UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from                     to                    

000-31635
(Commission file number)

ENDWAVE CORPORATION

(408) 522-3100
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No[  ].

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

     The number of shares of the registrant’s Common Stock outstanding as of October 29, 2004 was 10,074,495 shares.

ENDWAVE CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENDWAVE CORPORATION

(1) Derived from the Company’s audited financial statements as of December 31, 2003

See accompanying notes.

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ENDWAVE CORPORATION

See accompanying notes.

4

ENDWAVE CORPORATION

See accompanying notes.

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ENDWAVE CORPORATION

1. Business and Basis of Presentation

     Endwave Corporation and its subsidiary, JCA Technology, Inc. (together referred to below as “Endwave” or “the Company”) design, manufacture and market RF (radio frequency) subsystems and components that enable the transmission, reception and processing of high-speed electromagnetic signals in broadband wireless telecommunications systems, cellular telephone infrastructure networks, defense electronics systems, security systems, radar equipment, homeland security and other similar systems requiring RF, microwave and millimeter wave technology.

     The Company designs products to best satisfy its customers’ technical, inventory, logistical, and cost requirements by using proprietary technologies, RF design, and manufacturing expertise. Endwave offers a broad range of products at multiple levels of integration that are optimized for a customer’s specific product and performance needs. Products include RF modules such as power amplifiers, low noise amplifiers, up and down converters, frequency multipliers, oscillators, frequency synthesizers, integrated transceivers, and power amplifier switch combiners used in cellular base stations. The Company’s proprietary circuit and manufacturing technologies enable it to design and manufacture RF subsystems that minimize the use of expensive gallium arsenide and reduce labor costs. The Company uses third-party fabrication facilities both for the manufacture of gallium arsenide and other semiconductor devices, which it designs, and for the assembly and test of its commercial production.

     The accompanying unaudited condensed consolidated financial statements of Endwave include the financial results of JCA from the purchase date, July 21, 2004 and have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003. Certain prior period amounts have been reclassified to conform to the current period presentation.

2. Summary of Significant Accounting Policies

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

     The Company’s primary customers are equipment manufacturers who integrate the Company’s products into their systems. The Company recognizes product revenues at the time title passes, which is upon product shipment or when withdrawn from a consignment location. Revenues related to product sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. Revenues under development contracts are generally recorded on a percentage of completion basis, using project hours as the basis to measure progress toward completing the contract and recognizing revenue. Up-front fees, if any, associated with development agreements are recognized over the estimated development and production period. In no event are revenues recognized prior to becoming payable by the customer. The costs incurred under these development agreements are included in research and development expenses.

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Warranty

     The warranty periods for the Company’s products are generally between one and three years from date of shipment. The Company generally provides for estimated warranty expense at the time of shipment. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required. During the second quarter of 2004, the Company determined that approximately $1.3 million of warranty accrual related to a possible pattern defect on a specific customer issue was no longer necessary. The amount is included in “warranties settled or reversed” in the table below. This decrease in the warranty accrual was partially offset by increases to the warranty accrual of $996,000 during the nine months ended September 30, 2004.

     Changes in the Company’s product warranty liability during the nine-month periods ended September 30, 2004 and 2003 are as follows:

Impairment of Long-Lived Assets

     For long-lived assets used in operations, the Company records impairment losses when events and circumstances indicate that these assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If less, the impairment losses are based on the excess of the carrying amounts over their respective fair values. Their fair values would then become the new cost basis. Fair value is determined by discounted future cash flows, appraisals, or other methods. For assets held for sale, impairment losses are measured at the lower of the carrying amount of the assets or the fair value of the assets less costs to sell. For assets to be disposed of other than by sale, impairment losses are measured as their carrying amount less salvage value, if any, at the time the assets cease to be used.

     During the first quarter of 2003, the Company recorded a charge of $2.4 million to reduce the carrying value of manufacturing equipment based on the amounts by which the carrying value of the assets exceeded their salvage value. The impairment took into consideration the move of production to the Company’s offshore supplier, which increased during 2003.

     During the third quarter of 2003, the Company recorded an additional charge of $139,000 to reduce the carrying value of engineering equipment based on the amounts by which the carrying value of these assets exceeded their fair value. The impairment evaluation took in to consideration the reduction in engineering headcount that occurred during the third quarter of 2003. The Company’s estimate of the fair value of the assets was based on selling prices of similar equipment.

     During the third quarter of 2004, the Company recorded a charge of $389,000 to write off the remaining carrying value of equipment held-for-sale of $259,000 and to write off $130,000 associated with sales tax capitalized as part of the Company’s acquisition of Stellex Broadband Wireless in April 2001. The equipment held-for-sale was determined to have no value based on a current market review of similar assets and the Company’s inability to sell the assets despite its marketing efforts. The $130,000 of capitalized sales tax was related to equipment that had been fully depreciated or fully impaired previously, and as such was also fully written off.

Restructuring Charges

     Restructuring charges include estimates pertaining to employee severance and fringe benefit costs and facility exit costs. In accordance with Statement of Financial Accounting Standards No. 146, “Accounting for Costs

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Associated with Exit or Disposal Activities” (“SFAS 146”), costs associated with restructuring activities initiated after December 31, 2002 have been recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company reviews remaining restructuring accruals on a quarterly basis and adjusts these accruals when changes in facts and circumstances suggest actual amounts will differ from management’s estimates. Changes in estimates occur when it is apparent that exit and other costs accrued will be more or less than originally estimated.

Stock-Based Compensation

     The Company has elected to use the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employee”, as permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), subsequently amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”) to account for stock-based awards issued to its employees under its stock option plans and stock purchase plans. Deferred stock compensation is amortized using the graded vesting method over the vesting period of the related options, generally four years.

     For purposes of pro forma disclosures, the Company estimates the fair value of its stock-based awards to employees using a Black-Scholes option-pricing model.

     Following is the pro forma effect on net loss and net loss per share for all periods presented had the Company applied SFAS 123’s fair value method of accounting for stock-based awards issued to its employees.

3. Business Combinations

     On July 21, 2004, the Company acquired all of the outstanding capital stock of JCA Technology, Inc. (“JCA”), a wholly owned subsidiary of Bookham Technology plc. JCA is a provider of RF amplifiers and modules and its products are broadly used in applications including electronic warfare, radar and secure communications. This acquisition is complementary to the Company’s existing portfolio of RF module products and allows it to strengthen its presence in the defense, commercial radar and homeland security markets.

     The transaction was accounted for under the purchase method of accounting and, accordingly, the results of operations are included in the accompanying unaudited condensed consolidated statements of operations for all periods or partial periods subsequent to the acquisition date.

     The net tangible assets acquired and liabilities assumed in the acquisition were recorded at fair value, which approximates the carrying amount as of the acquisition date. The Company determined the valuation of the identifiable intangible assets using future revenue assumptions and a valuation analysis from an independent appraiser. The amounts allocated to the identifiable intangible assets were determined through established valuation techniques accepted in the technology industry.

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     In calculating the value of the acquired in-process research and development (“IPR&D”), the independent appraiser gave consideration to the relevant market size and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by the Company and our competitors, individual product sales cycles, and the estimated lives of each of the products derived from the underlying technology. The value of the acquired IPR&D reflects the relative value and contribution of the acquired research and development. Consideration was given to the stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the expected cost to complete the project in determining the value assigned to the acquired IPR&D. The amounts allocated to the acquired IPR&D were immediately expensed in the period the acquisition was completed because the projects associated with the IPR&D had not yet reached technological feasibility and no future alternative uses existed for the technology.

     The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was used to value all of the identifiable intangible assets. Key assumptions used in analyzing the expected cash flows from the other identifiable intangible assets included our estimates of revenue growth, cost of sales, operating expenses and taxes. The purchase price in excess of the identified tangible and intangible assets was allocated to goodwill.

     The total purchase price of $6.1 million consisted of $5.9 million in cash and $158,000 in direct transaction costs. In connection with the acquisition of JCA, the Company implemented a restructuring plan to consolidate JCA’s manufacturing process to our Diamond Springs location. The restructuring plan terminated or will terminate a total of 39 employees, in order to eliminate duplicative activities and to reduce the cost structure of the combined company. These terminations primarily affected the manufacturing and operations group. The estimated cost for the related severance, benefits, payroll taxes and other associated costs totaled $431,000 and was accrued for at the time of the acquisition and has been recognized as a liability assumed in the business combination in accordance with EITF 95-3. The remaining obligations as of September 30, 2004 were $316,000. Severance payments will be substantially complete by the end of the fourth quarter of fiscal 2004.

     The aggregate purchase price for the JCA acquisition has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition as follows (in thousands):

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Pro forma financial information

     The following table presents the unaudited pro forma financial information for the combined entity of Endwave and JCA for the three and nine month periods ended September 30, 2004 and 2003, as if the acquisition had occurred at the beginning of the periods presented after giving effect to certain purchase accounting adjustments (in thousands, except per share amounts):

     These results are presented for illustrative purposes only and are not necessarily indicative of the actual operating results or financial position that would have occurred if the Company and JCA had been a consolidated entity during the periods presented.

4. Goodwill and Intangible Assets

Goodwill

     During the three months ended September 30, 2004, the Company recorded $1.8 million of goodwill associated with the purchase of JCA. See Note 3. Business Combinations for additional information. At the time of the acquisition the Company had no other goodwill on its balance sheet. Under SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is no longer subject to amortization. Rather, the Company evaluates goodwill for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.

Intangible Assets

     The components of acquired identifiable intangible assets as of September 30, 2004 are as follows (in thousands):

     The identifiable intangible assets are subject to amortization and have approximate original estimated weighted-average useful lives as follows: core/developed technology – 5 years, customer backlog – 6 months and customer relationships – 5 years.

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     The tradename has a gross carrying value of $1.1 million and is not subject to amortization and will be evaluated for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.

5. Inventories

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

6. Notes Payable

     On May 29, 2002, the Company obtained a loan, secured by fixed assets, in the amount of $1.5 million from U.S. Bancorp Finance, Inc. This loan had a term of three years and had a variable interest rate. The rate was 25 basis points above LIBOR and reviewed quarterly. During the second quarter of 2004, the Company paid off the remaining loan balance of $477,000 and, as such, there are no future payments to be made on the note.

7. Property, Plant and Equipment

     During the second quarter of 2004, the Company finalized the sale of its land and two buildings located in Diamond Springs, California. The Company received $4.3 million for the land and buildings net of related closing costs and legal fees. The net book value of the property on the date of sale was $3.5 million. At the time of the closing, the Company entered into a five-year operating lease with the new owner for one of the two buildings. As a result of the sale-leaseback transaction, the Company will recognize an overall gain of $777,000, which will be recognized on a straight-line basis over the term of the lease. The Company recognized $38,000 of gain during the third quarter of 2004.

     At September 30, 2004 and December 31, 2003, the Company had $0 and $306,000 of equipment classified as held for sale. See Note 2. Summary of Significant Accounting Policies for additional information on the write-off of equipment held-for-sale.

8. Restructuring Charges, Net

     Effective January 2004, the Company executed several agreements related to the lease of its Sunnyvale headquarters. Due to declining commercial real estate lease rates, the original lease executed in August 2001 was at an above market rate, and would have expired in July 2006. This lease was cancelled, effective January 2004, and the Company exited the property. In consideration for the cancellation, the Company paid the landlord a settlement fee of approximately $3.0 million, resulting in a net lease termination expense of $2.9 million. The Company also entered into a new lease for 16,000 square feet in Sunnyvale, California at a lower, at-market rate. The new lease was effective as of January 2004 and will expire in August 2006.

     During the third quarter of 2004, in connection with the acquisition of JCA, the Company recorded a charge for restructuring of $431,000. The charge was included as part of the purchase price allocation in accordance with EITF 95-3. As discussed in Note 3. Business Combinations, the Company has or is planning to terminate a total of 39 employees, in order to eliminate duplicative activities and to reduce the cost structure of the combined company. These terminations primarily affected the manufacturing and operations group. The charge was for the related severance, benefits, payroll taxes and other associated costs. The remaining obligations as of September 30, 2004 were $316,000. Severance payments will be substantially complete by the end of the fourth quarter of fiscal 2004.

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     During the third quarter of 2003, the Company recorded a restructuring charge of $490,000 (the “Third Quarter 2003 Plan”), all of which was for severance payments. Through the end of the third quarter of 2004, the Company eliminated 18 positions and made cash payments of $486,000 under the Third Quarter 2003 Plan.

     During the first quarter of 2002, the Company announced and began to implement a restructuring program (the “First Quarter 2002 Plan”) to reduce operating expenses and align resources with long-term growth opportunities. The Company recorded a restructuring charge of $3.5 million, the components of which were $1.1 million for severance and fringe benefit costs related to the elimination of 107 positions across all functions, $310,000 for lease termination payments, and $2.1 million for excess equipment. In the fourth quarter of 2002, the Company lowered its estimate of the total costs associated with the First Quarter 2002 Plan and recorded an adjustment of $142,000, which reflected lower than estimated severance and related costs. With the exception of $120,000 of remaining net lease payments on abandoned facilities through 2006, the Company has substantially completed the activities associated with the First Quarter 2002 Plan. Total payments made on the lease during the third quarter and first nine months of 2004 were $20,000 and $59,000, respectively.

     Our restructuring estimates will be reviewed and revised quarterly and may result in an increase to restructuring and other charges.

9. Loss (Recovery) on Sublease

     During the first quarter of 2003, the Company subleased 12,700 square feet of its Sunnyvale, California headquarter building to an unrelated third party. The rental income for the lease period was less than the rental expense that would be incurred and, therefore, a loss at sublease inception of $662,000 was incurred. There have been no other losses on subleases recorded in the periods presented herein. During the first quarter of 2004, $359,000 of this loss was reversed as the sublease was terminated prior to its expiration date, as part of the overall lease termination described above in Note 8.

10. Net Loss Per Share

     Basic and diluted net loss per share is computed by dividing the net loss for the three and nine months ended September 30, 2004 and 2003, by the weighted average number of shares of common stock outstanding during the period. Options to purchase 1,893,060 and 2,013,060 shares of common stock were outstanding at September 30, 2004 and 2003, respectively, but were not included in the computation of diluted net loss per share as the effect would be anti-dilutive.

11. Comprehensive Income (Loss)

     The Company had $34,000 of other comprehensive loss at September 30, 2004 and $2,000 of other comprehensive loss at December 31, 2003 resulting from unrealized losses on its available-for-sale investments.

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12. Segment Disclosures

     The Company operates in a single segment. Although we sell to customers in various geographic regions throughout the world, the end customers may be located elsewhere. The Company’s product sales by geographic location for the three and nine months ended September 30, 2004 and 2003 were as follows (in thousands and as a percentage of total revenues):

     For the three months ended September 30, 2004, Nokia and PowerWave accounted for 55% and 10% of total revenues listed above, respectively. For the three months ended September 30, 2003, Nokia and Stratex Networks accounted for 54% and 14% of total revenues listed above, respectively. For the periods presented, no other customer accounted for more than 10% of the Company’s total revenues.

     For the nine months ended September 30, 2004, Nokia accounted for 54% of total revenues listed above. For the nine months ended September 30, 2003, Nokia and Stratex Networks accounted for 58% and 13% of total revenues listed above, respectively. For the periods presented, no other customer accounted for more than 10% of the Company’s total revenues.

13. Commitments and Contingencies

     From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial and other resources. The Company is not currently aware of any legal proceedings or claims, and management does not believe that the Company is subject to other claims that would constitute material contingencies.

14. Related Party Transactions

     The Company maintains a supply agreement and a technology services agreement with Northrop Grumman, which is a principal stockholder of Endwave. The supply agreement specifies volume and price commitments, as well as a description of a consigned inventory arrangement. Under this agreement, the Company purchased inventory of $488,000 and $968,000 for the third quarter of 2004 and 2003, respectively, and $1.8 million and $2.0 million for the first nine months of 2004 and 2003, respectively. The $1.8 million of purchases made during the first nine months of 2004 is net of the reversal of a $793,000 liability pertaining to this agreement that was settled during the first quarter of fiscal 2004.

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     The Company also sells various products and services under purchase orders and agreements to Northrop Grumman, and recognized revenues of $63,000 and $84,000 for the third quarter of 2004 and 2003, respectively, and $105,000 and $223,000 for the first nine months of 2004 and 2003 respectively. The Company incurred costs related to this revenue of approximately $12,000 and $41,000 during the third quarter of 2004 and 2003, respectively, and $28,000 and $81,000 during the first nine months of 2004 and 2003, respectively.

     At September 30, 2004, the Company had accounts receivable of $20,000 and accounts payable of $139,000, related to its customer and supplier relationships with Northrop Grumman.

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

     The Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. The following discussion should be read together with our financial statements, notes to those financial statements and Risk Factors included elsewhere in this Form 10-Q, as well as the information contained under Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2003. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those described in our forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

Overview

     Revenues for the third quarter of 2004 of $7.6 million were down $610,000, or 7%, from the third quarter of 2003. Revenues for the first nine months of 2004 of $21.8 million were down $2.5 million or 10%, from the first nine months of 2003. The decrease in revenue is primarily due to pricing decreases of 10 to 15% amongst our larger customers based on contractual volume commitments and competitive market demands, as well as a decrease in development fees recognized. This was partially offset by revenues from our wholly owned subsidiary, JCA Technology, Inc. (“JCA”) of $1.0 million during the third quarter of 2004.

     Revenues of $7.6 million during the third quarter of 2004 were consistent with revenues of $7.6 million from the second quarter of 2004. We experienced decreased revenues to several customers due to a seasonal slowness with European summer holidays, offset by revenues from JCA during the third quarter of 2004 of $1.0 million.

     We anticipate fourth quarter 2004 revenues to increase from our third quarter 2004 revenues as we ramp up sales to our European customers after a seasonal lull in the third quarter, add new designs for new customers and as we continue to integrate our acquisition of JCA into our operations. However, the telecommunications market has been difficult to forecast as the economic recovery has remained slow and inconsistent and the integration of our acquisition is also susceptible to uncertainty. See “Risk Factors” below.

     During 2004, we have undertaken a number of steps to increase revenues while working to reduce costs and better address our customers’ needs.

     We took the following steps during 2004:

•		On July 21, 2004, we acquired JCA, a provider of RF amplifiers and modules to the defense, commercial radar, and homeland security market for approximately $6.1 million in cash. During the third quarter of 2004, JCA had revenues of $1.0 million. We anticipate future revenues from the acquisition will be $1.0 million to $2.0 million per quarter after full integration of the operation.
•		During the second quarter of 2004, we finalized the sale of our land and two buildings located in Diamond Springs, California. We received $4.3 million for the land and buildings net of related closing costs and legal fees. The net book value of the property on the date of sale was $3.5 million. At the time of the closing, we entered into a five-year operating lease with the new owner for one of the two buildings. As a result of the sale-leaseback transaction, we will recognize an overall gain of $777,000, which will be recognized on a straight-line basis over the term of the lease.
•		Effective January 2004, we executed several agreements related to the lease of our Sunnyvale headquarters. Due to declining commercial real estate lease rates, the original lease executed in August 2001 was at an above market rate, and would have expired in July 2006. This lease has been cancelled, effective January 2004. In consideration for the cancellation, we paid our landlord

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		a settlement fee of $3.0 million, resulting in a net termination expense of $2.9 million. We also entered into a new lease for 16,000 square feet in Sunnyvale, California at a lower, at-market rate. The new lease is effective January 2004 and will expire August 2006. Through this settlement and new lease agreement, we will realize significant reductions in the facility costs for our Sunnyvale headquarters through the new lease period.
•		In March 2004, we executed a renewal to our master supply agreement with Northrop Grumman through December 31, 2005. This renewal expands our access to Northrop Grumman’s custom wafer processing services, includes guaranteed pricing, and stipulates that Northrop Grumman hold specified amounts of consigned inventory on our behalf.

     We have continued to focus on consolidating our manufacturing at the location of our partner in Southeast Asia. During the first nine months of 2004, over 70% of our shipped products were manufactured and shipped by our offshore partner. By shifting our production overseas, we have realized cost reductions in the manufacturing of our products and have increased flexibility to scale our business.

     During the fourth quarter of 2004, we will begin to manufacture high volume products based on our customers’ designs at the location of our partner in Southeast Asia. Accordingly, we expect these products will have a slightly lower gross margin than our internal designs. As a result, our gross margin may be negatively impacted in the near term while increasing after we have had the opportunity to secure material cost savings and redesign products for lower costs and more efficient processes. We believe, however, that this model will allow us to increase market share, establish relationships with new customers, and further absorb some of our fixed costs. We would not expect to incur other significant operating costs associated with this model unless we elect to redesign the product.

Results of Operations

     Three and nine months ended September 30, 2004 and 2003

     The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated:

Revenues

     Total revenues in the third quarter of 2004 were $7.6 million, a 7% decrease from $8.2 million for the same period in 2003 and were comprised of product revenues and development fees. Total revenues for the nine months of 2004 were $21.8 million, a 10% decrease from $24.3 million for the same period in 2003. The decrease in revenues is primarily due to pricing decreases of 10 to 15% amongst our larger customers based on contractual volume commitments and competitive market demands, as well as a decrease in development fees recognized. This

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was partially offset by revenues from our wholly owned subsidiary, JCA, of $1.0 million during the third quarter of 2004.

     Product revenues were $7.4 million in the third quarter of 2004, a 6% decrease from $8.0 million for the same period in 2003. Product revenues were $21.2 million in the first nine months of 2004, a 10% decrease from $23.5 million for the same period in 2003. The decrease in revenue is primarily due to pricing decreases of 10 to 15% amongst our larger customers based on contractual volume commitments and competitive market demands. This was partially offset by revenue from our wholly owned subsidiary, JCA, of $1.0 million during the third quarter of 2004.

     We generate development fees by developing product prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. Development fees were $154,000 and $564,000 for the three and nine months ended September 30, 2004, respectively, as compared to $251,000 and $807,000 for the three and nine months ended September 30, 2003. The decrease in development fees is attributable to decreased funding for the development of custom designed products for new and existing customers. We expect to generate future product revenues as a result of these development agreements. We do not foresee development fees to be a significant component of our overall revenues in the near term.

  Cost and Expenses

     Cost of product revenues. Cost of product revenues consists primarily of: costs of direct materials and labor utilized to assemble and test our products; equipment depreciation; costs associated with procurement, production control, quality assurance, and manufacturing engineering; costs associated with maintaining our manufacturing facilities; fees paid to our offshore manufacturing partner; and costs associated with warranty returns offset by the benefit of usage of materials that were previously written off.

     Cost of product revenues was $5.4 million for the three months ended September 30, 2004, an 8% decrease from $5.9 million for the same period in 2003. As a percentage of revenues, cost of product revenues decreased to 71.2% in the quarter ended September 30, 2004, from 71.9% for the same period in 2003. The percentage improvement is attributable to cost reductions within the manufacturing process, reduced materials’ costs and a shift toward variable costs of manufacturing from fixed costs. The cost of product revenues was favorably impacted by the utilization of inventory that was previously written off amounting to approximately $114,000 during the third quarter of 2004 as compared to $580,000 during the third quarter of 2003.

     Cost of product revenues was $14.6 million for the nine months ended September 30, 2004, a 23% decrease from $19.1 million for the same period in 2003. As a percentage of revenues, cost of product revenues decreased to 67.2% in the nine months ended September 30, 2004, from 78.5% for the same period in 2003. The percentage improvement is attributable to cost reductions within the manufacturing process, reduced materials’ costs, a shift toward variable costs of manufacturing from fixed costs and the reversal of a $793,000 charge to cost of product revenues for a liability that was settled during the first quarter of 2004. The cost of product revenues was favorably impacted by the utilization of previously reserved inventory amounting to approximately $361,000 during the first nine months of 2004 as compared to $996,000 during the first nine months of 2003.

     Research and development expenses. Research and development expenses were $1.4 million for the three months ended September 30, 2004, a 27% increase from $1.1 million for the same period in 2003. As a percentage of revenues, research and development expenses increased to 18.4% in the quarter ended September 30, 2004, from 13.4% for the same period in 2003. The increase was primarily attributable to research and development expenses incurred by JCA during the quarter of $264,000. We also experienced increased project costs incurred to support our current development efforts.

     Research and development expenses were $3.5 million for the nine months ended September 30, 2004, a 5% decrease from $3.6 million for the same period in 2003. As a percentage of revenues, research and development expenses increased to 15.8% in the nine months ended September 30, 2004, from 15.0% for the same period in 2003. The decrease in absolute dollars was primarily attributable to the restructuring of our engineering team

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partially offset by the increase due to research and development expenses incurred by JCA during the quarter and increased project costs as noted above.

     During the fourth quarter of 2004, we expect a moderate increase to research and development expenses as we complete certain development programs and incur costs associated with advanced development programs. Additionally, there may be unexpected increases to research and development expenses due to new customer-specific development projects for which we could receive some development fees.

     Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, marketing, finance, accounting, information technology, and human resources personnel, professional fees, facilities costs and promotional activities. Selling, general and administrative expenses were $2.2 million for the three months ended September 30, 2004, a 42% increase from $1.6 million for the same period in 2003. As a percentage of revenues, selling, general and administrative expenses increased to 29.0% in the quarter ended September 30, 2004, from 19.0% for the same period in 2003. The increase was primarily attributable to selling, general and administrative expenses incurred by JCA during the quarter of $405,000 as well as increased consulting and service fees.

     Selling, general and administrative expenses were $5.7 million for the nine months ended September 30, 2004, a 15% decrease from $6.8 million for the same period in 2003. As a percentage of revenues, selling, general and administrative expenses decreased to 26.3% in the nine months ended September 30, 2004, from 27.9% for the same period in 2003. The decrease was primarily attributable to our restructuring actions in the third quarter of 2003 and expense control measures. The latter were aimed at bringing operating expenses more in line with revenues and included a significant decrease in facility expenses, partially offset by the expenses incurred by JCA during the third quarter of 2004 and increased consulting and service fees.

     During the fourth quarter of 2004, we expect a decrease in selling, general and administrative expenses.

     In-process research and development. As part of the acquisition of JCA on July 21, 2004 we acquired $320,000 of in-process research and development (“IPR&D”). The value of the IPR&D was determined based on a valuation analysis from an independent appraiser. The amount of the purchase price for JCA allocated to IPR&D was determined through established valuation techniques accepted in the technology industry. The $320,000 allocated to the acquired IPR&D was immediately expensed in the period the acquisition was completed because the projects associated with the IPR&D had not yet reached technological feasibility and no future alternative uses existed for the technology. There was no such charge in the first six months of 2004 or during the first nine months of 2003.

     Amortization of intangible assets. As part of the acquisition of JCA on July 21, 2004 we acquired $4.2 million of identifiable intangible assets, including $2.3 million of core/developed technology, $1.1 million for the tradename, $780,000 for customer relationships and $140,000 for customer backlog. These assets are subject to amortization and have approximate original estimated weighted-average useful lives as follows: core/developed technology – 5 years, customer backlog – 6 months, customer relationships – 5 years. The tradename intangible asset is not subject to amortization and will be evaluated for impairment at least annually or more frequently if events and change in circumstances suggest that the carrying amount may not be recoverable.

     The amortization associated with the core/developed technology is a charge to cost of product revenues. During the third quarter of 2004, $75,000 of amortization of core/developed technology was charged to cost of product revenues. The amortization associated with the customer relationships and customer backlog is a charge to operating expenses. During the third quarter of 2004, $73,000 of amortization of customer relationships and customer backlog was charged to operating expenses. There were no such charges in the first six months of 2004 or during the first nine months of 2003.

     Restructuring charges, net. During the third quarter of 2004, we reversed $4,000 associated with the third quarter of 2003 restructuring plan, as we had overestimated the related charges at that time. As of September 30, 2004 there is no remaining accrual for the third quarter 2003 restructuring plan.

     During the first quarter of 2004, we incurred a net lease termination fee of $2.9 million related to the termination of the lease agreement for our corporate headquarters in Sunnyvale, California. During the first quarter

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we finalized the renegotiation of the lease, which resulted in a $3.0 million cash payment to our landlord in exchange for substantially reduced rent in a new location. This settlement was partially offset by a $101,000 benefit due to the reversal of deferred rent liability related to the previous lease agreement.

     During the third quarter of 2003, we recorded a restructuring charge of $490,000, all of which was for severance payments. The Company eliminated 18 positions and made cash payments of $486,000 under the plan. The remaining $4,000 was reversed during the third quarter of 2004 as noted above.

     Amortization of deferred stock compensation. Deferred stock compensation charges consist primarily of charges related to the difference between deemed fair market values for financial reporting purposes on the date of employee option grants and the option price for option awards prior to our initial public offering, as well as expenses attributable to the acceleration of options. During the third quarter of 2004, there was no amortization of deferred stock compensation as the remaining balance was fully amortized during the second quarter of 2004. During the third quarter of 2003, amortization of deferred stock compensation was $21,000.

     During the first nine months of 2004, amortization of deferred stock compensation was $204,000, a decrease from $617,000 in the same period in 2003. The decrease was related to the timing of the termination of employees with deferred compensation associated with their stock options and the effects of the graded vested method of amortization, which accelerates the amortization of deferred compensation.

     As of September 30, 2004, there is no remaining deferred stock compensation; therefore, no additional amortization will be recognized during the fourth quarter of 2004.

     Loss (recovery) on building sublease. During the first quarter of 2003, we recorded a charge of $662,000 associated with the sublease of our Sunnyvale, California headquarter building for the excess of the remaining lease obligations over the anticipated sublease income. During the first quarter of 2004, $359,000 of this loss was reversed as the sublease was terminated prior to expiration date, as a part of lease termination noted above. There was no such charge or recovery during the third quarter of 2004.

     Impairment of long-lived assets. During the third quarter of 2004, we recorded a charge of $389,000 to write off the remaining carrying value of equipment held-for-sale of $259,000 and to write off $130,000 associated with sales tax capitalized as part of our acquisition of Stellex Broadband Wireless in April 2001. The equipment held-for-sale was determined to have no value based on a current market review of similar assets and our inability to sell the assets despite our marketing efforts. The $130,000 of capitalized sales tax was related to equipment that had been fully depreciated or fully impaired previously, and as such was also fully written off.

     During the first quarter of 2003, we evaluated the carrying value of the long-lived assets utilized in our manufacturing process. As we moved more of our production to our offshore partner, we did not need as much manufacturing equipment, and took an impairment charge of $2.4 million for excess manufacturing equipment. The impairment charge was calculated as the difference between the carrying value and the estimated salvage value of the equipment.

     During the third quarter of 2003, we recorded an additional charge of $139,000 to reduce the carrying value of engineering equipment based on the amounts by which the carrying value of these assets exceeded their fair value. The impairment evaluation took in to consideration the reduction in engineering headcount that occurred during the third quarter of 2003. Our estimate of the fair value of the assets was based on sales prices of similar equipment.

     Interest and other income, net. Interest and other income, net consists primarily of interest income earned on our cash, cash equivalents and short-term investments and gains and losses on the sale of fixed assets, offset by interest expense on notes payable and capital equipment leases. Interest and other income, net was $231,000 for the three months ended September 30, 2004, a decrease from $262,000 for the same period in 2003. As a percentage of revenues, interest and other income, net decreased to 3.0% in the quarter ended September 30, 2004, from 3.2% for the same period in 2003. The decrease is primarily due to lower cash balances as we paid out $6.1 million during the quarter related to the acquisition of JCA.

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     Interest and other income, net was $993,000 for the nine months ended September 30, 2004, an increase from $404,000 for the same period in 2003. As a percentage of revenues, interest income, expense and other, net increased to 4.6% in the nine months ended September 30, 2004, from 1.7% for the same period in 2003. The increase was due primarily to the sale of land, fixed assets and assets held-for-sale during the first quarter of 2004, which resulted in a net gain of $473,000 during the period. Additionally, we experienced lower interest expense during the first nine months of 2004 as all of our capital leases were paid off prior to the start of the current fiscal year.

Liquidity and Capital Resources

Selected Financial Liquidity Data

     We had cash, cash equivalents, restricted cash, and short-term investments at September 30, 2004 and December 31, 2003 of $26.6 million and $30.1 million, respectively.

     During the first nine months of 2004, we used $2.6 million of cash in operating activities, as compared to $541,000 in the same period of 2003. The use of $2.6 million of cash in the first nine months of 2004 was due to the net loss adjusted for non-cash items of $3.2 million, a $2.3 million decrease in accounts payable, accrued warranty, and accrued compensation and other current and long-term liabilities, partially offset by a decrease in accounts receivable of $1.7 million, a decrease in inventory of $851,000 and a decrease in other assets of $345,000. The use of $541,000 in the first nine months of 2003 was due to net loss adjusted for non-cash items of $3.2 million, a $1.9 million increase to accounts receivable, partially offset by a $3.5 million decrease to inventory, a $545,000 decrease to other assets and an increase of $437,000 million in accounts payable, accrued warranty and other current and long-term liabilities.

     Investing activities provided cash of $4.3 million in the first nine months of 2004 as compared to $5.9 million in the same period for 2003. The decrease in the cash provided by investing activities during the current year was due to the use of $6.1 million for the purchase of JCA and fewer maturities of short-term investments than in the corresponding period in the previous year. This was partially offset by the proceeds from the decrease in restricted cash of $778,000, and by the proceeds on sales of property and equipment during the nine months ended September 30, 2004 of $5.1 million, primarily due to the $4.3 million generated by the sale of our Diamond Springs, California location.

     Financing activities provided cash of $477,000 in the first nine months of 2004 as compared to a use of $1.2 million in the first nine months of 2003. The $477,000 provided by financing activities in the first nine months of 2004 was due to the $1.3 million of proceeds from the exercise of employee stock options and stock issuances offset by the $778,000 payment made on the notes payable. Financing activities in the same period for 2003 included payments on capital lease obligations of $1.3 million, which were paid off during 2003 and $370,000 on notes payable.

     We believe that our existing cash and investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, revenues could decline below our expectations resulting in insufficient cash flow from operations or we may require additional financing to fund strategic acquisitions. As a result, we could be required, or could elect, to raise additional funds during that period and we may need to raise additional capital in the future. Additional capital may not be available at all, or may only be available on terms unfavorable to us. With the exception of operating leases, we have not entered into any off-balance sheet financing arrangements, we have not established or invested in any variable interest entities, we do not have any unconditional purchase obligations, nor do we have non-cancelable commitments for capital expenditures. We have not guaranteed the debt or obligations of other entities or entered into options on non-financial assets.

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     The following table summarizes our future payment obligations for operating leases (excluding interest):

Risk Factors

     Stockholders or potential investors considering the purchase of shares of our common stock should carefully consider the following risk factors, in addition to other information contained in this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial could also impair our business operations.

We expect to operate near our break even point and may not be profitable in the future.

     We have had a history of losses. We had a net loss of $2.0 million and $4.6 million for the three and nine months ended September 30, 2004, respectively. Additionally, we had net losses of $7.9 million, $31.0 million and $156.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. While we have taken ongoing restructuring actions, there is no guarantee that these restructuring actions will enable the Company to achieve profitability in the future. Our failure to attain profitability may cause the market price of our common stock to decline in the future.

We are subject to risks associated with acquisitions.

     Acquiring other businesses is an important focus of our strategy for growth. Most recently, on July 21, 2004, we announced the acquisition of JCA Technology, Inc., JCA, a wholly owned subsidiary of Bookham plc., a provider of RF amplifiers and modules to the defense, commercial radar, and homeland security markets. The process of integrating JCA or any other acquired business into our business and operations is risky and may create unforeseen operating difficulties and expenditures. We are currently working toward integrating JCA into our operations and face the possibility of the following difficulties:

•		assimilating the acquired operations and personnel;
•		integrating information technology and reporting systems;
•		retention of key personnel;
•		retention of acquired customers;
•		disruption of the acquired business;
•		disruption of our ongoing business; and
•		implementation of controls, procedures and policies.

     Moreover, we may not be able to successfully overcome potential problems encountered with these acquisitions or other potential acquisitions. In addition, future acquisitions could materially adversely affect our operating results by diluting our stockholders’ equity, causing us to incur additional debt, incurring significant immediate expenses related to write-offs, or incurring amortization of acquisition expenses and acquired assets.

We are required in many cases to obtain government approvals and licenses prior to shipping product and rejections or delays in getting approvals could delay or reduce revenues.

     Many of the products we produce and supply to our foreign customers are controlled by U.S. government export regulations promulgated by the Departments of State, Commerce and Defense. Prior to shipment of these products, we must apply for various approvals and licenses. This application process is lengthy and granting of the

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licenses and approvals is not certain. Delays or rejections in approving our applications would subsequently delay or reduce out shipments for these products.

Our ability to grow our business in the U.S. government end-use market could be limited by Congress or Executive Branch agency decisions regarding future government program appropriations and authorizations.

     Our growth strategy is partially dependent on growth in sales to Defense and Homeland Security prime contractors as a first-tier subcontractor. Government appropriations and prime contractor reactions to changing levels of contract funding availability can cause re-programming of first-tier subcontractor requirements by prime contractors in a way that reduces sales over past periods or alters future forecasts. At the first-tier subcontractor level, the impacts of reduced (or increased) federal funding are often not known until the winter following the start of the government’s fiscal year.

We depend upon a small number of key customers for a large part of our revenues, and the loss of any of them, or their failure to sell their systems, would limit our ability to generate revenues.

     We depend, and expect to remain dependent, on a relatively small number of key customers for a large portion of the sales of our products. If our customers reduce orders for our products, we could lose revenues and suffer damage to our reputation in the industry. For the quarter ended September 30, 2004, sales to Nokia and PowerWave accounted for 55% and 10% of total revenues, respectively.

     The loss of any one of our major customers, particularly Nokia, would have a material adverse effect on our business, financial condition and results of operations. Most of our customers are not under any commitment to purchase products from us, except on a purchase order basis. Under our contract with Nokia, Nokia is required to provide us with a weekly rolling forecast for the upcoming 52-week period and we are obligated to provide products to them in a consignment stock location. The amount and type of product shipped to the consignment location is based upon Nokia’s estimate of need and RF frequency. Revenues are recognized at the time product is withdrawn by Nokia from the consignment location, or at the latest, after four months have passed since the date of receipt, assuming all other criteria for revenue recognition have been met. As a result, there could be up to a four-month period whereby we would not recognize revenues for product previously shipped. Deliveries are based on forecast but there is no guarantee that the forecast will be fulfilled. Forecasts may vary greatly and can be changed without notice.

     Our customers may not have or use the financial, marketing, technological and other resources necessary to ensure that their solutions will succeed in a marketplace characterized by rapid technological changes and intense competition. For example, communications service providers may insist that wireless systems integrators provide extensive financing for the deployment of large broadband wireless access networks, and our customers may be unwilling or unable to provide the necessary financial resources. If the wireless systems integrators that we supply were not successful in selling their broadband wireless access systems for any reason, our operating results would be harmed.

Until late 2002, our cost of product revenues has exceeded our product revenues, and because we expect competitive conditions will force us to reduce prices in the future, we must achieve further cost reductions in order to maintain sufficient positive gross margins to remain profitable.

     We reported negative gross margins from inception until the fourth quarter of 2002. If we are not able to continue to reduce our per-unit cost of product revenues to a sufficient degree, we may not be able to maintain positive gross margins. We expect market conditions, particularly declining prices for competing broadband access solutions, will force us to reduce our prices in the future. In order to reduce these costs, we must continue to migrate our products to designs that require lower cost materials, improve our manufacturing efficiencies and successfully move production to low cost, offshore locations. The combined effects of these actions may not be sufficient to achieve the cost reductions needed to maintain positive gross margins and to sustain profitability.

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Our operating results have historically fluctuated significantly and are likely to continue to do so in future periods. These results may fail to meet the expectations of securities analysts or investors, causing our stock price to fall.

     Our quarterly and annual operating results are difficult to predict and are likely to continue to fluctuate significantly from period to period. It is likely that our operating results in one or more future quarters may be below the expectation of security analysts and investors. In that event, the trading price of our common stock almost certainly would decline. Our operating results may fluctuate for many reasons, including but may not limited to:

•		variations in the timing and size of, or cancellations or reductions of, customer orders and shipments;
•		variations in the availability, cost and quality of components from our suppliers, particularly from our single source suppliers and suppliers of scarce components;
•		competitive factors, including pricing, availability and demand for competing products;
•		constraints on our manufacturing capacity;
•		variability of the product development and sales cycle with our customers;
•		variations in our manufacturing yields and other factors affecting our manufacturing costs;
•		changes in our sales prices;
•		changes in the mix of products with different gross margins;
•		failure to meet milestones under any significant development contracts;
•		obsolescence of our component inventories;
•		hiring and loss of personnel, particularly in manufacturing, research and development and sales and marketing; and
•		product defect claims and associated warranty expenses.

We have a lengthy product development and sales cycle. As a result, we must invest substantial financial and technical resources in a potential sale before we know whether the sale will occur. If the sale does not occur, we may not have the opportunity to sell products to that customer until another generation of its system is developed.

     Our products are highly technical and accordingly our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements and design an appropriate solution. Depending on the product, the typical product development and sales cycle can take anywhere from three to twelve months, and we incur significant expenses as part of this process without any assurance of resulting revenues. During the product development phase, our engineers typically work with the customer to define the product and design a prototype product for the customer to evaluate. We generate revenues only if our product is selected for incorporation into a customer’s system and that system is accepted in the marketplace. If our product is not selected, or the customers development program is discontinued, we generally will not have an opportunity to sell our product to that customer until that customer develops a new generation of its system. In the past, we have had difficulty meeting some of our major customers’ stated volume and cost requirements. The length of our product development and sales cycle makes us particularly vulnerable to the loss of a significant customer or a significant reduction in orders by a customer because we may be unable to quickly replace the lost or reduced sales.

We may not be able to design our products as quickly as our customers require, which could cause us to lose sales and may harm our reputation.

     Existing and potential customers typically demand that we design products for them under difficult time constraints. In the current market environment, the need to respond quickly is particularly important. If we are unable to commit the necessary resources to complete a project for a potential customer within the requested

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timeframe, we may lose a potential sale. Our ability to design products within the time constraints demanded by a customer will depend on the number of product design professionals who are available to focus on that customer’s project and the availability of professionals with the requisite level of expertise is limited.

     Each of our products is designed for a specific range of frequencies. Because different national governments license different portions of the frequency spectrum for the broadband wireless access market, and because communications service providers that use broadband wireless access systems license specific frequencies as they become available, we must adapt our products rapidly to use a wide range of different frequencies in order to remain competitive. This may require the design of products at a number of different frequencies simultaneously. This design process can be difficult and time consuming, could increase our costs and could cause delays in the delivery of products to our customers, which may harm our reputation and affect the timing of our revenues.

We may not be able to manufacture and deliver our products as quickly as our customers require, which could cause us to lose sales and would harm our reputation.

     At times in the past, we have not produced products in the volume requested by our customers. In the future, we may not be able to manufacture products and deliver them to our customers at the times, and in the volumes they require. If we fail to manufacture and deliver products in a timely fashion, our reputation may be harmed, we may jeopardize existing orders and lose potential future sales and we may be forced to pay penalties to our customers. Manufacturing delays and interruptions can occur for many reasons including but not limited to:

•		lack of sufficient capacity;
•		the failure of a supplier to deliver needed components on a timely basis, or with acceptable quality;
•		poor manufacturing yields;
•		labor disputes;
•		manufacturing personnel shortages;
•		equipment failures;
•		natural disasters;
•		transportation disruptions;
•		acts of terrorism;
•		changes in import/export regulations
•		infrastructure failures; and
•		political instability.

     The manufacturing of our products is complex. The yield, or percentage of products manufactured that conform to required specifications, can decrease for many reasons, including materials containing impurities, equipment not functioning in accordance with requirements or human error. If our yield is lower than we expect, we may not be able to deliver products on time.

We rely heavily on our Southeast Asia manufacturing partners to produce product for us. If our partners are unable to produce product in sufficient quantities or with adequate quality or they choose to terminate our partnership arrangements, we may not be able to fulfill our production commitments to our customers, which could cause us to lose sales and would harm our reputation.

     As part of our operating strategy, we partially or wholly outsource the assembly and test of some of our subassemblies and finished products to partners located in Southeast Asia. We plan to continue this arrangement as a key element of our operating strategy. If these vendors do not provide us with high quality products and services in a timely manner, or if one or more of these vendors terminates its relationship with us, we may be unable to obtain

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satisfactory replacements to fulfill customer orders on a timely basis. Factors that could result in an interruption of supply from our offshore partners include, but may not be limited to:

•		changes in local regulations and government policy;
•		currency fluctuations;
•		lack of sufficient capacity;
•		the failure of a supplier to deliver needed components on a timely basis, or with acceptable quality;
•		poor manufacturing yields;
•		labor disputes;
•		manufacturing personnel shortages;
•		equipment failures;
•		natural disasters;
•		transportation disruptions;
•		acts of terrorism;
•		changes in import/export regulations
•		infrastructure failures; and
•		political instability.

     In the event of an interruption of supply from our offshore partners, our reputation may be harmed and we may lose potential future sales.

Our reliance on Northrop Grumman and other third-party semiconductor providers to manufacture our gallium arsenide devices may cause a significant delay in our ability to fill orders and limit our ability to assure product quality and control costs.

     We do not own or operate a semiconductor fabrication facility. We currently rely on the semiconductor fabrication facilities of Northrop Grumman, and other third parties to manufacture substantially all of the gallium arsenide and other semiconductor devices incorporated in our products. The loss of our relationship with any of these third parties or our use of their semiconductor fabrication facilities, and any resulting delay or reduction in the supply of gallium arsenide devices to us, will impact our ability to fulfill customer orders and could damage our relationships with our customers. Our current supply agreement with Northrop Grumman expires in December of 2005.

     We may not be able to negotiate an extension to this agreement on favorable terms, if at all. We also may not be successful in forming alternative supply arrangements that provide us with a sufficient supply of gallium arsenide devices. Because there are limited numbers of third-party semiconductor fabrication facilities that use the particular process technologies we select for our products and have sufficient capacity to meet our needs, using alternative or additional third-party semiconductor fabrication facilities would require an extensive qualification process that could prevent or delay product shipments.

Since we do not own or control any of these third party semiconductor suppliers, any change in the corporate structure or ownership of the corporations that own these foundries, could have a negative effect on or future relations and ability to negotiate favorable supply agreements.

     Our reliance on these third-party suppliers involves several additional risks, including reduced control over manufacturing costs, delivery times, reliability and quality of the products incorporating these devices. The fabrication of semiconductor devices is a complex and precise process. There are many factors that can cause a

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substantial percentage of wafers to be rejected or numerous devices on a wafer to be nonfunctional including, but not limited to:

•		minute impurities;
•		difficulties or inconsistencies in the fabrication process;
•		defects in the masks used to print circuits on a semiconductor wafer; and
•		wafer breakage.

     We expect that our customers will continue to establish demanding specifications for quality, performance and reliability that must be met by our products. Our third-party semiconductor fabrication facilities may not be able to achieve and maintain acceptable production yields in the future. In the past, we have experienced delays in product shipments from our third-party semiconductor fabrication facilities, which in turn delayed product shipments to our customers. To the extent these suppliers suffer failures or defects, or delay deliveries to us, we could experience lost revenues, increased costs and delays in, cancellations or rescheduling of orders or shipments, any of which would harm our business.

Because of the scarcity of some components and our dependence on single suppliers for some other components, we may be unable to obtain an adequate supply of components, or we may be required to pay higher prices or to purchase components of lesser quality.

     We currently purchase a number of components, some from single source suppliers for which alternative sources may not be readily available, including, but not limited to:

•		electronic filters;
•		circuit carrier assemblies;
•		voltage controlled oscillators;
•		semiconductor devices;
•		yttrium iron garnet components;
•		magnetic components; and
•		frequency references.

     Any delay or interruption in the supply of these or other components could impair our ability to manufacture and deliver our products, harm our reputation and cause a reduction in our revenues. In addition, any increase in the cost of the components that we use in our products could make our products less competitive and lower our margins. Our single source suppliers could enter into exclusive agreements with or be acquired by one of our competitors, increase their prices, refuse to sell their products to us, discontinue products or go out of business. Even to the extent alternative suppliers are available to us, identifying them and entering into arrangements with them is difficult and time consuming, and they may not meet our quality standards. We may not be able to obtain sufficient quantities of required components on the same or substantially the same terms. Additionally, consolidations among our suppliers could result in other sole source suppliers for us in the future.

Because we do not have long-term commitments from many of our customers, we must estimate customer demand, and errors in our estimates would have negative effects on our inventory levels and revenues.

     Our primary market, the telecommunications industry, has been characterized in recent years by severe demand fluctuations and down turns. Further, the overall economic slow down in the U.S. and other economies has exacerbated these difficulties. This has led to fluctuating order forecasts from some of our customers. There can be no certainty as to the degree of the severity or duration of these fluctuations in demand. We also cannot predict the extent and timing, of the impact of the economic downturn in the United States and the worldwide downturn for the telecommunications industry on economies in Canada, Europe and other countries and geographic regions.

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     Our sales are generally made on the basis of formal agreements and purchase orders, which may be later modified or canceled by the customer, rather than firm long term purchase commitments. We have historically been required to place firm orders for products and manufacturing equipment with our suppliers up to nine months prior to the anticipated delivery date and, on occasion, prior to receiving an order for the product, based on our forecasts of customer demands. Our sales process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates, causing excess inventory to accrue or a lack of manufacturing capacity when needed. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect or at all. As a result, we would have excess inventory, which would harm our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity were available, we would lose revenue opportunities, lose market share and damage our customer relationships. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and were unable to benefit from this increased demand.

Because we may expand our manufacturing capacity in advance of demand, our manufacturing facilities may continue to be underutilized, which may harm our operating results.

     As part of our strategy, we may expand our manufacturing capacity beyond the level required for our current sales. As a result, our manufacturing facilities in the future may continue to be underutilized from time to time. We expand our manufacturing capacity based on industry projections for future growth. Even if the broadband wireless industry experiences significant growth, we could still be unsuccessful in selling our products and growing along with the industry. If demand for our products does not increase significantly, underutilization of our manufacturing facilities will likely continue and could harm our profitability and other operating results. Conversely, if we do not maintain adequate manufacturing capacity to meet demand for our products, we will lose opportunities for additional sales. Any failure to have sufficient manufacturing capacity to meet demand would harm our market share and operating results.

Our products may contain component, manufacturing or design defects or may not meet our customers’ performance criteria, which could harm our customer relationships, industry reputation, revenues and profitability.

     We have experienced manufacturing quality problems with our products in the past and may have similar problems in the future. As a result of these problems, we have replaced components in some products, or replaced the product, in accordance with our product warranties. Our product warranties typically last one to three years. As a result of component, manufacturing or design defects, we may be required to repair or replace a substantial number of products under our product warranties. Further, our customers may discover latent defects in our products that were not apparent when the warranty period expired. These defects may cause repair or replacement expenses beyond the normal warranty, the loss of customers or damage to our reputation. We have experienced this type of failure in the past and have had to provide liabilities for repairing the affected units. We cannot guarantee that similar failures will not occur in the future resulting in significant liabilities and charges in future periods.

Some of the contracts that we have entered into or assumed during acquisitions may contain clauses making Endwave liable for consequential damages or other indirect costs that customers may incur. These indirect costs may be significantly higher than the cost of repair or replacement of the Endwave product.

     We typically warrant our products for a period of one to three years, during which time we have the option to repair or replace any faulty products that are returned to us during the warranty period. In addition, some contracts require that if there are hidden or latent defects, or defects that appear after the warranty period which could not be detected during normal inspection, we shall undertake any and all necessary corrective actions, including but not limited to redesigning the parts and replacing defective parts in the field. If mutually agreed, repair or replacement of defective units can be undertaken by the customer, who we shall compensate for actual costs.

     Some radios incorporating our transceivers and manufactured and shipped by one of our customers are experiencing degraded performance after installation in the field. The cause of the degradation has been identified to be a faulty electronic component supplied by one of our vendors. We believe the cause of the component’s out of specification performance has been identified and corrected. Although the transceiver products were delivered under a contract between Endwave and the customer, the component supplier has agreed to compensate our

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customer for the “indirect costs” associated with the repair and replacement of the degraded radios and modules. These indirect costs include the costs associated with removing and replacing the radios in the field as well as removing and replacing the transceiver module in the radio. Subsequently we have reached an agreement with the component supplier to share a portion of these repair and replacement costs.

Any failure to appropriately protect our intellectual property could reduce or eliminate any competitive advantage we have.

     Our success will depend, in part, on our ability to protect our intellectual property. We rely primarily on a combination of patent, copyright, trademark and trade secret laws to protect our proprietary technologies and processes. Nevertheless, these measures may not be adequate to safeguard the proprietary technology underlying our products. With regard to our pending patent applications, no patents may be issued as a result of these or any future applications. If they are issued, any patent claims allowed may not be sufficiently broad to protect our technology. In addition, any existing or future patents may be challenged, invalidated or circumvented, and any right granted hereunder may not provide meaningful protection to us. The failure of any patents to provide protection to our technology might make it easier for our competitors to offer similar products and use similar manufacturing techniques.

     We generally enter into confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with our strategic partners, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable, limited, or unenforceable outside of the United States, Europe and Japan. We may not be able to obtain any meaningful intellectual property protection in other countries and territories. Additionally, we may, for a variety of reasons, decide not to file for patent, copyright, or trademark protection outside of the United States or to discontinue support of existing patents, copyrights or trademarks within the United States or foreign countries. We occasionally agree to incorporate a customer’s or supplier’s intellectual property into our designs, in which cases we have obligations with respect to the non-use and non-disclosure of that intellectual property.

     We also license technology from Velocium, an operating unit of Northrop Grumman. There are no limitations on our rights to make, use or sell products we may develop in the future utilizing the technology licensed to us by Velocium, provided that the products are for commercial customers and non-satellite applications.

     Steps taken by us to prevent misappropriation or infringement of our intellectual property or that of our customers may not be successful. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. Litigation of this type could result in substantial costs and diversion of our resources.

We depend on our key personnel. Skilled personnel in our industry can be in short supply. If we are unable to retain our current personnel and hire additional qualified personnel, our ability to develop and successfully market our products would be harmed.

     We believe that our future success will depend upon our ability to attract, integrate and retain highly skilled managerial, sales and marketing, research and development and manufacturing personnel. Skilled personnel in our industry can be in short supply. To attract and retain qualified personnel, we may be required to grant large option or other stock-based incentive awards, which may be highly dilutive to other stockholders. We may also be required to pay significant base salaries and cash bonuses, which could harm our operating results. In addition, prospective employees, given the current volatility of the stock prices of technology focused companies, could perceive the stock option component of our compensation package overly risky and require more significant salary or cash bonus incentives for that reason.

     We are particularly dependent on the continued employment of our senior management team and other key personnel. If one or more members of our senior management team or other key personnel were unable or unwilling

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to continue in their present positions, these persons would be very difficult to replace, and our business could be seriously harmed. We do not maintain “key person” life insurance policies.

Our ability to increase our sales in international markets may be limited by risks related to international trade and marketing.

     For the quarter ended September 30, 2004, 76% of our revenues were derived from sales invoiced and shipped to customers outside the United States. In addition, some of our United States based customers may sell products, which incorporate our products, into international markets. Adverse international economic conditions or developments could in the future negatively affect our revenues and sales by our customers into these regions, which would impact our revenues. In addition to the uncertainty as to our ability to maintain and expand our international presence, there are certain risks inherent in foreign operations, including, but not limited to:

•		changing regulations of various countries or regulating agencies effecting radio deployments and spectrum use;
•		difficulties in complying with foreign laws and regulations and obtaining foreign governmental approvals and permits;
•		delays in or prohibitions on exporting products resulting from export restrictions for our products and technologies;
•		international trade disagreements or embargos;
•		fluctuations in foreign currencies and the United States dollar, especially the Euro;
•		political and economic instability;
•		unforeseen effects of terrorism and terrorist activities;
•		adverse tax consequences; and
•		seasonal reductions in business activity.

     In addition, foreign laws treat the protection of proprietary rights and intellectual property differently from laws in the United States and may not protect our proprietary rights and intellectual property to the same extent as United States laws.

We currently transact business only in U.S. dollars. In the future, economic or competitive situations may require us to conduct business in other currencies. If this were to happen, we could become subject to currency exchange rate volatility, which could have an adverse impact on our operating results and financial condition.

     We conduct all of our current business in U.S. dollars. In the future, economic conditions or competitive pressures may require us to sell product in other currencies, especially the Euro because of the high concentration of current and potential customers in countries that have adopted the Euro. If this was to occur and our contracts did not provide currency protection, we could experience significant currency exchange rate volatility. That volatility could have serious impacts on dollar value of our sales and subsequently on our operating results and financial condition.

Many of our customers operate in Euro-based economies. The current rise in the value of the Euro could make their products noncompetitive in world markets thereby reducing their revenues and causing Endwave to also lose revenues.

     Many of our customers operate in countries that have adopted the Euro as their standard currency. The recent rise in the Euro could make products built in those countries noncompetitive in world markets due to the relative strength of the Euro. If this were to happen, it is likely that our customers would lose sales and Endwave would subsequently see reduced demand. Further, similar currency effects may require our customers to reduce their

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prices, bringing further pressure on Endwave to reduce its prices. Such price reductions offered to our customers could harm our margins, operating results and financial condition.

Compliance with current or future environmental laws and regulations could impose significant burdens on us, which could have an adverse impact on our operating results and financial condition.

     We use a small number of hazardous substances to produce our products. If we fail to comply with present or future governmental regulations related to the use, storage, handling, discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes, we may have our manufacturing operations suspended and we may be assessed fines. We may also be required to alter our manufacturing processes or even cease operations in locations where we cannot become compliant with applicable government regulation, which would result in significant costs. In particular, we face the costs and risks associated with a transition to lead free solders in our products. Governmental regulations could also require that we incur expensive remediation costs or other expenses to comply with environmental regulations. We could also face future liabilities in civil actions for violations of environmental laws and regulations. Liability for cleanup under the Comprehensive Environmental Response, Compensation and Liability Act is joint and several. Consequently, if other parties that share responsibility with us for contamination at any site are unable to pay for their share of any damages or remediation, we may be held liable to pay for some or all of their share.

The broadband wireless access industry is relatively new and its future is uncertain. If significant demand for this technology does not develop, it will limit our ability to grow our revenues.

     Broadband wireless access technology is one of several possible ways to provide high-speed infrastructure for transmission of voice, video and data. However, the level of demand for high speed access will be at least partially dependent upon the development of end user applications that will require higher data rates, and their acceptance and use by the market. If this demand will be significant and at what rate it will be created is not known at this time.

     Broadband wireless access technology is relatively new and unproven in the marketplace. This technology may prove unsuitable for widespread commercial deployment, in which case it is unlikely we could generate enough revenues to obtain and sustain profitability. Many factors will influence the success or failure of broadband wireless access technology, including, but not limited to:

•		its capacity to handle growing demands for faster transmission of increasing amounts of video, voice and data;
•		its cost effectiveness and performance compared to other forms of broadband access, the prices and performance of which continue to improve;
•		its reliability and security;
•		whether the products can be manufactured in sufficient volume;
•		its suitability for a sufficient number of geographic regions;
•		the availability of sufficient frequencies for wireless communications service providers to deploy products at commercially reasonable rates;
•		the availability of sufficient site locations for wireless communications service providers to install products at commercially reasonable rates;
•		the development of user applications that will create the demand for higher capacity infrastructure for voice, video and data traffic;
•		safety and environmental concerns regarding broadband wireless transmissions; and
•		permission by domestic and international regulatory authorities to allow construction of new wireless systems.

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Many competing technologies serve our broadband access market, and if the broadband wireless access technologies upon which our products are based do not succeed as a solution for broadband access, we may not be able to sustain or grow our business.

     Providers of broadband wireless access solutions compete with providers of other high speed solutions, including digital subscriber lines, cable, fiber and other high-speed wire, satellite and wireless technologies. Many of these alternative technologies use existing installed infrastructure and have achieved significantly greater market acceptance and penetration than broadband wireless access technologies. Moreover, current broadband wireless access technology has inherent technical limitations that may inhibit its widespread adoption in many areas, including the need for line-of-sight installation and reduced communication distance in bad weather. Broadband wireless access technology continues to evolve which could cause some service providers to delay product purchases or could result in significant shifts in the products the market favors. In addition, the need for communications service providers to obtain the rights to install broadband wireless access equipment on rooftops and in other locations may inhibit its widespread adoption. We expect broadband access technologies to face increasing competitive pressures from both current and future alternative technologies. In light of these factors, many communications service providers may be reluctant to invest heavily in broadband wireless access solutions and, accordingly, the market for these solutions may fail to develop or may develop more slowly than we expect. Either outcome would limit our sales opportunities.

The broadband wireless access infrastructure equipment industry is intensely competitive, and our failure to compete effectively could reduce our revenues and margins.

     Competition in the market for RF subsystems for broadband wireless access systems is intense. In addition, new entrants to the market can emerge and become significant competitors. Some new competitors have been formed by acquiring assets of failed or disbanded companies. Generally, these assets have been acquired at prices much lower than normally expected and this may give these new entrants a cost advantage.

     We believe that the principal competitive factors in our industry are:

•		technical leadership and product performance;
•		time-to-market in the design and manufacturing of products;
•		manufacturing capability and scalable capacity;
•		financial stability;
•		favorable access to semiconductor materials;
•		price;
•		the ability to migrate to low cost solutions;
•		product breadth;
•		logistical flexibility; and
•		carrier class quality.

     There are also wireless systems integrators, for example, Ericsson, that design and manufacture their own RF subsystems for internal use. To the extent wireless systems integrators presently, or may in the future, produce their own RF subsystems, we lose the opportunity to gain a customer and the related sales opportunities. Conversely, if they should decide to outsource their requirements, we may have new opportunities.

     Many of our current and potential competitors are substantially larger than us and have greater financial, technical, manufacturing and marketing resources. If we were unable to compete successfully, our future operations and financial results would be harmed.

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We must adapt to the rapid technological changes inherent in the broadband wireless access industry in order to succeed.

     In order to succeed, we must improve current products and develop and introduce new products that are competitive in terms of price, performance and quality and that adequately address the changing requirements of wireless systems integrators, their customers and subscribers and emerging industry standards. To accomplish this, we make substantial investments in the research and development of new products for and improvements to existing products. If these investments do not result in competitive products that generate large volume orders, we may be unable to generate sufficient revenues to achieve profitability. We intend to continue to incur substantial research and development and product development expenses. It is possible that these investments will not generate product revenues sufficient to offset the original investment expense.

Government regulation of the communications industry could limit the growth of the markets that we serve or could require costly alterations of our current or future products.

     The markets that we serve are highly regulated. Communications service providers must obtain regulatory approvals to operate broadband wireless access networks within specified licensed bands of the frequency spectrum. The FCC and foreign regulatory agencies have adopted regulations that impose stringent RF emissions standards on the communications industry. Changes to these regulations may require that we alter the performance of our products.

     The enactment by governments of new laws or regulations or a change in the interpretation of existing regulations could adversely affect the market for our products. Although there is a present trend toward deregulation and current regulatory developments are favorable to the promotion of new and expanded wireless services, this could change at any time, and future regulatory changes could have a negative impact on us. Further, the increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for broadband wireless access products, generally following extensive investigation and deliberation over competing technologies. In the past, the delays inherent in this governmental approval process have caused, and in the future may cause, the cancellation, postponement or rescheduling of the installation of communications systems by our customers. These delays could affect our ability to allocate our research and development resources effectively, cause our existing and potential customers to delay orders and otherwise harm our ability to generate revenues.

Our industry is characterized by vigorous protection and pursuit of intellectual property rights. This could cause us to become involved in costly and lengthy litigation, which could subject us to liability, prevent us from selling our products or force us to redesign our products.

     The wireless access industry is characterized by vigorous protection and pursuit of intellectual property rights. We have received and may receive in the future notices of claims of infringement of other parties’ proprietary rights. In addition, the invalidity of our patents may be asserted or prosecuted against us. Furthermore, in a patent or trade secret action, we could be required to withdraw the product or products as to which the infringement was claimed from the market or redesign products offered for sale or under development. We have also at times agreed to indemnification obligations in favor of our customers and strategic partners that could be triggered upon an allegation or finding of our infringement of other parties’ proprietary rights. These indemnification obligations would be triggered for reasons including our sale or supply to a customer or strategic partner of a product which was later discovered to infringe upon another party’s proprietary rights. Irrespective of the validity or successful assertion of intellectual property claims, we would likely incur significant costs and diversion of our resources with respect to the defense of any claims. To address any potential claims or actions asserted against us, we may seek to obtain a license under a third-party’s intellectual property rights. However, in such an instance, a license may not be available on commercially reasonable terms, if at all.

Endwave has broad and comprehensive legal, ethical, and regulatory compliance responsibilities, which could cause legal liability and reputational harm if not managed carefully.

     As a public company engaged in commercial and government end-use commerce on both a national and international basis from substantially a California base of operations, we are charged with strict compliance under

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multi-jurisdictional law or regulation in all we do. The relative small size of the company, coupled with our aggressive growth plan against an industry backdrop of “zero tolerance” for breach of legal and ethical obligations, creates a risk that we may unintentionally not fully comply with all requirements. If this risk is realized, the result could be public or private litigation, administrative penalties including higher compliance costs, or in an extreme case, criminal sanctions

The market price of our common stock is likely to fluctuate.

     The price of our common stock has fluctuated widely since our initial public offering in October 2000. The market price of our common stock can fluctuate significantly for many reasons, including, but not limited to:

•		our financial performance or the performance of our competitors;
•		technological innovations or other trends or changes in the broadband wireless access industry;
•		successes or failures at significant product evaluations or site demonstrations;
•		the introduction of new products by us or our competitors;
•		acquisitions, strategic alliances or joint ventures involving us or our competitors;
•		decisions by major participants in the communications industry not to purchase products from us or to pursue alternative technologies;
•		decisions by investors to de-emphasize investment categories, groups or strategies that include our company or industry;
•		market conditions in the industry, the financial markets and the economy as a whole; and
•		because a small percentage of our stock is owned by public stockholders, it trades in low volumes which could cause volatility in our share price.

     In addition, the stock market has experienced extreme price and volume fluctuations, including significant volatility in the market price of our common stock in particular. These market fluctuations can be unrelated to the operating performance of particular companies and the market prices for securities of technology companies have been especially volatile. Future sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. Additionally, future stock price volatility for our common stock could provoke the initiation of securities litigation, which may divert substantial management resources and have an adverse effect on our business, operating results and financial condition. Our existing insurance coverage may not sufficiently cover all costs and claims that could arise out of any such securities litigation. We anticipate that prices for our common stock will continue to be volatile.

Our ability to achieve our business goals is substantially dependent on our access to sufficient capital.

     If we do not have sufficient capital to fund our operations, we may be forced to discontinue product development, reduce our sales and marketing efforts and forego attractive business opportunities, and we may lose the ability to respond to competitive pressures. It is possible we may need to raise additional funds in the future, and this additional financing may not be available to us in favorable terms, if at all. We may also require additional capital to acquire or invest in complementary businesses or products or obtain the right to use complementary technologies. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. If we issue debt securities to raise funds, we may incur significant interest expense, which would harm our profitability. The issuance of debt securities may also require us to agree to various restrictions typical of debt securities, including limitations on further borrowing and our right to pay dividends.

Northrop Grumman and our officers and directors control a large percentage of our common stock and together are able to control the outcome of matters requiring stockholder approval.

     As of September 1, 2004, directors and holders of five percent or more of our outstanding common stock beneficially owned approximately 47% of our common stock. Of this percentage, Northrop Grumman alone

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beneficially owns approximately 35% of our common stock. As a result, our executive officers, directors and five percent stockholders as a group are able to effectively control all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. Northrop Grumman alone is able to significantly influence matters on which the stockholders vote. This concentration of ownership may also delay, deter or prevent a change in control and may make some transactions more difficult or impossible to complete without the support of these stockholders, even if the transaction is favorable to our stockholders. In addition, because of their ownership of our common stock, these stockholders are in a position to significantly affect our corporate actions in a manner that could conflict with the interests of our public stockholders.

Our certificate of incorporation, bylaws and arrangements with executive officers contain provisions that could delay or prevent a change in control.

     We are subject to certain Delaware anti-takeover laws by virtue of our status as a Delaware corporation. These laws prevent us from engaging in a merger or sale of more than 10% of our assets with any stockholder, including all affiliates and associates of any stockholder, who owns 15% or more of our outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of our voting stock unless the board of directors approved the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock of the corporation, or the business combination is approved by our board of directors and authorized by least 66-2/3% of our outstanding voting stock not owned by the interested stockholder. A corporation may opt out of the Delaware anti-takeover laws in its charter documents, however we have not chosen to do so. Additionally, our certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control of management, including a staggered board of directors, the elimination of the ability of our stockholders to act by written consent, discretionary authority given to our board of directors as to the issuance of preferred stock, and indemnification rights for our directors and executive officers. In addition, we have an Officer Retention Plan that provides for the acceleration of vesting of a percentage of the stock options granted to our officers under certain conditions. Under this plan, an unvested portion of each officer’s stock options will become vested and, in addition, severance benefits will be paid to the officer, if we undergo a change in control transaction or the officer is terminated without cause. This plan may make us a less attractive acquisition target or may reduce the amount a potential acquirer may otherwise be willing to pay for our company.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

     We believe that there have been no material changes in our reported market risks since our report on market risks in our annual report on Form 10-K for the year ended December 31, 2003 under the heading corresponding to that set forth above. Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, as our investments in cash equivalents include investment grade commercial paper and government securities. We place our investments with high-quality issuers and attempt to limit when possible the amount of credit exposure to any one issuer. Due to the nature of our short-term investments, we do not believe we are subject to any material market risk exposure. We do not have any material equity investments or foreign currency or other derivative financial instruments.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

     Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this report to ensure that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

     Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and our chief financial officer have concluded that these controls and

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procedures are effective at the “reasonable assurance” level. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Changes in internal controls over financial reporting.

     In connection with various restructuring plans during 2003, there were significant changes to our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). We believe that these changes, although significant, did not materially affect and are not reasonably likely to materially affect our internal controls over financial reporting.

     During the first nine months ending September 30, 2004, we have implemented additional controls and procedures to ensure that reconciliations, analyses and supporting documentation are prepared on a timely basis. We have also increased our accounting staff resources. We will continue to refine our internal controls and procedures over time, to continue to facilitate the accurate presentation of our financial condition, results of operations and cash flows.

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PART II. OTHER INFORMATION

Item 5. Submission of Matters to a Vote of Security Holders

     We held our Annual Meeting of Stockholders on July 21, 2004. The results of the voting were as follows:

Item 6. Exhibits

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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: November 8, 2004

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Index to Exhibits

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