant and equipment, net
    
    
    6,640
    
    
    
    7,260Other assets, net
    
    
    77
    
    
    
    140$
    49,733
    
    
    $
    53,074LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,540
    
    
    $
    1,733Accounts payable to affiliates
    
    
    703
    
    
    
    1,355Accrued warranty
    
    
    5,726
    
    
    
    5,835Accrued compensation
    
    
    1,039
    
    
    
    1,139Notes payable
    
    
    522
    
    
    
    516Restructuring liabilities, current
    
    
    86
    
    
    
    98Other current liabilities
    
    
    476
    
    
    
    992Total current liabilities
    
    
    10,092
    
    
    
    11,668Notes payable, less current portion
    
    
    129
    
    
    
    262Other long-term liabilities
    
    
    81
    
    
    
    101Commitments and contingenciesStockholders equity:Common stock, $0.001 par value per share;
100,000,000 authorized, 9,584,623 and
9,347,585 issued and outstanding on March 31,
2004 and December 31, 2003, respectively
    
    
    9
    
    
    
    9Additional paid-in capital
    
    
    302,855
    
    
    
    302,427Deferred stock compensation
    
    
    (85
    )
    
    
    (221
    )Accumulated other comprehensive income (loss)
    
    
    1
    
    
    
    (2
    )Accumulated deficit
    
    
    (263,270
    )
    
    
    (261,091
    )Treasury stock, at cost, 39,150 shares
    
    
    (79
    )
    
    
    (79
    )Total stockholders equity
    
    
    39,431
    
    
    
    41,043$
    49,733
    
    
    $
    53,074
  (1)
    
    Derived from the Companys audited financial statements as of December
31, 2003 See accompanying notes. 3




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ENDWAVE CORPORATION 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except share and per share amounts)
(unaudited)
 Three months endedMarch 31,2004
    
    2003Revenues:Product revenues ($0 and $65 from affiliates, respectively)
    
    $
    6,495
    
    
    $
    7,597Development fees
    
    
    122
    
    
    
    60Total revenues
    
    
    6,617
    
    
    
    7,657Costs and expenses:Cost of product revenues ($685 and $665 from affiliates,
respectively)
    
    
    3,971
    
    
    
    7,002Research and development
    
    
    974
    
    
    
    1,102Selling, general and administrative
    
    
    1,829
    
    
    
    2,508Restructuring charges, net
    
    
    2,899
    
    
    
    Amortization of deferred stock compensation*
    
    
    119
    
    
    
    512Loss (recovery) on building sublease
    
    
    (359
    )
    
    
    662Impairment of long-lived assets
    
    
    
    
    
    
    2,409Total costs and expenses
    
    
    9,433
    
    
    
    14,195Loss from operations
    
    
    (2,816
    )
    
    
    (6,538
    )Interest and other income, net
    
    
    637
    
    
    
    65Net loss
    
    $
    (2,179
    )
    
    $
    (6,473
    )Basic and diluted net loss per share
    
    $
    (0.23
    )
    
    $
    (0.72
    )Shares used in computing of basic and diluted net loss per share
    
    
    9,472,107
    
    
    
    9,014,661* Amortization of deferred stock compensation:Cost of product revenues
    
    $
    64
    
    
    $
    113Research and development
    
    
    25
    
    
    
    166Selling, general and administrative
    
    
    30
    
    
    
    233$
    119
    
    
    $
    512
 See accompanying notes to the condensed financial statements. 4




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ENDWAVE CORPORATION 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Three months endedMarch 31,2004
    
    2003Operating activities:Net loss
    
    $
    (2,179
    )
    
    $
    (6,473
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    419
    
    
    
    777Impairment of long-lived assets
    
    
    
    
    
    
    2,409Amortization of deferred stock compensation
    
    
    119
    
    
    
    512Gain on the sale of land and equipment
    
    
    (474
    )
    
    
    Loss (recovery) on building sublease
    
    
    (359
    )
    
    
    662Changes in operating assets and liabilities:Accounts receivable, net
    
    
    301
    
    
    
    (1,215
    )Inventories
    
    
    (1,004
    )
    
    
    2,052Other assets
    
    
    175
    
    
    
    200Accounts payable
    
    
    (193
    )
    
    
    (9
    )Accounts payable to affiliates
    
    
    (652
    )
    
    
    53Other current and long-term liabilities
    
    
    (398
    )
    
    
    (81
    )Net cash used in operating activities
    
    
    (4,245
    )
    
    
    (1,113
    )Investing activities:Purchases of equipment
    
    
    (6
    )
    
    
    (45
    )Proceeds on sales of property and equipment
    
    
    721
    
    
    
    Purchases of short term investments
    
    
    (8,508
    )
    
    
    (7,279
    )Proceeds on maturities of short term investments
    
    
    9,366
    
    
    
    15,942Net cash provided by investing activities
    
    
    1,573
    
    
    
    8,618Financing activities:Payments on capital lease obligations
    
    
    
    
    
    
    (324
    )Payments on notes payable
    
    
    (127
    )
    
    
    (122
    )Decrease in restricted cash
    
    
    127
    
    
    
    Proceeds from exercises of stock options
    
    
    445
    
    
    
    Net cash provided by (used in) financing activities
    
    
    445
    
    
    
    (446
    )Net change in cash and cash equivalents
    
    
    (2,227
    )
    
    
    7,059Cash and cash equivalents at beginning of period
    
    
    13,408
    
    
    
    9,224Cash and cash equivalents at end of period
    
    $
    11,181
    
    
    $
    16,283Supplemental cash flow information:Cash paid for interest
    
    $
    9
    
    
    $
    41
 See accompanying notes to the condensed financial statements. 5




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ENDWAVE CORPORATION 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
  1.
    
    Business and Basis of Presentation Endwave Corporation (referred to below as Endwave or the Company) designs,
manufactures and markets RF (radio frequency) subsystems that enable the
transmission, reception and processing of high-speed electromagnetic signals in
broadband wireless telecommunications systems, cellular telephone
infrastructure networks, defense electronics systems, 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 manual labor. 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 financial statements of Endwave have
been prepared in conformity with generally accepted accounting principles 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 generally accepted accounting principles 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 financial statements should be read in conjunction with
the Companys audited financial statements for the year ended December 31,
2003.  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 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 customers are primarily wireless systems integrators and
equipment manufacturers who integrate the Companys products into their
products. 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. The Company recognizes development fees ratably over the
estimated term of the development period or when specific milestones are
achieved. 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




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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. Based on a review of the warranty level made by management during
the first quarter of 2004, no additional warranty provision was accrued for
during the quarter. Changes in the Companys product warranty liability during the period
ended March 31, 2004 and 2003 are as follows: 2004
    
    2003(in thousands)Balance at December 31
    
    $
    5,835
    
    
    $
    5,583Warranties accrued
    
    
    
    
    
    
    110Warranties settled
    
    
    (109
    )
    
    
    (31
    )Balance at March 31
    
    $
    5,726
    
    
    $
    5,662
 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 fair value.
The evaluation took into consideration the move of production to the Companys
offshore supplier, which increased during 2003. The Companys estimate of fair
value of the assets was based on estimated salvage value of the equipment, less
selling costs. During the third quarter of 2003, the Company recorded an additional
charge of $139,000 to reduce engineering equipment based on the amounts by
which the carrying value of these assets exceeded their fair value. The
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 estimated salvage value of the equipment less
selling costs. Restructuring Charges The Company accounts for restructuring activities following formally
approved plans that identify the actions and timeline over which the
restructuring activities will occur. Restructuring charges include estimates
pertaining to employee severance and fringe benefit costs and facility exit
costs. 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. 7




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Stock-Based Compensation The Company has elected to use the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employee (APB
25), as permitted by Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation (SFAS 123), subsequently amended by
SFAS 148, Accounting for Stock-Based Compensation  Transition and Disclosure
to account for stock-based awards issued to its employees under its stock
option plans and stock purchase plans. Deferred stock compensation is amortized
using the graded vesting method over the vesting period of the related options,
generally four years. For purposes of pro forma disclosures, the Company estimates the fair
value of its stock-based awards to employees using a Black-Scholes
option-pricing model. Following is the pro forma effect on net loss and net loss per share for
all periods presented had the Company applied SFAS 123s fair value method of
accounting for stock-based awards issued to its employees. Three months endedMarch 31,2004
    
    2003(in thousands)Net loss, as reported
    
    $
    (2,179
    )
    
    $
    (6,473
    )Add: Stock-based employee compensation expense included in reported net loss
    
    
    119
    
    
    
    512Deduct: Stock-based employee compensation expense determined under the fair
value based method for all awards
    
    
    (677
    )
    
    
    (1,495
    )Net loss, pro forma
    
    $
    (2,715
    )
    
    $
    (7,444
    )Basic and diluted net loss per share, as reported
    
    $
    (0.23
    )
    
    $
    (0.72
    )Basic and diluted net loss per share, pro forma
    
    $
    (0.29
    )
    
    $
    (0.84
    )
  3.
    
    Inventories Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market and are comprised of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Raw materials
    
    $
    7,231
    
    
    $
    7,298Work in process
    
    
    471
    
    
    
    153Finished goods.
    
    
    1,421
    
    
    
    668$
    9,123
    
    
    $
    8,119
  4.
    
    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 has a term
of 3 years and has a variable interest rate. The rate is 25 basis points above
Libor and is reviewed quarterly. The weighted average cost of debt is
approximately 4.2% for the first quarter of 2004. The following summarizes the future cash payments, excluding interest, in
thousands: Years ending December 31,2004
    
    $
    3892005
    
    
    262Total minimum payments required
    
    $
    651
 8




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5.
    
    Property, Plant and Equipment Held for Sale At
March 31, 2004 and December 31, 2003, the Company had
$266,000 and
$306,000 of equipment classified as held for sale. During the first quarter of 2004, the Company committed to a plan to sell
its land and buildings located in Diamond Springs, California. As of March 31,
2004 the fair value of the land and buildings is estimated to exceed the net
book value of $3.5 million. The sale may be structured as a sale/leaseback transaction.  6.
    
    Restructuring Charges, Net Effective January 2004, the Company executed several agreements related to
the leasing arrangements for its Sunnyvale headquarters. Due to declining
commercial real estate lease rates, the original lease executed in August 2001
was at an above market rate, and would have expired in July 2006. This lease
was cancelled, effective January 2004 and the Company exited the property. In
consideration for the cancellation, the Company paid the landlord a settlement
fee of approximately $3.0 million resulting in a net lease termination expense
of $2.9 million. The Company also entered into a new lease for 16,000 square
feet in Sunnyvale, California at a lower, at-market rate. The new lease rate
is effective in January 2004 and will expire in August 2006. 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 first quarter of 2004, the Company
eliminated 18 positions and made cash payments of $ 483,000 under the Third
Quarter 2003 Plan. Severance payments will be complete by the end of the second
quarter of fiscal 2004. Third Quarter 2003 Plan
    
    Severance BenefitsThird quarter 2003 restructuring charge
    
    $
    490Cash payments
    
    
    (470
    )Accruals at December 31, 2003
    
    
    20Cash payments
    
    
    (13
    )Accruals at March 31, 2004
    
    $
    7
 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 further 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 $160,000 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 first quarter of 2004 were $19,000.  7.
    
    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 6. 9




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8.
    
    Net Loss Per Share Basic net loss per share is computed by dividing the net loss for the
three months ended March 31, 2004 and 2003, by the weighted average number of
shares of common stock outstanding during the period. Potential common shares from the assumed exercise of stock options,
warrants and convertible securities have been excluded from the net loss per
share calculations as their effect would be anti-dilutive due to the Companys
reported net loss.  9.
    
    Comprehensive Income (Loss) The Company had $1,000 of other comprehensive income at March 31, 2004 and
$2,000 of other comprehensive loss at December 31, 2003 resulting from
unrealized gains and losses on its available for sale investments.  10.
    
    Segment Disclosures The Company operates in a single segment. The Companys product sales by
geographic location for the three months ended March 31, 2004 and 2003 were as
follows (in thousands and as a percentage of total revenues): Three months ended March 31,2004
    
    2003United States
    
    $
    1,451
    
    
    
    21.9
    %
    
    $
    1,637
    
    
    
    21.4
    %Finland
    
    
    3,164
    
    
    
    47.8
    %
    
    
    4,756
    
    
    
    62.1
    %Italy
    
    
    728
    
    
    
    11.0
    %
    
    
    763
    
    
    
    10.0
    %Other
    
    
    1,274
    
    
    
    19.3
    %
    
    
    501
    
    
    
    6.5
    %Total
    
    $
    6,617
    
    
    
    100.0
    %
    
    $
    7,657
    
    
    
    100.0
    %
 For the three months ended March 31, 2004, Nokia, Stratex Networks and
Siemens accounted for 48%, 13% and 11% of total revenues listed above,
respectively. For the three months ended March 31, 2003, Nokia, Siemens and
Stratex Networks accounted for 62%, 10% and 10% of total revenues listed above,
respectively. Nokia, located in Finland, was the only customer in Finland for
the quarters ended March 31, 2004 and 2003. No other customer accounted for
more than 10% of the Companys total revenues.  11.
    
    Commitments and Contingencies From time to time, the Company may be subject to legal proceedings and
claims in the ordinary course of business. These claims, even if not
meritorious, could result in the expenditure of significant financial and other
resources. The Company is not currently aware of any legal proceedings or
claims, and management does not believe that the Company is subject to other
claims that would constitute material contingencies.  12.
    
    Related Party Transactions The Company maintains a supply agreement and a technology services
agreement with Northrop Grumman, 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. For purchases made under this
agreement, the Company recorded charges to costs of product revenues of
$685,000 and $647,000 for the first quarter of 2004 and 2003, respectively.
The $685,000 of charges to costs of product revenues during the first quarter
of 2004 included the reversal of a $793,000 liability that was settled during
the quarter. The Company also sells various products and services under purchase orders
and agreements to Northrop Grumman, and recognized revenues of $0 and $65,000
for the first quarter of 2004 and 2003, respectively. In the quarter ended
March 31, 2003, the Company incurred costs related to this revenue of
approximately $18,000. At March 31, 2004, the Company had accounts receivable of $67,000 and
accounts payable of $703,000, related to its supplier and customer
relationships with Northrop Grumman. 10




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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 first quarter of 2004 of $6.6 million were down $1.0
million, or 14%, from the first quarter of 2003, and were down $2.9 million, or
30%, from the fourth quarter of 2003. Revenues were lower than anticipated as
slower sales due to seasonal fluctuations were compounded by lower than
expected sales to our largest customer. We anticipate a modest increase in
our revenues in the second quarter of 2004 with continuing increased demand for
our products in the second half of 2004. However, the telecommunications market
has been difficult to forecast as the economic recovery has remained slow and
inconsistent. This demand outlook has led us to take steps during 2004 to
reduce costs and better address our customers needs. We took the following steps during the first quarter of 2004 to control
costs:  
    
    Effective January 2004, we executed several agreements
related to the leasing arrangements for 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 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
rate 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
requires 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 offshore partner in Southeast Asia. During the first quarter
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 remainder of 2004 we expect to begin manufacturing product
based on our customers designs at the location of our offshore 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. We believe, however, that this
will allow us to increase market share, establish relationships with new
customers, increase revenues, and absorb some of our fixed costs. We would not
expect to incur other significant operating costs associated with this model
unless we elect to redesign the product. 11




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Results of Operations Three months ended March 31, 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 EndedMarch 31,2004
    
    2003Total revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of product revenues
    
    
    60.0
    
    
    
    91.5Research and development
    
    
    14.7
    
    
    
    14.4Selling, general and administrative
    
    
    27.6
    
    
    
    32.7Restructuring charges, net
    
    
    43.8
    
    
    
    Amortization of deferred stock compensation
    
    
    1.8
    
    
    
    6.7Loss (recovery) on building sublease
    
    
    (5.4
    )
    
    
    8.6Impairment of long-lived assets
    
    
    
    
    
    
    31.5Total costs and expenses
    
    
    142.5
    
    
    
    185.4Loss from operations
    
    
    (42.5
    )
    
    
    (85.4
    )Interest and other income, net
    
    
    9.6
    
    
    
    0.9Net loss
    
    
    (32.9
    )%
    
    
    (84.5
    )%
 Revenues Total revenues in the first quarter of 2004 were $6.6 million, a 14%
decrease from $7.7 million for the same period in 2003 and were comprised of
product revenues and development fees. The first quarter of 2004 revenues were
lower than anticipated as slower sales due to seasonal fluctuations were
compounded by lower than expected sales to our largest customer. Product revenues were $6.5 million in the first quarter of 2004, a 15%
decrease from $7.6 million for the same period in 2003. The decrease reflects
the lower than expected sales noted above. We generate development fees by developing product prototypes and custom
products pursuant to development agreements that provide for payment of a
portion of our research and development or other expenses. Development fees
were $122,000 for the three months ended March 31, 2004, as compared to $60,000
in the same period of 2003. The increase in development fees is attributable to
increased development of custom designed products for new and existing
customers. We expect to generate future product revenues as a result of these
development agreements. We do not foresee development fees to be a significant
component of our overall revenues in the near term. 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 previously reserved material. Cost of product revenues was
$4.0 million for the three months ended March 31, 2004, a 43% decrease from
$7.0 million for the same period in 2003. As a percentage of revenues, cost of
product revenues decreased to 60.0% in the quarter ended March 31, 2004, from
91.5% for the same period in 2003. The percentage improvement is attributable
to cost reductions within the manufacturing process, 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
quarter. The actions we took to reduce manufacturing costs included the
consolidation of our manufacturing sites, greater utilization of offshore
manufacturing, introduction of lower cost products and elimination of excess
overhead, equipment and capacity. The cost of product revenues was favorably
impacted by the utilization of previously reserved inventory amounting to
approximately $176,000 during the first quarter of 2004 as compared to $300,000
during the first quarter of 2003. We expect further, although less
significant, improvements in cost of product revenues as a result of our
continued efforts at cost reduction, introduction of new designs and
technology, and further strengthening of our offshore manufacturing model. 12




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Research and development expenses.Research and development expenses
were $1.0 million for the three months ended March 31, 2004, a 12% decrease
from $1.1 million for the same period in 2003. As a percentage of revenues,
research and development expenses increased to 14.7% in the quarter ended March
31, 2004, from 14.4% for the same period in 2003. The decrease in dollars was
primarily attributable to restructuring our engineering team to a more
efficient and cost effective size, while still supporting development of new
products and research associated with technology to be introduced in 2004.
These decreases were partially offset by increased project costs incurred to
support the development fees we earned during the first quarter of 2004. The
increase in research and development expenses as a percent of revenues was due
to lower sales during the first quarter of 2004 than the first quarter of 2003. During the remainder of 2004, we expect a moderate increase to research
and development expenses as we accelerate certain development programs and
begin new development programs. This increase could be more significant if we
have an unexpected increase in new customer-specific development projects for
which we could receive some development fees. Selling, general and administrative expenses.Selling, general and
administrative expenses consist primarily of salaries and related expenses for
executive, sales, marketing, finance, accounting, information technology, and
human resources personnel, professional fees, facilities costs and promotional
activities. Selling, general and administrative expenses were $1.8 million for
the three months ended March 31, 2004, a 27% decrease from $2.5 million for the
same period in 2003. As a percentage of revenues, selling, general and
administrative expenses decreased to 27.6% in the quarter ended March 31, 2004,
from 32.7% 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 an increase in professional service fees. During the remainder of 2004, we expect a further decline in selling,
general and administrative expenses as a result of lower rent expense from our
renegotiated lease. Restructuring charges, net.During the first quarter of 2004 we
incurred a net lease termination fee of $2.9 million related to the termination
of the lease agreement for our corporate headquarters in Sunnyvale, California.
During the quarter we finalized the renegotiation of the lease, which resulted
in a $3.0 million cash payment to our landlord in exchange for substantially
reduced rent in a new location. This settlement was partially offset by a
$101,000 benefit due to the reversal of deferred rent liability related to the
previous lease agreement. There was no such charge in the first quarter of
2003. 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 first quarter of 2004, amortization of deferred stock
compensation and other option-related expenses were $119,000, a decrease from
$512,000 in the same period in 2003. As a percentage of revenues, amortization
of deferred stock compensation decreased to 1.8% in the quarter ended March 31,
2004, from 6.7% for 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.
Remaining deferred compensation of $85,000 will be amortized during the
remainder 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. Impairment of long-lived assets. 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 13




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value and the estimated fair value of the equipment, less selling costs.
There was no such charge during the first quarter of 2004. Interest income, expense and other, net.Net interest income and other,
net consists primarily of interest income earned on our cash and cash
equivalents and short-term investments and gains and losses on the sale of
fixed assets, offset by interest expense on notes payable and capital equipment
leases. Interest income, expense and other, net was $637,000 for the three
months ended March 31, 2004, an increase from $65,000 for the same period in
2003. As a percentage of revenues, interest income, expense and other, net
increased to 9.6% in the quarter ended March 31, 2004, from 0.9% for the same
period in 2003. The increase was due primarily to the sale of fixed assets and
assets held-for-sale which resulted in a net gain of $473,000 during the
quarter. Additionally, there was lower interest expense during the first
quarter 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, restricted cash, cash equivalents and short-term investments
at March 31, 2004 and December 31, 2003 of $26.9 million and $30.1 million,
respectively. Our principal source of liquidity as of March 31, 2004, consisted of
approximately $26.9 million in cash, restricted cash, cash equivalents and
short-term investments. During the first quarter of 2004, we consumed $4.2
million of cash in operating activities, as compared to using $1.1 million in
the same period of 2003. The increase in the use of cash for the first quarter
of 2004 compared to the same period in 2003 was primarily due to the payment of
a $3.0 million lease termination fee included in the net loss, the $1.0 million
of cash used for the purchase of inventory and a $1.1 million decrease in
accounts payable, accounts payable to affiliates and other current and
long-term liabilities in the first quarter of 2004, as compared to $2.1 million
of cash generated by the reduction of inventory and a minimal decrease in
accounts payable, accounts payable to affiliates and other current and
long-term liabilities in the first quarter of 2003. This was partially offset
by a decrease in accounts receivable of $300,000 during the first quarter of
2004 due to lower revenues as compared to a $1.2 million increase in the first
quarter of 2003. Investing activities provided cash of $1.6 million in the first quarter of
2004 as compared to $8.6 million in the first quarter of 2003. The decrease in
the cash provided by investing activities was primarily due to fewer maturities
of short-term investments in the current year as a result of lower investment
balances. This was partially offset by $721,000 of proceeds from the sale of
property and equipment during the first quarter of 2004. Financing activities provided cash of $445,000 in the first quarter of
2004 as compared to a use of $446,000 in the first quarter of 2003. The
$445,000 provided by financing activities in the first quarter of 2004 was due
to proceeds from the exercise of employee stock options. Financing activities
in the first quarter of 2003 included payments on capital lease obligations of
$324,000, which were paid off during 2003 and $122,000 on notes payable. We believe that our existing cash and investment balances and anticipated
cash flows from operations 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 any variable interest entities, we do not have any unconditional
purchase obligations, nor do we have non-cancelable commitments for capital
expenditures. We have not guaranteed the debt or obligations of other entities
or entered into options on non-financial assets. The following table summarizes our future payment obligations for
operating leases and notes payable including obligations under the new lease
arrangement for our corporate headquarters (excluding interest): 14




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OperatingYears Ending December 31,
    
    Leases(in thousands)2004
    
    $
    2512005
    
    
    3092006
    
    
    131Total minimum payments required
    
    $
    691
 Years Ending December 31,
    
    Notes Payable(in thousands)2004
    
    $
    3892005
    
    
    262Total minimum payments required
    
    $
    651
 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 $2.2 million for the
quarter ended March 31, 2004. Additionally, we had net losses of $7.9 million,
$31.0 million, $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 consistent profitability in the future. Our failure to attain
consistent profitability may cause the market price of our common stock to
decline in the future. We depend upon a small number of customers, 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
customers for 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 March 31, 2004, sales to Nokia, Stratex
Networks, and Siemens accounted for 48%, 13% and 11% 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 or 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. 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. 15




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Until early 2003, 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 have 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
achieve profitability. 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, 16




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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 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 inport/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, 17




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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 offshore 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
offshore 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 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 18




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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 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 19




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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. Our sales are generally made on the basis of formal agreements and
purchase orders, which may be later modified or canceled by the customer,
rather than firm long term purchase commitments. We have historically been
required to place firm orders for products and manufacturing equipment with our
suppliers up to six months prior to the anticipated delivery date and, on
occasion, prior to receiving an order for the product, based on our forecasts
of customer demands. Our sales process requires us to make multiple demand
forecast assumptions, each of which may introduce error into our estimates,
causing excess inventory to 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 reserves
for repairing the affected units. We cannot guarantee that similar failures
will not occur in the future resulting in significant expenses 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. 20




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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 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. As part of the strategy for the growth and expansion of our business, we may
make additional acquisitions that could disrupt our business and severely harm
our financial condition. 21




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As part of our business strategy, we may invest in or acquire other
businesses, technologies or assets, or enter into strategic relationships with
third parties. For future acquisitions, we may issue additional stock, incur
debt, assume liabilities, incur amortization expenses related to intangible
assets or incur large and immediate write-offs. With the exception of the
integration of operations experienced following our merger with TRW Milliwave,
our acquisition of certain assets of M/A-COM from Tyco Electronics, our
acquisition of the broadband assets of the Fixed Wireless division of Signal
Technology Corporation, our acquisition of certain assets of Arcom and our
acquisition of certain assets of Verticom, we have no experience in integrating
acquired businesses with our existing business. Our operation of any acquired
businesses would involve numerous risks, including, but not limited to:  
    
    problems combining any purchased operations with our own operations;
    
    unanticipated costs;
    
    diversion of managements attention from our core business;
    
    adverse effects on existing business relationships with customers;
    
    risks associated with entering markets in which we have no or limited prior experience; and
    
    the potential loss of key employees, particularly those of the purchased organization. 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 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 March 31, 2004 78% 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;
    
    fluctuations in foreign currencies and the United States dollar, especially the Euro; 22




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
    
    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 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 23




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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. 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 24




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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. 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 25




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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. 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 26




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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. The Nasdaq Stock Market has a $1.00 per share minimum closing bid price
requirement, pursuant to which our common stock could be de-listed from the
Nasdaq National Market if its closing bid price is $1.00 for 30 consecutive
trading days and does not subsequently trade above $1.00 for 10 consecutive
trading days. There can be no assurance that our closing bid price will be
above the Nasdaq Stock Market requirements for the necessary time periods
mandated by the Nasdaq National Market. If we are unable to meet the Nasdaq
requirements to maintain listing on the Nasdaq National Market our common stock
could trade on the Nasdaq SmallCap Market, the OTC Bulletin Board or in the
pink sheets maintained by the National Quotation Bureau, Inc. Such
alternatives are generally considered to be less efficient markets, and our
stock price, as well as the liquidity of our common stock, will be adversely
impacted as a result. 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 March 1, 2004, directors and holders of five percent or more of our
outstanding common stock beneficially owned approximately 51% of our common
stock. Of this percentage, Northrop Grumman alone beneficially owns
approximately 36% 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
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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 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 quarter of 2004, we have implemented additional controls
and procedures to ensure that reconciliations, analyses and supporting
documentation are prepared on a timely basis. We will continue to refine our
internal controls and procedures over time, to continue to ensure the accurate
presentation of our financial condition, results of operations and cash flows. 28




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PART II. OTHER INFORMATION 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits. Number
    
    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
    
    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.10.8(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+
    
    Amended and Restated Supply Agreement by and between Northrup Grumman
Space and Mission Systems Corp. and Registrant dated March 26, 200410.32
    
    Industrial Lease by and between The Irvine Company and the Registrant
dated January 28, 200410.33
    
    Lease Surrender and Termination Agreement by and between The Irvine
Company and the Registrant dated January 28, 2004.
 29




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##### Table of Contents



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.
   (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.+
    
    Confidential treatment has been requested for a portion of this exhibit.  (b)
    
    Reports on Form 8-K We filed a Current Report on Form 8-K dated February 4, 2004 to furnish a press
release in which we announced our financial results for the quarter ended
December 31, 2003. 30




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##### 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: May 14, 2004 By:
    
    /s/ Edward A. Keible, Jr.Edward A. Keible, Jr.
 President and Chief Executive Officer By:
    
    /s/ Julianne M. BiaginiJulianne M. Biagini
 Senior Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer) 31




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##### Table of Contents



Index to Exhibits Number
    
    Description3.3
    
    Certificate of Amendment of Amended and Restated Certificate of
Incorporation effective June 28, 2002.10.31+
    
    Amended and Restated Supply Agreement by and between Northrup Grumman
Space and Mission Systems Corp. and Registrant dated March 26, 2004.10.32
    
    Industrial Lease by and between The Irvine Company and the Registrant
dated January 28, 200410.33
    
    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.
   +
    Confidential treatment has been requested for a portion of this exhibit. 32