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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 June 30, 2003

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

000-31635

(Commission file number)


ENDWAVE CORPORATION

(Exact name of registrant as specified in its charter)


|                                                                           |  |                                                
|-------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State of incorporation)                                          |  | 95-4333817
(I.R.S. Employer Identification No.)
|990 Almanor 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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

The number of shares of the registrants Common Stock outstanding as of
July 31, 2003 was 9,119,126 shares.



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TABLE OF CONTENTS



|                              |                                                                                                        |  |  |  |  |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                          
|                              | Condensed Balance Sheets as of June 30, 2003 (unaudited and December 31, 2002                         
|                              | Unaudited Condensed Statements of Operations for the three and six months ended June 30, 2003 and 2002
|                              | Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 2003 and 2002          
|                              | Notes to Condensed Financial Statements                                                               
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations         
|                              | Item 3. Qualitative and Quantitative Disclosures about Market Risk                                    
|                              | Item 4. Controls and Procedures.                                                                      
|PART II. OTHER INFORMATION   
|                              | Item 6. Exhibits and Reports on Form 8-K                                                              
|SIGNATURE                    
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 



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ENDWAVE CORPORATION

INDEX

|           |  |                                                                                |  |  |    |      |    | 
|---------- |  | ------------------------------------------------------------------------------ |  |  | -- | ---- | -- | 
|           |  |                                                                                |  |  |    | Page
|           |  |                                                                                |  |  |    |     
|PART I     |  | FINANCIAL INFORMATION                                                          |  |  |    |     
|Item 1     |  | Financial Statements                                                           |  |  | 3  |     
|           |  | Condensed Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002 |  |  | 3  |     
|           |  | Unaudited Condensed Statements of Operations for the three and six months      |  |  |    |     
|           |  | ended June 30, 2003 and 2002                                                   |  |  | 4  |     
|           |  | Unaudited Condensed Statements of Cash Flows for the six months ended June 30, |  |  |    |     
|           |  | 2003 and 2002                                                                  |  |  | 5  |     
|           |  | Notes to Condensed Financial Statements                                        |  |  | 6  |     
|           |  | Managements Discussion and Analysis of Financial Condition and Results of     |  |  |    |     
|Item 2     |  | Operations                                                                     |  |  | 13 |     
|Item 3     |  | Qualitative and Quantitative Disclosure about Market Risk                      |  |  | 16 |     
|Item 4     |  | Controls and Procedures                                                        |  |  | 16 |     
|PART II    |  | OTHER INFORMATION                                                              |  |  |    |     
|Item 6     |  | Exhibits and Reports on Form 8-K                                               |  |  | 17 |     
|SIGNATURES |  |                                                                                |  |  |    |      | 19 | 
|EXHIBITS   |  |                                                                                |  |  |    |      | 20 | 

2



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PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




ENDWAVE CORPORATION
CONDENSED BALANCE SHEETS
(In thousands, except share amounts)

|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |              |        | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | -------------------- |  | ------------- |  | ---- | ------ | -------- | ------ | - | ------ | ------------ | ------ | 
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        | December 31,
|                                                |                                                                                                                                |                      |  | June 30, 2003 |  | 2002
|                                                |                                                                                                                                |                      |  |               |  |     
|                                                |                                                                                                                                |                      |  | Unaudited)    |  | (1) 
|ASSETS                                          |                                                                                                                                |                      |  |              
|Current assets:                                 |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|                                                |                                                                                                                                |                      |  |               |  |      | $      |          |        |   |        |             
|                                                | Cash and cash equivalents                                                                                                      |                      |  |               |  |      |        | 12,788   |        |   | $      | 9,224        |       
|                                                | Restricted cash                                                                                                                |                      |  |               |  |      |        | 1,029    |        |   |        | 1,560        |       
|                                                | Short-term investments                                                                                                         |                      |  |               |  |      |        | 14,719   |        |   |        | 19,801       |       
|                                                | Accounts receivable, net                                                                                                       |                      |  |               |  |      |        | 5,751    |        |   |        | 4,101        |       
|                                                | Inventories                                                                                                                    |                      |  |               |  |      |        | 8,766    |        |   |        | 11,784       |       
|                                                | Other current assets                                                                                                           |                      |  |               |  |      |        | 211      |        |   |        | 718          |       
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|                                                |                                                                                                                                | Total current assets |  |               |  |      |        |          | 43,264 |   |        |              | 47,188 | 
|Property, plant and equipment, net              |                                                                                                                                |                      |  |               |  |      | 8,780  |          |        |   | 12,713 |             
|Other assets, net                               |                                                                                                                                |                      |  |               |  |      | 148    |          |        |   | 148    |             
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|                                                |                                                                                                                                |                      |  |               |  | $    | 52,192 |          |        | $ | 60,049 |             
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|LIABILITIES AND STOCKHOLDERS EQUITY            |                                                                                                                                |                      |  |              
|Current liabilities:                            |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|                                                | Accounts payable                                                                                                               |                      |  |               |  |      | $      | 1,361    |        |   | $      | 1,009        |       
|                                                | Accounts payable to affiliates                                                                                                 |                      |  |               |  |      |        | 1,077    |        |   |        | 1,029        |       
|                                                | Accrued warranty                                                                                                               |                      |  |               |  |      |        | 5,798    |        |   |        | 5,583        |       
|                                                | Accrued compensation and other liabilities                                                                                     |                      |  |               |  |      |        | 1,604    |        |   |        | 1,437        |       
|                                                | Capital lease obligations, current portion                                                                                     |                      |  |               |  |      |        |         |        |   |        | 1,146        |       
|                                                | Notes payable, current                                                                                                         |                      |  |               |  |      |        | 503      |        |   |        | 491          |       
|                                                | Other current liabilities                                                                                                      |                      |  |               |  |      |        | 1,444    |        |   |        | 773          |       
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|Total current liabilities                       |                                                                                                                                |                      |  |               |  |      | 11,787 |          |        |   | 11,468 |             
|Capital lease obligations, less current portion |                                                                                                                                |                      |  |               |  |      |       |          |        |   | 113    |             
|Notes payable, less current portion             |                                                                                                                                |                      |  |               |  |      | 526    |          |        |   | 783    |             
|Other long-term liabilities                     |                                                                                                                                |                      |  |               |  |      | 140    |          |        |   | 179    |             
|Commitments and contingencies                   |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|Stockholders equity:                           |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|                                                | Convertible preferred stock $0.001 par
value; 27,000,000 shares authorized and
none issued and outstanding                     |                      |  |               |  |      |        |         |        |   |        |             |       
|                                                | Common stock, $0.001 par value per share;
100,000,000 authorized, 9,076,988 and
9,014,661 issued and outstanding,
respectively |                      |  |               |  |      |        | 9        |        |   |        | 9            |       
|                                                | Additional paid-in capital                                                                                                     |                      |  |               |  |      |        | 301,987  |        |   |        | 302,116      |       
|                                                | Deferred stock compensation                                                                                                    |                      |  |               |  |      |        | (518     | )      |   |        | (1,292       | )     
|                                                | Accumulated other comprehensive (loss)                                                                                         |                      |  |               |  |      |        | (110     | )      |   |        | (67          | )     
|                                                | Accumulated deficit                                                                                                            |                      |  |               |  |      |        | (261,550 | )      |   |        | (253,181     | )     
|                                                | Treasury stock, at cost, 39,150 shares held
at June 30, 2003 and December 31, 2002                                             |                      |  |               |  |      |        | (79      | )      |   |        | (79          | )     
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|                                                | Total stockholders equity                                                                                                     |                      |  |               |  |      |        | 39,739   |        |   |        | 47,506       |       
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             
|                                                |                                                                                                                                |                      |  |               |  | $    | 52,192 |          |        | $ | 60,049 |             
|                                                |                                                                                                                                |                      |  |               |  |      |        |          |        |   |        |             



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|(1) |  | Derived from the Companys audited financial statements as of December 31, 2002
|--- |  | -------------------------------------------------------------------------------

See accompanying notes to the condensed financial statements.

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ENDWAVE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)

|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |     |        | 
|---------------------------------------------------------------- | ----------------------------------- | ---------------------------------------------------- | --------- | ------------------ | ----- | ---------------- | --------- | ---- | ----- | ---- | --------- | --- | ------ | - | --------- | --- | ------ | 
|                                                                 |                                     |                                                      |           | Three Months Ended |       | Six Months Ended
|                                                                 |                                     |                                                      |           | June 30,           |       | June 30,        
|                                                                 |                                     |                                                      |           |                    |       |                 
|                                                                 |                                     |                                                      |           | 2003               |       | 2002             |           | 2003 |       | 2002
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |     
|Revenues                                                         |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|                                                                 |                                     | Revenues                                             |           | $                  | 8,396 |                  |           | $    | 6,098 |      |           | $   | 15,988 |   |           | $   | 10,017 | 
|                                                                 |                                     | Revenues from affiliates                             |           |                    | 74    |                  |           |      | 147   |      |           |     | 139    |   |           |     | 606    | 
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|Total revenues                                                   |                                     |                                                      | 8,470     |                    |       |                  | 6,245     |      |       |      | 16,127    |     |        |   | 10,623    |    
|                                                                
|Costs and expenses:                                              |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|                                                                 |                                     | Cost of product revenues                             |           |                    | 6,168 |                  |           |      | 7,432 |      |           |     | 13,151 |   |           |     | 13,836 | 
|                                                                 |                                     | Cost of product revenues from
affiliates             |           |                    | 22    |                  |           |      | 47    |      |           |     | 41     |   |           |     | 178    | 
|                                                                 |                                     | Research and development                             |           |                    | 1,445 |                  |           |      | 2,621 |      |           |     | 2,547  |   |           |     | 5,764  | 
|                                                                 |                                     | Selling, general and administrative                  |           |                    | 2,724 |                  |           |      | 2,524 |      |           |     | 5,232  |   |           |     | 4,700  | 
|                                                                 |                                     | Restructuring charge (recovery) and
asset write-offs |           |                    |      |                  |           |      | (3    | )    |           |     | 2,409  |   |           |     | 3,033  | 
|                                                                 |                                     | Amortization of deferred stock
compensation          |           |                    | 84    |                  |           |      | 901   |      |           |     | 596    |   |           |     | 2,046  | 
|                                                                 |                                     | Loss on building sublease                            |           |                    |      |                  |           |      |      |      |           |     | 662    |   |           |     |       | 
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|Total costs and expenses                                         |                                     |                                                      | 10,443    |                    |       |                  | 13,522    |      |       |      | 24,638    |     |        |   | 29,557    |    
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|Loss from operations                                             |                                     |                                                      | (1,973    | )                  |       |                  | (7,277    | )    |       |      | (8,511    | )   |        |   | (18,934   | )  
|Interest and other income, net                                   |                                     |                                                      | 77        |                    |       |                  | 1,177     |      |       |      | 142       |     |        |   | 1,388     |    
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|Net loss                                                         |                                     | $                                                    | (1,896    | )                  |       | $                | (6,100    | )    |       | $    | (8,369    | )   |        | $ | (17,546   | )  
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|Basic and diluted net loss per share                             |                                     | $                                                    | (0.21     | )                  |       | $                | (0.68     | )    |       | $    | (0.93     | )   |        | $ | (1.97     | )  
|Shares used in computing of basic and
diluted net loss per share |                                     |                                                      | 9,056,441 |                    |       |                  | 8,918,499 |      |       |      | 9,035,666 |     |        |   | 8,911,820 |    
|                                                                
|*Amortization of deferred stock compensation:                    |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|                                                                 | Cost of product revenues            |                                                      | $         | 50                 |       |                  | $         | 242  |       |      | $         | 163 |        |   | $         | 589 |       
|                                                                 | Research and development            |                                                      |           | 14                 |       |                  |           | 282  |       |      |           | 180 |        |   |           | 613 |       
|                                                                 | Selling, general and administrative |                                                      |           | 20                 |       |                  |           | 377  |       |      |           | 253 |        |   |           | 844 |       
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    
|                                                                 |                                     | $                                                    | 84        |                    |       | $                | 901       |      |       | $    | 596       |     |        | $ | 2,046     |    
|                                                                 |                                     |                                                      |           |                    |       |                  |           |      |       |      |           |     |        |   |           |    

See accompanying notes to the condensed financial statements.

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ENDWAVE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                                            |                                                    |                                   |        |                  |        |      |         |         |        |  
|--------------------------------------------------------------------------- | -------------------------------------------------- | --------------------------------- | ------ | ---------------- | ------ | ---- | ------- | ------- | ------ | -
|                                                                            |                                                    |                                   |        | Six Months Ended
|                                                                            |                                                    |                                   |        | June 30,        
|                                                                            |                                                    |                                   |        |                 
|                                                                            |                                                    |                                   |        | 2003             |        | 2002
|                                                                            |                                                    |                                   |        |                  |        |     
|Operating activities:                                                       |                                                    |                                   |        |                  |        |      |         |        
|Net loss                                                                    |                                                    | $                                 | (8,369 | )                |        | $    | (17,546 | )      
|Adjustments to reconcile net loss to net cash used by
operating activities: |                                                    |                                   |        |                  |        |      |         |        
|                                                                            | Depreciation                                       |                                   |        | 1,464            |        |      |         | 2,428   |       
|                                                                            | Impairment of long-lived assets                    |                                   |        | 2,409            |        |      |         |        |       
|                                                                            | Amortization of deferred stock compensation        |                                   |        | 596              |        |      |         | 2,046   |       
|                                                                            | Restructuring charge                               |                                   |        |                 |        |      |         | 3,033   |       
|                                                                            | Loss on building sublease                          |                                   |        | 662              |        |      |         |        |       
|                                                                            | Changes in operating assets and liabilities:       |                                   |        |                  |        |      |         |         |       
|                                                                            |                                                    | Accounts receivable, net          |        |                  | (1,650 | )    |         |         | (866   | )
|                                                                            |                                                    | Inventories                       |        |                  | 3,018  |      |         |         | 1,416  |  
|                                                                            |                                                    | Other current assets              |        |                  | 508    |      |         |         | 932    |  
|                                                                            |                                                    | Accounts payable                  |        |                  | 352    |      |         |         | (2,242 | )
|                                                                            |                                                    | Accounts payable, related parties |        |                  | 48     |      |         |         | (457   | )
|                                                                            |                                                    | Accrued liabilities               |        |                  | 352    |      |         |         | (2,332 | )
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|                                                                            | Net cash used in operating activities              |                                   |        | (610             | )      |      |         | (13,588 | )     
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|Investing activities:                                                       |                                                    |                                   |        |                  |        |      |         |        
|                                                                            | Purchases of property and equipment                |                                   |        | (53              | )      |      |         | (48     | )     
|                                                                            | Proceeds on sales of property plant and equipment  |                                   |        | 113              |        |      |         | 4       |       
|                                                                            | Proceeds on sale of short term investments         |                                   |        | 5,290            |        |      |         | 6,289   |       
|                                                                            | Purchase of Verticom assets                        |                                   |        | (250             | )      |      |         |        |       
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|                                                                            | Net cash provided by investing activities          |                                   |        | 5,100            |        |      |         | 6,245   |       
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|Financing activities:                                                       |                                                    |                                   |        |                  |        |      |         |        
|                                                                            | Principal payments under capital lease obligations |                                   |        | (1,259           | )      |      |         | (1,207  | )     
|                                                                            | Payment of note payable                            |                                   |        | (245             | )      |      |         |        |       
|                                                                            | Proceeds from stock
issuance                       |                                   |        | 47               |        |      |         | 112     |       
|                                                                            | Purchase of treasury stock                         |                                   |        |                 |        |      |         | (62     | )     
|                                                                            | Proceeds from exercises of stock options           |                                   |        |                 |        |      |         | 5       |       
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|                                                                            | Net cash used in financing activities              |                                   |        | (1,457           | )      |      |         | (1,152  | )     
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|Net change in cash and cash equivalents                                     |                                                    |                                   | 3,033  |                  |        |      | (8,495  | )      
|Cash and cash equivalents at beginning of period                            |                                                    |                                   | 9,224  |                  |        |      | 21,303  |        
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|Cash and cash equivalents at end of period                                  |                                                    | $                                 | 12,257 |                  |        | $    | 12,808  |        
|                                                                            |                                                    |                                   |        |                  |        |      |         |        
|Supplemental cash flow information:                                         |                                                    |                                   |        |                  |        |      |         |        
|Cash paid for interest                                                      |                                                    | $                                 | 98     |                  |        | $    | 164     |        
|                                                                            |                                                    |                                   |        |                  |        |      |         |        

See accompanying notes to the condensed financial statements.

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ENDWAVE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)



|1. |  | Unaudited Interim Financial Information
|-- |  | ---------------------------------------

The accompanying unaudited condensed financial statements of Endwave
Corporation (the Company) have been prepared in conformity with generally
accepted accounting principles and with the instructions to Form 10-Q and Rule
10-01 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
accompanying unaudited condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, 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, 2003. These condensed
financial statements should be read in conjunction with the Companys audited
financial statements for the year ended December 31, 2002. The balance sheet
at December 31, 2002 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.



|2. |  | Summary of Significant Accounting Policies
|-- |  | ------------------------------------------

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 revenue at the time title passes,
which is upon product shipment or when the product is withdrawn from a
consignment location. Revenues related to product sales are recognized in
accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101), when: (1) there is persuasive evidence that an
arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the sellers price to the buyer is fixed or determinable, and (4)
collectibility is reasonably assured. There are typically no significant
acceptance requirements or post-shipment obligations on the part of the
Company. 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 agreements are included in research and development expenses.

Related Party Transactions

Northrop
Grumman beneficially owns approximately 38.5% of the Companys common
stock. In December 2001, the Company entered into an agreement with TRW, now
owned by Northrop Grumman, to repair RF subsystems previously supplied by TRW
to Nokia. This agreement terminates on completion of the repair of all units
requiring repair. In the three and six month periods ended June 30, 2003, the
Company recognized revenues of approximately $74,000 and $147,000,
respectively. In the three and six month periods ended June 30, 2002, the
Company recognized revenues of approximately $139,000 and $606,000,
respectively.

Warranty

The warranty periods for the Companys products are generally between one
and three years from date of shipment. The Company provides for estimated
warranty expense at the time of shipment. While the Company engages in 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.

Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company provides an allowance for specific customer accounts where
collection is doubtful and also provides a general allowance for other accounts
based on historical collection and write-off

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experience. If the financial condition of customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

Cash Equivalents and Short-Term Investments

The Company invests its excess cash primarily in highly liquid investment
grade commercial paper and money market accounts with United States banks and
in short-term investments.

The Company considers all highly liquid investments with maturity of 90
days or less when purchased to be cash equivalents. Investments with maturities
between 90 days and one year are classified as short-term investments
available-for-sale and are carried at fair value with unrealized gains and
losses included in accumulated other comprehensive income (loss) in
stockholders equity. If the fair value of a security is below its carrying
value for each trading day for six consecutive months or if its decline is due
to a significant adverse event, the impairment is considered to be
other-than-temporary. Other-than-temporary declines in fair value of short-term
marketable securities are charged against other income.

Restricted Cash

The Company refinanced some of its capital leases during 2002 to take
advantage of the low interest rate environment. The restricted cash is a
compensating balance to the notes payable with a major bank and is in an
interest-bearing note. The amount restricted declines as the Company pays it
monthly obligation of principal and interest. The interest rate on the note
payable is 25 basis points above LIBOR rates and is set quarterly.

Inventories

Inventories are stated at the lower of standard cost or market (net
realizable value). Standard costs approximate average actual costs. The Company
uses a standard cost accounting system to value inventory and these standards
are reviewed at a minimum of once a year. The Company provides for the
inventory value for estimated excess and obsolete inventory, based on
managements assessment of future demand and market conditions. If actual
future demand or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.

Property, Plant and Equipment

Property, plant and equipment is stated at cost. Depreciation is computed
on a straight-line basis over the useful lives of the assets, ranging from
three to thirty years.

|                        |  |             |              | 
|----------------------- |  | ----------- | ------------ | 
|                        |  | Depreciable
|                        |  | Life       
|                        |  |            
|Buildings               |  |             | 30 years     | 
|Software                |  |             | 3 years      | 
|Leasehold improvements  |  |             | 3 years      | 
|Machinery and equipment |  |             | 5 to 7 years | 

Accounting for the Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, the assets are written
down to their estimated fair values.

Income Taxes

Income taxes have been provided using the liability method. Deferred tax
assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

The Company was formed through the merger of TRW Milliwave into Endgate
Corporation. The merger of TRW Milliwave with and into Endgate was
accomplished through a tax-free reorganization under the Internal Revenue Code.
As such, Endgates and TRW Milliwaves tax bases in their assets and
liabilities carried over to the Company with no step-up in basis. Therefore,
the amortization of intangible assets resulting from the merger, including
goodwill, is not deductible for tax purposes. Since inception, Endgate incurred
net losses and therefore generated significant net operating loss
carry-forwards. These carry-forwards were not reflected on Endgates balance
sheet as an asset because they were

7



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fully reserved due to uncertainty about Endgates ability to utilize these
loss carryforwards. The merger with TRW Milliwave imposed limitations on the
combined companys ability to utilize these pre-existing net operating loss
carryforwards. Generally accepted accounting principles require that deferred
tax liabilities be recorded for identifiable intangible assets acquired in a
business combination accounted for as a purchase. The deferred tax asset
related to net operating loss carryforwards is greater than the deferred tax
liabilities related to the identifiable intangible assets acquired. A valuation
allowance has been provided to eliminate the net deferred tax asset because
ultimate realization is uncertain. Because TRW Milliwave was a wholly-owned
subsidiary of TRW, and therefore part of the consolidated TRW tax return prior
to merging with Endgate, TRW was able to utilize TRW Milliwaves net operating
losses in the consolidated income tax return of TRW for periods prior to March
31, 2000, leaving TRW Milliwave with no net operating loss carryforwards.

Stock-Based Compensation

In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS
123) and SFAS No. 148 Accounting for Stock-Based CompensationTransition and
Disclosure, (SFAS 148), the Company applies Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations in accounting for its stock option plans and stock
purchase plan. Accordingly, the Company does not recognize compensation cost
for stock options to employees granted at fair market value.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period, and the
estimated fair value of purchases under the employee stock purchase plan is
expensed in the year of purchase as well as the stock-based employee
compensation cost, net of related tax effects, that would have been included in
the determination of net income if the fair value based method had been applied
to all awards. The effects on pro forma disclosure of applying SFAS No. 123 are
not likely to be representative of the effects on pro forma disclosure of
future years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a
reliable single measure of its employee stock options.

|                                                                                                                |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ---------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                |  | Three
Months Ended |        | Six Months Ended
|                                                                                                                |  | June 30,           |        | June 30,        
|                                                                                                                |  |                    |        |                 
|                                                                                                                |  | 2003               |        | 2002             |  | 2003 |        | 2002
|                                                                                                                |  |                    |        |                  |  |      |        |     
|                                                                                                                |  | (in thousands)     |        | (in thousands)  
|                                                                                                                |  |                    |        |                 
|Net loss, as
reported                                                                                           |  | $                  | (1,896 | )                |  | $    | (6,100 | )    |  | $ | (8,369  | ) |  | $ | (17,546 | )
|Add: Stock-based employee compensation
expense included in reported net loss                                    |  |                    | 84     |                  |  |      | 901    |      |  |   | 596     |   |  |   | 2,046   |  
|Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards |  |                    | (1,419 | )                |  |      | (2,923 | )    |  |   | (2,902  | ) |  |   | (6,789  | )
|                                                                                                                |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        
|Net loss,
pro forma                                                                                             |  | $                  | (3,231 | )                |  | $    | (8,122 | )    |  | $ | (10,675 | ) |  | $ | (22,289 | )
|                                                                                                                |  |                    |        |                  |  |      |        |      |  |   |         |   |  |   |        
|Basic and diluted net loss per share, as
reported                                                               |  | $                  | (0.21  | )                |  | $    | (0.68  | )    |  | $ | (0.93   | ) |  | $ | (1.97   | )
|Basic and diluted net loss per share, pro forma                                                                 |  | $                  | (0.36  | )                |  | $    | (0.91  | )    |  | $ | (1.18   | ) |  | $ | (2.50   | )

In connection with the grant of stock options to employees prior to the
initial public offering, Endwave recorded deferred stock compensation within
stockholders equity of approximately $20,218,000, representing the difference
between the deemed fair value of the common stock for financial statement
presentation purposes and the option exercise price of these options at the
date of grant. Deferred stock compensation is amortized using the graded
vesting method over the vesting period of the related options, generally four
years. For employees that were terminated, the associated deferred compensation
was reversed. The Company amortized approximately $ 84,000 and $ 901,000 for
the three months ended June 30, 2003 and 2002, respectively and $ 596,000 and $
2.0 million for the six months ended June 30, 2003 and 2002, respectively.

8



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Use of Estimates in the Preparation of Financial Statements

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.

Research and Development Expenses

Research and development expenses are charged to operating expenses as
incurred.

Financial Instruments and Concentration of Risk

The estimated fair values of cash, investments, accounts receivable,
accounts payable and accrued expenses approximate their carrying value because
of the short term nature of these instruments or the stated interest rates are
indicative of market interest rates. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash, investments and trade accounts receivable.

The Company sells its products primarily to wireless systems integrators
and equipment manufacturers. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses have historically been
immaterial and within managements expectations. Concentrations of credit risk
with respect to trade accounts receivable are due to the few number of entities
comprising the Companys customer base. The Company does not require collateral
for trade accounts receivable, and, therefore, the Company could record losses
up to $5.8 million as of June 30, 2003 if all of these customers fail to pay.

The Company does not own or operate a semiconductor fabrication facility
and relies on the semiconductor fabrication facilities of Velocium and other
third parties to manufacture substantially all of the gallium arsenide and
other semiconductor devices incorporated in its products. The loss of the
Companys relationship with any of these third parties or the Companys use of
their semiconductor fabrication facilities, particularly Velociums facility,
and any resulting delay or reduction in the supply of gallium arsenide devices,
could impact the Companys ability to fulfill customer orders and could damage
its relationships with customers. In connection with the merger with TRW
Milliwave, the Company entered into a supply agreement for these devices with
TRW, which was subsequently renewed with Velocium, a former wholly-owned
subsidiary of TRW that is now an operating unit of Northrop Grumman Space &
Mission Systems. The Company expects to obtain a substantial portion of needed
gallium arsenide devices from Velocium in the foreseeable future. The
commercial terms of this agreement were renegotiated in March 2002 and the
agreement expires in December 2005.

The Company may not be successful in forming alternative supply arrangements
that provide a sufficient supply of gallium arsenide devices. Because there are
limited numbers of third-party semiconductor fabrication facilities that use
the particular process technologies the Company uses for its products and that
have sufficient capacity to meet its needs, using alternative or additional
third-party semiconductor fabrication facilities would require an extensive
qualification process that could prevent or delay product shipments. Because
the Company does 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 future
relationships and ability to negotiate favorable supply agreements.



|3. |  | Restructuring Charge
|-- |  | --------------------

As a result of a continued decline in overall economic conditions and
further reductions in capital spending by telecommunications service providers,
on February 28, 2002, the Company announced a restructuring plan designed to
reduce operating expenses in order to further align resources with long-term
growth opportunities.

During the first quarter of 2002, the Company recorded a restructuring
charge of $3.5 million (the First Quarter 2002 Plan), the components of which
were $1.1 million for severance payments, $310,000 for lease cancellations, and
a non cash charge of $2.1 million for excess equipment, offset by a $142,000
adjustment for excess severance benefits. During the twelve months ended
December 31, 2002, the Company eliminated 107 positions and made cash payments
of $1.0 million under the First Quarter 2002 Plan. Of the 107 positions that
were eliminated, 67 were in operations, 33 were in engineering and 7 were in
sales, general and administration. Below is a table summarizing activity
relating to the First Quarter 2002 Plan (in thousands):

9



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##### Table of Contents



|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |        |     |  
|--------------------------------------- | ------------------------------------ | ------------ | ----- | --------- | - | ---------- | ----- | --------- | - | - | --- | ------------------- | --- | - | ----- | ------ | --- | -
|                                        |                                      |              |       |           |   |            |       |           |   |   |     | Lease Cancellations |     |   |       |       
|                                        |                                      |              |       | Severance |   | Fixed      |       | and Other |   |   |     |                    
|First Quarter 2002 Plan                 |                                      | Benefits     |       | Assets    |   | Exit Costs |       | Total    
|                                        |                                      |              |       |           |   |            |       |          
|First quarter 2002 restructuring charge |                                      | $            | 1,159 |           |   | $          | 2,057 |           |   | $ | 310 |                     |     | $ | 3,526 |       
|Settlement of contractual obligations:  |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       
|                                        | Cash payment                         |              |       | (1,012    | ) |            |       |          |   |   |     | (55                 | )   |   |       | (1,067 | )  
|                                        | Non cash amount for excess equipment |              |       |          |   |            |       | (2,429    | ) |   |     |                    |     |   |       | (2,429 | )  
|                                        | Cash proceeds from equipment sale    |              |       |          |   |            |       | 372       |   |   |     |                    |     |   |       | 372    |    
|                                        | Adjustment                           |              |       | (142      | ) |            |       |          |   |   |     |                    |     |   |       | (142   | )  
|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       
|Balance at December 31, 2002            |                                      |              | 5     |           |   |            |      |           |   |   | 255 |                     |     |   | 260   |       
|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       
|                                        | Cash payment                         |              |       | (3        | ) |            |       |          |   |   |     | (20                 | )   |   |       | (23    | )  
|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       
|Balance at March 31, 2003               |                                      |              | 2     |           |   |            |      |           |   |   | 235 |                     |     |   | 237   |       
|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       
|                                        |                                      | Cash
payment |       |           |  |            |       |           |  |   |     |                     | (19 | ) |       |        | (19 | )
|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       
|Balance at June 30,
2003                |                                      | $            | 2     |           |   | $          |      |           |   | $ | 216 |                     |     | $ | 218   |       
|Current                                 |                                      | $            | 2     |           |   | $          |      |           |   | $ | 76  |                     |     | $ | 78    |       
|Noncurrent                              |                                      |              |      |           |   |            |      |           |   |   | 140 |                     |     |   | 140   |       
|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       
|                                        |                                      | $            | 2     |           |   | $          |      |           |   | $ | 216 |                     |     | $ | 218   |       
|                                        |                                      |              |       |           |   |            |       |           |   |   |     |                     |     |   |       |       

During the third quarter of 2002, the Company recorded a restructuring
charge of $4.9 million (the Third Quarter 2002 Plan), the components of which
were $1.8 million for severance payments and a non-cash charge of $3.1 million
for excess equipment. During the third and fourth quarters, the Company
eliminated 102 positions and made cash payments of $1.1 million under the Third
Quarter 2002 Plan. Of the 102 positions that were eliminated, 77 were in
operations, 14 were in engineering and 11 were in sales, general and
administration. The Company executed the Third Quarter 2002 Plan by the end of
2002, and severance payments will be substantially complete by the end of 2003.
Below is a table summarizing activity relating to the Third Quarter 2002 Plan
(in thousands):

|                                        |                                      |          |           |        |       |       |       |        |   |   |       |        |  
|--------------------------------------- | ------------------------------------ | -------- | --------- | ------ | ----- | ----- | ----- | ------ | - | - | ----- | ------ | -
|                                        |                                      |          | Severance |        | Fixed |       |       |        |  
|Third Quarter 2002 Plan                 |                                      | Benefits |           | Assets |       | Total
|                                        |                                      |          |           |        |       |      
|Third quarter 2002 restructuring charge |                                      | $        | 1,750     |        |       | $     | 3,109 |        |   | $ | 4,859 |       
|Settlement of contractual obligations:  |                                      |          |           |        |       |       |       |        |   |   |       |       
|                                        | Cash payments                        |          |           | (1,057 | )     |       |       |       |   |   |       | (1,057 | )
|                                        | Non cash amount for excess equipment |          |           |       |       |       |       | (3,120 | ) |   |       | (3,120 | )
|                                        | Cash proceeds from equipment sale    |          |           |       |       |       |       | 11     |   |   |       | 11     |  
|                                        |                                      |          |           |        |       |       |       |        |   |   |       |       
|Balance at December 31, 2002            |                                      |          | 693       |        |       |       |      |        |   |   | 693   |       
|                                        |                                      |          |           |        |       |       |       |        |   |   |       |       
|                                        | Cash payment                         |          |           | (239   | )     |       |       |       |   |   |       | (239   | )
|                                        |                                      |          |           |        |       |       |       |        |   |   |       |       
|Balance at March 31, 2003               |                                      |          | 454       |        |       |       |      |        |   |   | 454   |       
|                                        | Cash payment                         |          |           | (138   | )     |       |       |       |   |   |       | (138   | )
|Balance at June 30, 2003                |                                      | $        | 316       |        |       | $     |      |        |   | $ | 316   |       
|                                        |                                      |          |           |        |       |       |       |        |   |   |       |       
|Current                                 |                                      | $        | 316       |        |       | $     |      |        |   | $ | 316   |       
|Noncurrent                              |                                      |          |          |        |       |       |      |        |   |   |      |       
|                                        |                                      |          |           |        |       |       |       |        |   |   |       |       
|                                        |                                      | $        | 316       |        |       | $     |      |        |   | $ | 316   |       
|                                        |                                      |          |           |        |       |       |       |        |   |   |       |       



|4. |  | Inventories
|-- |  | -----------

Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market and are comprised of the following (in thousands):

|                |  |          |       |              |  |   |        | 
|--------------- |  | -------- | ----- | ------------ |  | - | ------ | 
|                |  | June 30, |       | December 31,
|                |  | 2003     |       | 2002        
|                |  |          |       |             
|Raw materials   |  | $        | 8,157 |              |  | $ | 10,250 | 
|Work in process |  |          | 80    |              |  |   | 441    | 
|Finished goods  |  |          | 529   |              |  |   | 1,093  | 
|                |  |          |       |              |  |   |        | 
|                |  | $        | 8,766 |              |  | $ | 11,784 | 
|                |  |          |       |              |  |   |        | 

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|5. |  | 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 set quarterly. The annualized weighted average cost of the
debt is approximately 4.5% for the six months ended June 30, 2003.



|6. |  | Guarantees
|-- |  | ----------

The Company typically offers a one to two year warranty for all of its
products. The specific terms and conditions of those warranties vary depending
upon the product sold and the specific customer agreement. The Company
estimates the costs that may be incurred under its warranty, and records a
liability in the amount of such costs at the time product revenue is
recognized. The Companys product warranty accrual reflects managements best
estimate of probable liability. Management determines the warranty based on
historical experience and other current available evidence. The Company
periodically assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.

From
time to time, the Company enters into contracts with customers of its
products in which the Company provides some indemnification to the
customer in the event of claims of patent or other intellectual
property infringement resulting from the customers use of the
technology. Such provisions are customary in the industry and do not
reflect an assessment by the Company of the likelihood of a claim.
The Company has not recorded a liability for potential obligations
under these indemnification provisions and would not record such a
liability unless the Company believed that the likelihood of a
material obligation was probable. See Note 14 Commitments
and Contingencies.

Warranty accrual for the six months ended June 30, 2003 was as follows (in
thousands):

|                                                      |  |   |       |  
|----------------------------------------------------- |  | - | ----- | -
|Balance as of December 31, 2002                       |  | $ | 5,583 |  
|Accrual                                               |  |   | 110   |  
|Settlements/payments                                  |  |   | (49   | )
|Adjustment related to completion of warranty programs |  |   | 18    |  
|                                                      |  |   |       |  
|Balance as of March 31, 2003                          |  | $ | 5,662 |  
|Accrual                                               |  |   | 119   |  
|Settlements/payments                                  |  |   | (6    | )
|Adjustment related to completion of warranty programs |  |   | 23    |  
|                                                      |  |   |       |  
|Balance as of June 30, 2003                           |  | $ | 5,798 |  
|                                                      |  |   |       |  



|7. |  | Impairment of Property, Plant and Equipment
|-- |  | -------------------------------------------

The Company evaluates the carrying value of property, plant and equipment,
whenever certain events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. Such events or circumstances
include, but are not limited to, a prolonged industry downturn, or a
significant reduction in projected future cash flows. Based on its evaluation
performed in the first quarter of 2003, the Company recorded a charge of $2.4
million to reduce manufacturing equipment based on the amounts by which the
carrying value of these assets exceeded their fair value. The evaluation took
into consideration the move of production to the Companys offshore supplier,
which increased in the first quarter of 2003, and is expected to continue to
increase through the end 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.



|8. |  | Net Loss Per Share
|-- |  | ------------------

Basic
net loss per share is computed by dividing the net loss for the six
months ended June 30, 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 Loss
|-- |  | ------------------

The Company had $82,000 and $42,000 of other comprehensive loss in the
three and six months ended June 30, 2003, respectively, resulting from
unrealized loss on its available for sale investments. There were no other
items of other comprehensive income or loss during the six months ended June
30, 2003.

11



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|10. |  | Segment Disclosures
|--- |  | -------------------

The Company operates in a single segment. The Companys product sales by
geographic location for the three and six months ended June 30, 2003 and 2002
were as follows (in thousands and as a percentage of net sales):

|              |       |   |       |        |      |  |                             |       |   |   |       |        |  |  |      |       |  
|------------- | ----- | - | ----- | ------ | ---- |  | --------------------------- | ----- | - | - | ----- | ------ |  |  | ---- | ----- | -
|              |       |   |       |        |      |  | Three Months Ended June 30, |       |   |   |      
|              |       |   |       |       
|              |       |   | 2003  |        | 2002
|              |       |   |       |        |     
|United States |       | $ | 2,762 |        |      |  | 32.6                        | %     |   | $ | 1,510 |        |  |  | 24.2 | %    
|Finland       |       |   | 4,782 |        |      |  | 56.5                        |       |   |   | 4,625 |        |  |  | 74.1 |      
|Other         |       |   | 926   |        |      |  | 10.9                        |       |   |   | 110   |        |  |  | 1.7  |      
|              |       |   |       |        |      |  |                             |       |   |   |       |        |  |  |      |      
|              | Total |   | $     | 8,470  |      |  |                             | 100.0 | % |   | $     | 6,245  |  |  |      | 100.0 | %
|              |       |   |       |        |      |  |                             |       |   |   |       |        |  |  |      |      
|             
|              |       |   |       |        |      |  | Six Months Ended June 30,   |       |   |   |      
|              |       |   |       |       
|              |       |   | 2003  |        | 2002
|              |       |   |       |        |     
|United States |       | $ | 4,399 |        |      |  | 27.3                        | %     |   | $ | 2,929 |        |  |  | 27.6 | %    
|Finland       |       |   | 9,538 |        |      |  | 59.1                        |       |   |   | 7,480 |        |  |  | 70.4 |      
|Other         |       |   | 2,190 |        |      |  | 13.6                        |       |   |   | 214   |        |  |  | 2.0  |      
|              |       |   |       |        |      |  |                             |       |   |   |       |        |  |  |      |      
|              | Total |   | $     | 16,127 |      |  |                             | 100.0 | % |   | $     | 10,623 |  |  |      | 100.0 | %
|              |       |   |       |        |      |  |                             |       |   |   |       |        |  |  |      |      

For the three months ended June 30, 2003, Nokia and DMC Stratex accounted
for 56% and 15% of total sales listed above, respectively. For the six months
ended June 30, 2003, Nokia and DMC Stratex accounted for 59% and 13% of total
sales listed above, respectively. Nokia, located in Finland, was the only
customer in Finland in 2003 and 2002. No other customer accounted for more
than 10% of the Companys revenues in the aggregate or in these geographical
areas listed above.



|11. |  | Treasury Stock
|--- |  | --------------

In January 2002, the Company announced a plan to repurchase up to an
aggregate of 750,000 shares of the companys common stock. The repurchases
will be made from time to time on the open market at prevailing market prices
or in negotiated transactions off the market. During the six months ended June
30, 2003, the Company did not repurchase any shares and during the six months
ended June 30, 2002, the Company repurchased shares for $62,000 under this
repurchase program. To date, 39,150 shares have been repurchased for $79,000.
Treasury stock is carried at cost.



|12. |  | Acquisition of Assets
|--- |  | ---------------------

On
May 13, 2003, the Company completed the acquisition of certain assets of
Verticom, Inc., for $250,000 in cash. The asset purchase included the
product design for Verticoms MTS-2000 synthesizer, which is used in
a military and device application, as well as the inventory,
equipment and intellectual property licenses required to manufacture
and supply production units to a new Endwave customer. The entire
purchase price was allocated to inventory acquired.



|13. |  | Subsequent Events
|--- |  | -----------------

On July 29, 2003, the Company announced that it would effect a reduction
in force of approximately 20%, eliminating positions across all functions of
the Company. The reduction in force will generally be completed by the end of
the third quarter of 2003, and is expected to result in a charge in the third quarter for
severance-related expenses of approximately $600,000 to $800,000. The
reduction is expected to reduce the Companys anticipated 2004 operating
expenses by $2.3 million. Additionally, the Company will accelerate its plan
to transition other high-volume manufacturing programs offshore, resulting in
approximately 70% of its production occurring offshore by the end of the fourth
quarter of 2003.



|14. |  | 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 claims
that would constitute material contingencies.

12



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

This 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 and notes to those financial statements included elsewhere
in this Form 10-Q. 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.

The following discussion should be read together with our financial
statements, and notes to those financial statements, included elsewhere in this
Form 10-Q, as well as the information contained under 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, 2002.

The rapid and severe downturn for the United States economy and the
telecommunications industry beginning in late 2000 has reduced the demand for
our customers products and by extension our products. In addition to the weak
domestic economic environment, the worldwide telecommunications market is
experiencing reduced demand. This decreased demand has led to fluctuating order
forecasts from many of our customers. There can be no certainty as to the
degree of the severity or duration of this economic downturn or the decline in
the telecommunications industry. We also cannot predict the extent and timing,
if any, of the impact of the economic downturn in the United States and the
worldwide downturn for the telecommunications industry on economies in Canada,
Europe, Asia and other countries and geographic regions.

We depend, and expect to remain dependent, on a small number of wireless
systems integrators, original equipment manufacturers, and major government
contractors for sales of our products. For the three months ended June 30,
2003, sales attributable to Nokia and DMC Stratex accounted for 56% and 15%,
respectively, of our net sales during the period. During the six months ended
June 30, 2003, sales attributable to Nokia and DMC Stratex accounted for 59%
and 13%, respectively, of our net sales during the period.

We have a master supply agreement with Velocium, a former wholly-owned
subsidiary of TRW that is now an operating unit of Northrop Grumman Space and
Missions Systems Corp which expires on December 31, 2005. This agreement
expands our access to Velociums custom wafer processing services, to
state-of-the-art gallium arsenide technologies, products operating at lower
frequency bands for wireless infrastructure applications, indium phosphide
products for advanced applications and guaranteed pricing and purchase
commitments.

We maintain an on-site inventory management program with Nokia. This
program provides storage of Endwave finished goods at Nokias factory and
allows Nokia to draw against this inventory based on their manufacturing needs.
Revenues are recognized as Nokia draws the inventory from this stocking
location.

On February 26, 2003, we announced the acquisition of certain broadband
assets of Arcom Wireless Inc., a subsidiary of Dover Corporation for $55,000 in
cash. The acquisition was structured as an asset purchase. The assets
purchased included a transceiver design, equipment and intellectual property
licenses required to manufacture and supply a 58 GHz integrated transceiver
product to an existing customer. We expect to begin shipping product
attributable to the acquired designs in the third quarter of 2003.

On March 25, 2003, we announced that had been selected by Siemens as a
supplier of wireless transmitter/receiver (Tx/Rx) modules for the Siemens SRA L
family of digital radios. Under the agreement, we will manufacture and supply
Tx/Rx modules to Siemens for integration into production units of the SRA L
radio to be deployed in certain markets within Europe in support of third
generation (3G) mobile service deployments. Delivery of the transceiver units
began in December 2002 and will continue into 2003.

On
May 13, 2003, we completed the acquisition of certain assets of
Verticom, Inc. for $250,000 in cash. The asset purchase included the product design for Verticoms
MTS-2000 synthesizer, which is used in a military and device application, as
well as the inventory, equipment and intellectual property licenses required to
manufacture and supply production units to a new Endwave customer.
The entire purchase price was allocated to inventory acquired.

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On July 29, 2003, we announced that we would effect a reduction in force
of approximately 20%, eliminating positions across all functions of the
company. The reduction in force will generally be completed by the end of the
third quarter of 2003, and is expected to result in a charge in the third quarter for
severance-related expenses of approximately $600,000 to $800,000. The
reduction is expected to reduce our anticipated 2004 operating expenses by $2.3
million. Additionally, we will accelerate our plan to transition other
high-volume manufacturing programs offshore, resulting in approximately 70% of
our production occurring offshore by the end of the fourth quarter of 2003.

Results of Operations for the three and six months ended June 30, 2003 and 2002

Revenues

Revenues were $8.5 million for the three months ended June 30, 2003, a 37%
increase from $6.2 million for the same period in 2002. Revenues were $16.1
million for the six months ended July 30, 2003, a 52% increase from $10.6
million for the same period in 2002. The increase in product revenues for the
three and six months ended June 30, 2003 related to increased shipments to
several of our commercial transceiver customers and increased interest in
defense and military applications, as well as a result of our acquisition
strategy whereby we have brought on new customers. Additionally, during the
first quarter of 2002, there was a decrease in the number of transceivers sold
to Nokia, as a result of implementing a consignment stock location at their
production facilities. We expect revenue in the third quarter of 2003 to be
lower than in the second quarter, as a result of the seasonally slower summer
months.

Costs and Expenses

Cost of product revenues. Cost of product revenues consists primarily of
the costs of direct materials and labor utilized to assemble and test our
products, costs associated with procurement, production control, quality
assurance and manufacturing engineering, maintenance of our manufacturing
facilities, transition to offshore manufacturing vendors, building and
equipment depreciation, and costs associated with warranty returns.

Cost of product revenues for the three months ended June 30, 2003 was $6.2
million, a 17% decrease in absolute dollars from $7.5 million for the same
period in 2002. As a result of cost reduction efforts, cost of product
revenues decreased by 17% although revenues increased 35% from the same period
in the prior year.

Cost of product revenues for the six months ended June 30, 2003 was $13.2
million, a 6% decrease in absolute dollars from $14 million for the same period
in 2002. As a result of cost reduction efforts, cost of product revenues
decreased by 6% although revenues increased 52% from the same period in the
prior year.

The decrease in cost of product revenues as a percentage of product
revenues is attributable to cost reduction programs that have been implemented
during the last 24 months. These programs include the outsourcing of over 50%
of the assembly and test of our products to an offshore manufacturer,
elimination of excess equipment and capacity, reduction of manufacturing and
overhead positions and introduction of cost-reduced product designs. We
expect cost of product revenues as a percentage of sales to increase in the
third quarter of 2003 as we experience lower product revenues partially offset
by the move of more of our manufacturing activities to the facility of our
offshore partner and the introduction of lower cost designs.

Research and development expenses. Research and development expenses
primarily include the costs of engineering personnel, outside services,
prototyping materials and equipment depreciation. Research and development
expenses for the three months ended June 30, 2003 were $1.4 million, a 46%
decrease from $2.6 million for the same period in 2002. Research and
development expenses for the six months ended June 30, 2003 were $2.5 million,
a 58% decrease from $5.8 million for the same period in 2002. The decrease for
each period was primarily attributable to cost containment efforts, work force
reductions, and leverage of existing designs for new development programs. We
expect research and development expenses to increase in the next quarter as a
result of additional consulting and materials costs associated with a new
commercial development project for which we expect to receive partial reimbursement
in subsequent quarters.

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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,
facilities and human resources personnel, professional fees, bad debt expense
and promotional activities. Selling, general and administrative expenses for
the three months ended June 30, 2003 were $2.7 million, an 8% increase from
$2.5 million for the same period in 2002. Selling, general and administrative expenses for
the six months ended June 30, 2003 were $5.2 million, a 11% increase from $4.7
million for the same period in 2002. The increase was primarily attributable
to an increase in the allowance for doubtful accounts and increased insurance
costs, partially offset by cost reduction efforts and reduced staffing in each
of the functional areas. We expect selling, general and administrative
expenses to decrease in the next quarter as a result of our recently announced
restructuring efforts.

Restructuring charge. As a result of a continued decline in overall
economic conditions and further reductions in capital spending by
telecommunications service providers, on February 28, 2002, the Company
announced a restructuring plan, designed to reduce operating expenses in order
to align resources with long-term growth opportunities. This plan included the
reduction of 107 positions, consolidation of excess facilities and charges
related to excess property and equipment. As a result, a restructuring charge
of approximately $3.5 million was recorded in the first quarter of 2002, the
components of which were $1.1 million for severance payments, $310,000 for
lease cancellations and $2.1 million for excess equipment offset by $490,000
resulting from settlement of lease obligations for vacated leased space in
Sunnyvale, California. There were no restructuring charges recorded in the six
months ended June 30, 2003.

Amortization of deferred stock compensation. Deferred stock compensation
charges consist of charges related to the difference between deemed fair market
values on the date of employee option grants and the option price.
Amortization of deferred stock compensation for the three months ended June 30,
2003 was $84,000 and $901,000 for the same period in 2002. Amortization of
deferred stock compensation for the six months ended June 30, 2003 was $596,000
and $2.0 million for the same period in 2002. The decrease is primarily due
to using an accelerated method to amortize deferred stock compensation that
results in higher expense in earlier periods and the forfeiture of options by
terminated employees. Deferred stock compensation will be fully amortized in
June 2004.

Loss on building sublease. During the first quarter of 2003, we subleased
12,700 square feet of our Sunnyvale, California headquarter building to an
unrelated third party. The rental income for the lease period is less than the
rental expense that will be incurred, and therefore a loss at sublease
inception of $662,000 was incurred. There have been no other losses on
subleases recorded in periods presented.

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 move more of our production to our offshore
partner, we do not need as much manufacturing equipment, and have therefore
taken an impairment charge of $2.4 million for excess manufacturing equipment.
The impairment charge was calculated as the difference between the carrying
value and the salvage value of the equipment, less selling costs. There have
been no other impairment charges recorded in periods presented.

Interest and other income, net

Interest and other income, net consists primarily of interest income
earned on our cash, cash equivalents and short-term investments offset by
interest expense on capital equipment leases and notes payable. Interest and
other income, net was $77,000 and $1.2 million, for the three months ended June
30, 2003 and 2002, respectively. Interest and other income, net was $142,000
and $1.4 million, for the six months ended June 30, 2003 and 2002,
respectively. Interest income for the three months ended June 30, 2003 was
$85,000, a 68% decrease from $264,000 for the same period in 2002. Interest
income for the six months ended June 30, 2003 was $173,000, a 71% decrease from
$604,000 for the same period in 2002. The decrease in interest income was
primarily attributable to lower interest rates, lower average invested cash
balances and lower yields on interest-bearing investments. Interest expense
represented interest on capital leases and a note payable collateralized by
capital equipment. Interest expense decreased to $57,000 for the three months
ended June 30, 2003, from $164,000 for the three months ended June 30, 2002 as
a result of a decreased number of capital equipment leases and overall lower
interest rates. Interest expense decreased to $98,000 for the six months
ended June 30, 2003, from $310,000 for the six months ended June 30, 2002 as a
result of a decreased number of capital equipment leases and overall lower
interest rates. Other income for the three and six months ended June 30, 2002
included $1.2 million from the gain on contract termination offset by cost of
$66,000 for capital lease termination.

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Liquidity and Capital Resources

Our principal source of liquidity as of June 30, 2003 consisted of
approximately $28.5 million in cash, cash equivalents, restricted cash and
short-term investments. In the six months ended June 30, 2003, we used
$610,000 for operating activities, as compared to $13.6 million for the same
period in 2002. The decrease in the use of cash in operations was primarily
due to a significant decrease in the net loss for the period, decrease in
inventories, and an increase in accounts payable, partially offset by an
increase in accounts receivable.

Investing activities provided $5.1 million of cash in the six months ended
June 30, 2003, as compared to $6.2 million in the same period in 2002. The
decrease in the proceeds of cash in investing activities was primarily due to
fewer sales of short-term investments and the purchase of the Verticom assets.

Financing activities in the six months ended June 30, 2003 used $1.5
million of cash, as compared to $1.2 million in the same period in 2002. The
net cash used in financing activities for the six months ended June 30, 2003,
consisted primarily of principal payments of lease obligations and note
payable. During the second quarter of 2003, $643,000 of capital leases were
paid ahead of the end of their terms, in order to minimize interest expense in
future periods. Therefore, capital lease payments and interest expense will be
lower in the future.

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, 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.

There have been no material changes in contractual obligations as reported
in our annual report on Form10-K for the year ended December 31, 2002.




Item 3. Qualitative and Quantitative Disclosures about Market Risk

We believe that there have been no material changes in our reported market
risks faced since our report on market risks in our annual report on Form 10-K
for the year ended December 31, 2002 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.

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-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
Exchange Act)) are effective to ensure that information that we are required
to disclose in reports that we file or submits 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.

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls during the most recent
quarter. There were no significant deficiencies or material weaknesses in our
internal controls, and therefore there were no corrective actions taken.

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PART II. OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits.

|            |  |                                                                                                                                                                                                                       |  |  |  | 
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Number      |  | Description                                                                                                                                                                                                           |  |  |  | 
|            |  |                                                                                                                                                                                                                       |  |  |  | 
|2.1(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.                                                                                                                                                              
|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(i)    |  | Officer 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.                                                                                                         
|31.1        |  | Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbannes-Osley Act of 2002.                                                                                                                 
|31.2        |  | Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbannes-Osley 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.

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|       |  |                                                                                                               
|------ |  | --------------------------------------------------------------------------------------------------------------
|(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.

(b)  Reports on Form 8-K

We filed a Current Report on Form 8-K dated May 7, 2003 to furnish a press
release in which we announced our financial results for the quarter ended March
31, 2003.

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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: August 13, 2003                                                                                                                                                                                   
|
| |  | By: /s/ Edward A. Keible, Jr.
      Edward A. Keible, Jr.
      President and Chief Executive Officer                                                                                                   
|
| |  |                                                                                                                                                                                                         
|
| |  |                                                                                                                                                                                                         
|
| |  | By: /s/ Julianne M. Biagini
      Julianne M. Biagini
      Senior Vice President
      and Chief Financial Officer
      (Duly Authorized Officer and Principal
      Financial and Accounting Officer)

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Index of Exhibits

|     |  |                                                                                                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbannes-Osley Act of 2002.                                                                      
|31.2 |  | Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbannes-Osley Act of 2002.                                                                      
|32.1 |  | Certifications by Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Public Company Accounting Reform and Investor
Protection Act of 2002.

20